Liability Insurance: Consider the Cost of Not Having Enough
Is it fair to say that most people don’t like to talk about insurance? Life insurance is a euphemistic way of referring to death insurance, that is, insurance that is purchased to protect against the premature death of the person insured. Disability insurance is purchased to offset the risk of a lengthy disability that may prevent the insured person from being able to work and therefore earn an income. If we move into the general insurance area, we probably think of auto insurance and home insurance. We want to insure against the cost of repairing or replacing a vehicle. If we own a home, we want to protect ourselves against severe damage to that home that may require it to be rebuilt.
Home insurance is sometimes synonymous with fire insurance. Several years ago, a home just down the road from my home was severely damaged by a fire, due to a marijuana grow-op as I recall. The house had been rented out. I suspect the property owner didn’t know what the tenants were up to; I don’t think an illegal operation would have qualified for insurance coverage in that case. In any event, the property was sold, and a new house was built.
Worse than having to pay for something that you hope you never need is the situation when the coverage you pay for is not covered by the policy you purchased. That means getting the right kind of insurance so that you are paying for something useful to you when you need it.
Introduction to Liability Insurance
One of the forms of insurance that we pay for, usually included in our home and auto policies, is liability insurance. A simple definition of liability insurance is that it is purchased to cover the owner of the home or auto against liability for injury or damage to others. If liability sounds like a fancy word used by lawyers, think of it as responsibility insurance. You pay an insurance company to have them take over your financial responsibility in the event of an injury or damage that occurred on your property.
Importance of Liability Insurance
Liability insurance is a mandatory part of auto insurance in all provinces in Canada. Mandatory minimums vary; however, most provinces set the minimum at $200,000. This seems like a lot, but most insurance advisors would recommend coverage much higher than this. Imagine if you are driving, get into an accident that is your fault, and there is a life-changing injury that will require expensive care for the rest of the injured person’s life. Assuring yourself that you are a good driver and would never put yourself into that situation will do you no good when that unlikely event happens.
The same can be said for home insurance if someone injures him or herself on your property because you failed to make a reasonable effort in keeping your property free of hazards.
Types of Liability Insurance in Canada
There are several forms of liability insurance in Canada. Many of them relate to business or professional activities and may go under names like general liability insurance, product liability insurance, or professional liability insurance. For example, as someone who practises financial planning, I have professional liability insurance.
Perhaps you volunteer as a board member for a non-profit or charitable organization. In that case, you will want to know that the organization has directors and officers liability insurance.
Even if you do not run a business or sit on a board, your circumstances may justify the purchase of umbrella liability insurance which would go beyond your home and auto insurance coverages both in the kinds of coverage and the limits on insurance payouts.
How Much Liability Insurance Coverage is Needed?
Factors to consider when determining the coverage amount
In this section, I will limit the discussion to private households not engaged in business or professional activities.
Despite most provinces requiring only $200,000 of liability coverage as a part of your auto insurance policy. Most insurers recommend $1 million or even $2 million in coverage. Factors to consider include frequent carpooling with others in your vehicle, driving your vehicle for business reasons, frequent travel to the United States, and driving in areas with lots of traffic or high accident rates.
Using my household’s situation as an example, I work from home and my wife does not carpool; we seldom-to-never drive for business reasons as my wife’s company provides a company vehicle; we probably travel by car to the United States once or twice a year; but we drive to Toronto several times a year. We also live near an intersection that was labelled “Calamity Corners” nearly a century ago. Fortunately, that name is more of a historical relic than a present reality.
In a blog post written for the general public, far be it from me to make a specific recommendation on automobile liability insurance. However, in my view, the costs to go from $1 million to $2 million in coverage are generally not onerous and should be seriously considered.
Interestingly, if you own your home “free and clear,” that is, unencumbered by a mortgage, you do not have an obligation to purchase home insurance. That is not a good way to save money, though. Again, $1 million is probably a good base from which to start, but you may want to go further. If you frequently entertain at your home, you may wish to consider the likelihood of slips, trips, or falls on your property. I live in London, Ontario, which is in the “snow belt” according to the many people who opined about our move here more than 22 years ago. In such an environment, slips and falls can be an issue.
Even if your winter weather has a less notorious reputation, if you like to host parties where alcohol is served, you may also have liability if you allow the guests at your home to become intoxicated and leave in their vehicles. Again, this argues for paying for more coverage or limiting situations that can increase your liability.
How to Save on Your Insurance Premium
Rather than finding savings in the insurance premium you pay by cutting the maximum liability coverage, there are some better ways to save money, in my opinion.
You may want to purchase an anti-theft device on your car and/or a security system for your home. Insurance companies often offer discounts for these kinds of actions.
Some Canadians have one insurance company providing coverage for their home and another covering their automobile. Sometimes this can be inevitable if, for example, you own an antique automobile that requires a special policy; however, if you can bundle your home and auto policies under one insurance provider, you can often receive a discount.
When home and auto insurance policies combined exceed $2,000 each year, it can be difficult to do anything but make monthly payments. Nevertheless, if you can pay your premium annually, you often avoid extra charges.
Finally, I will suggest that you consider raising the deductible. If you are involved in an auto collision, you may have to pay an initial amount, the deductible, out of your pocket before the insurance covers the rest of the cost to repair the vehicle. Raising that deductible to a higher level may reduce your annual costs. In Ontario, for example, you do not need to report a collision if there were no injuries, and the combined damage was less than $2,000. You may wish to report the collision despite those rules, but many people would prefer to resolve the costs without involving the police or insurance, and if that is your perspective you may wish to set a higher deductible on your auto insurance.
You may also wish to increase the deductible for home insurance. In my view, home insurance, as well as most other forms of insurance, is meant to protect against catastrophic costs. At what point do otherwise insurable costs transition from a level you can manage on your own to causing you severe financial damage? I don’t suggest you go right up to that edge, but if your home insurance deductible is $1,000 you may want to increase it to $2,000 or even $3,000.
To wrap up this post, I encourage those with potential liabilities to make sure they have coverage in place to protect themselves against the extraordinary financial damage that can occur without adequate insurance. Be willing to pay for insurance because the impact of not having it in place can be quite literally catastrophic.
This is the 191st blog post for Russ Writes, first published on 2023-04-03
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.