One of the basic coverage categories of a homeowner's insurance policy is liability insurance.
Liability insurance protects you and other members of your household, including your pets, from accidental bodily injury or property damage for which you are held liable.
That means that if you, a family member or pet is responsible for injury or damage, liability insurance pays for those damages.
Liability insurance does not protect you and your household members from accidents or damage that you sustain. The property damage component of your policy, your health insurance or another party's liability insurance may provide coverage for those kinds of mishaps.
Liability insurance also includes no-fault medical insurance. Like no-fault auto insurance, this coverage allows the injured parties to submit claims for medical expenses without first having to prove which side was at fault.
The Insurance Information Institute (III) recommends you obtain about $300,000 to $500,000 of basic liability insurance. You can obtain additional coverage through an umbrella liability policy. Umbrella liability coverage is also called excess liability coverage and is bought as a separate policy.
The basic idea in obtaining umbrella coverage is to protect the value of your assets. In case you are held liable for an accident or property damage, adequate liability insurance will prevent you from selling assets to pay the difference. An umbrella policy would pay for the extra amount of damages.
For example, if you have a net worth of $1 million, a limit of $300,000 of liability coverage in your basic plan and a liability claim of $500,000, you would have to liquidate $200,000 of assets in order to pay the balance of the claim.
The Insurance Information Institute estimates that each additional $1 million in excess-liability coverage costs between $150 and $300. The larger your basic liability limit, the less excess coverage you need and the lower your premium for excess coverage.
Liability insurance is also a common category of auto insurance. As a result, you may wish to buy homeowner's insurance from the same insurer. By consolidating your insurance coverage with a single insurer, you may be able to reduce your premiums. The following calculator lets you enter homeowner's insurance premiums, at the bottom, to calculate your home loan closing costs.