How to protect yourself from the damages of a HUGE lawsuit

I've been thinking a little bit more about liability limits.

It seems to me, many types of insurance are easy to shop for. When you buy life insurance there is only so much life insurance a life insurance company will sell you. Generally before age 40 or so, you can buy 20 times your annual income and no more. Life insurance actuaries have discovered that if you are allowed to buy more than that you truly may be worth more dead than alive. (Some companies, due to low interest rates have bumped that to 25 or 30 times your income for now.)

If you want to buy disability income insurance you can generally buy up 60% to 70% or your pretax income in benefits.

If you buy fire insurance on your house, the company will only sell you enough insurance to rebuild your house. They won't sell you enough insurance to build a house with 4 more bedrooms and 2 more bathrooms than your current home. Some of us might be tempted to burn down our home so we could build a much nicer home.

Those are called objective risks. When I can't work because I've got cancer, I know how much income I'm missing out on. If my boat sinks to the bottom of Flathead Lake, I know how much a new boat will cost.

Subjective Risk....explained

The subjective risks of liability opens a Pandora's Box of issues. If I'm at fault in a car accident, I really have no idea how much I'll be liable for until after the matter works its way through the court system. Now if I have good insurance hopefully the company can settle long before I have to go to trial. But that doesn't always happen. Sometimes the insurance company will insist we go to trial. And in some cases, for people that don't buy enough insurance, the insurance company writes the injured party a check for the liability limit on your policy and tells you you are on your own to defend yourself the rest of the way.

Imagine a car accident in which 'John Doe' is at fault. John Doe wanted to drive legally so he bought the state minimum limits of car insurance, in Montana that is $25,000 per person for bodily injury, $50,000 per accident for bodily injury. Now if John is in a serious accident chances are the insurance company is going to try to get the injured party to settle for $25,000. If the insurance company can't, then insurance company is going to write a check for $25,000 to the injured party and then be done with the issue.

One of the nice features of a car insurance policy is that the insurance company will provide you with a civil defense. And they will continue to provide you with that defense until your liability limits have been exhausted. A bonus feature is that the defense usually (all of the companies of which I write private passenger car with for sure) is outside the limit of liability on the policy. So you may have $100,000 per person limit on your policy and in fact the insurance company may pay out the $100,000 to an injured person plus they may provide you with a defense that was in addition to that limit. So they may provide you with $130,000 worth of money when all is said and done.

Now our friend John has seemingly been fiscally responsible and saved himself a little bit of money on insurance premiums by buying the minimum liability limits. But when the time comes for him to actually use the insurance he finds out just how irresponsible he has been. Once the insurance company settles with the railroad engineer (who won't be working for at least a year and has huge medical bills, physical therapy bills, and pain and suffering) for $25,000 our friend John now must compensate the engineer out of his own pocket for the remainder of the bills. John will probably have to sell his home and car. John will have to cash in his savings. He will probably have to sell his toys, like a boat or motorcycle. And at some point a judge just may insist some of John's wages be garnished to help the Engineer with his bills.

Seems like an unlikely scenario. Does it happen? You bet it does.

I'm not a fan of insurance premiums. I'd rather not pay them just like you probably don't want to pay them. But I certainly want the benefits of a good policy and unfortunately that costs money.

I don't really know how much is enough and I really don't have a good answer on how to help you determine how much is enough. My suggestion is buy as much liability insurance as your car insurance company will sell you on your car insurance policy. Many people should consider adding a personal umbrella liability insurance policy. With this you can add $1,000,000 ore more dollars of insurance.