Liability insurance comes in two varieties: bodily injury liability coverage and property damage liability coverage, and most states require both. Here's the distinction between the two, as well as how much liability auto insurance you need.

What is liability car insurance?

Liability coverage is a component of your auto insurance policy that pays for expenses incurred as a result of an accident caused by you. It is made up of two major parts:

Bodily injury liability coverage

This coverage compensates you if you cause bodily harm to another person in a car accident that was your fault. Bodily injury liability coverage, or BI, typically covers medical expenses, recovery treatments, and lost wages if a person is unable to work while recovering. It may also cover funeral expenses in the event of a fatal accident.

Property damage liability coverage

When you are at fault in an accident, this coverage, sometimes abbreviated PD, pays for damage you cause to vehicles or other property. It could, for example, pay to repair the other driver's car or replace a fence you hit.

Property damage liability coverage may also cover items in a person's vehicle. Assume you get into a minor fender bender, but the other driver had $4,000 in crystal in the trunk, which is now sparkly rubble. The replacement — as well as the new bumper — will be covered by your property damage liability insurance.

Aside from injuries and property damage, liability car insurance can also cover legal fees or court costs if you are sued following an accident.

Liability car insurance limits

Liability coverage will only pay up to the maximum amounts specified in your policy, also known as limits. If the damage from an accident exceeds those limits, you will be responsible for the remainder.

Split liability limits

Most auto insurance policies have three main liability limits, which are frequently summarized by three numbers. For example, your state's required minimum coverage may be something like "30/60/15." This is how I interpret it.

Limitation on bodily injury liability per person. The first number is the most your insurance company will pay for a single person's injuries in the event of an accident ("30" in the example above, representing $30,000).

Limitation on bodily injury liability per accident. The second figure is the maximum for injuries to everyone involved in the accident, excluding your own. If there are multiple people injured in an accident, the per-accident maximum comes into play. (This is the "60" mentioned above, which stands for $60,000.00.)

Property damage liability limit per accident. The final figure represents the most your insurance company will pay for property damage caused by you. This includes damage to vehicles, structures, or anything else that isn't a person ("15" above, $15,000).

One important distinction to keep in mind: whereas bodily limits have a per-person limit, property damage liability only has a per-accident limit. If you hit three cars, your insurance will pay the sum represented by that final number ($15,000 in this example), and you will be responsible for the remainder.

Combined single limit liability

One larger liability limit to cover both bodily injury and property damage is an alternative to split limit liability coverage. In many cases, the flexibility of combined single limit liability provides more financial protection than split limit coverage.

Consider the above-mentioned split liability limit (30/60/15) in comparison to a combined single limit of $60,000. Assume you were in an accident and injured two people, one of whom required $10,000 in treatment and the other $50,000. You'd have to pay $20,000 for the second person's injuries under the split liability limit because their treatment exceeded your policy's per-person maximum. However, with a combined liability limit of $60,000, all treatment would be covered.

A combined single limit liability may be more expensive than split limits.

What liability auto insurance doesn’t cover

Liability auto insurance does not cover your own medical bills or car repairs; it is only intended to compensate others for the damage you cause behind the wheel.

Other types of insurance, such as health insurance for medical expenses and collision insurance for vehicle repairs, will be required to cover your own bills. Consider purchasing full coverage car insurance if you want more protection. Full coverage is not a specific policy type, but rather a combination of coverage types such as liability insurance, comprehensive and collision coverage.

Do you need liability car insurance?

In a nutshell, yes: almost all auto insurance policies must include some level of liability coverage. Except for Alaska, New Hampshire, and Virginia, every state requires all drivers to have liability insurance. (Virginia waives the liability requirement for $500, and Alaska exempts some residents from mandatory minimums.) Each state establishes its own minimum levels of coverage, and many require additional types of insurance (see table below).

These regulations are in place to protect drivers who are not at fault in a collision. If you are in an accident and another driver is at fault, you should be able to get back on the road as soon as possible. This is made possible by liability insurance.

How much liability insurance do you need?

You are only required to have the minimum amount of liability insurance required by your state, but you may want to increase the limit to protect your savings and other financial assets if you cause an accident. Medical bills and car repairs can be exorbitantly expensive, and a split second can mean the difference between a normal day and the start of bankruptcy proceedings.

Assume you collide with another vehicle, total it, and seriously injure four people. If you are at fault, you will be held liable for the car's value as well as the medical bills of all four passengers. You now have nearly $500,000 in medical bills to pay, as well as $50,000 for the car and road damage. Is your liability insurance going to cover them?

If you don't have enough coverage — that is, if your bodily injury and property damage limits aren't sufficiently high — you'll be held personally liable for any excess. The people you injured can sue you for that money, and you could lose your home or have your wages garnished in some states. They can come after you more if you have more to lose.

In general, you should have enough liability insurance to cover your net worth. That is the value of all of your cash and possessions, minus your debt.

If you don't have much, there's less incentive to sue you, and you might not need any extra insurance. Perhaps you'll decide that the extra cash in your pocket is more valuable than the peace of mind that comes with additional coverage.

Need more liability insurance? Grab an umbrella

Your auto insurer may not allow you to have liability limits that are high enough to cover all of your assets — many auto insurers have a maximum bodily injury limit of $500,000 or less.

Consider purchasing an umbrella insurance policy if you believe you will require more liability coverage than your auto insurer will provide. Umbrella policies extend your auto and home liability insurance coverage beyond your carrier's standard limits.

Umbrella policies, in general, protect those with a large number of assets or who are more likely to be exposed to risk. If you throw a lot of parties, have an easily accessible pool, have a lot of dogs, or own rental properties, you may be exposed to the type of risk that an umbrella policy is designed to cover.

Liability auto insurance if you don’t own a car

If you don't own a car but occasionally drive someone else's, you should consider purchasing liability coverage in the form of non-owner car insurance. This type of policy compensates you if you are found to be at fault for injuries or property damage while driving someone else's vehicle.

Non-owner insurance only provides auto liability coverage and is only appropriate if the cars you typically borrow (or rent) belong to someone other than your household. Otherwise, you should be added to the auto policy of a household member. (If an insurer discovers you live with a customer, they may have already added you to their policy.)