What Is Liability Insurance?

If you’re sued or need to pay for someone else’s medical expenses after you’re found at fault in an accident on the road or in your home, liability coverage will kick in.

Written by Jess Ullrich / June 30, 2022

Quick Bites

  • Liability coverage protects you if you’re responsible for a car accident or an injury on your property.
  • This coverage is included in typical auto, homeowners and renters insurance policies.
  • Liability insurance can cover legal, medical and damages costs for at-fault accidents or injuries.

Nobody ever wants to be responsible for injuring another person or damaging someone else’s property, but sometimes it happens. And if it happens to you, having solid liability coverage can help preserve your savings while the other party gets paid for damages.

Read on to learn what this coverage is, how it works and the types of policies available.

Inside this article

  1. What is liability insurance?
  2. How does liability work?
  3. Examples of liability insurance
  4. What else to keep in mind
  5. FAQs

What is liability insurance?

Liability insurance is a type of coverage that protects you financially if you’re found at fault in a car accident or if someone is hurt on your property (whether you’re a homeowner or renter). If you accidentally hit someone’s retaining wall with your car, for example, your car liability insurance would cover the cost.

The police or insurance adjusters will typically determine fault in an accident. But if there’s no simple way to determine who’s at fault, the courts may get involved. This is pretty rare, though.

Typical homeowners and renters insurance policies also include liability coverage, which can cover legal costs if someone is injured at your home. There are other types of liability insurance as well, which we’ll discuss shortly.

How does liability insurance work?

Liability coverage pays a third party (the person or people who are injured in the accident) directly if you’re found at fault for an accident or injury.[1] It can cover the cost of any legal fees and other payouts, up to the coverage limit.

Common limits for auto liability coverage are $100,000 per person or $300,000 per accident for bodily injury, and $50,000 for property damage. With homeowners or renters insurance, you can generally get up to $500,000 in coverage.

For example: If you’re sued after a guest at your home trips over a laundry basket and falls down your stairs, your homeowners liability insurance can help offset the cost if you’re found at fault. Let’s say you have $100,000 worth of coverage, but the person’s legal fees and medical bills amount to $105,000. You’d need to pay the additional $5,000 out of pocket to cover costs.

Examples of liability insurance

There are several types of liability insurance coverage, and you can also get umbrella insurance as added protection—it basically provides coverage beyond what typically policies offer.

You might hear about liability coverage most often in terms of auto insurance. That’s because 49 states and Washington D.C. mandate that drivers have a minimum amount of liability coverage to be road-ready. Liability coverage isn’t required in New Hampshire.[2]

With auto insurance, both property damage liability and bodily injury liability are included as part of a full coverage policy.

  • Property damage liability covers you if you cause damage to someone else’s property.

  • Bodily injury protects you if you cause an accident and hurt another person.

Besides its application for auto insurance, liability coverage is also an option with other types of insurance, including:

Homeowners, renters insurance

Most standard homeowners and renters policies include liability coverage, which protects you if someone is injured at your home and you’re found responsible. For instance, if your deck collapses during a party and you’re on the hook for medical bills, or your friend breaks their ankle tripping over a loose paver on your patio, your homeowners insurance could help offset these costs.

Commercial liability insurance

This coverage works similar to homeowners or renters coverage, but it protects businesses if a client or customer is injured and the business owner is at fault. With commercial liability insurance, it’s generally recommended to have $1 million in per-occurrence coverage and $2 million aggregate coverage.

Pet liability insurance

While standard homeowners and renters insurance policies may include a small amount of coverage for dog bites or related issues, you can also choose to purchase additional pet liability insurance for added protection. For instance, if your dog bites the mail carrier, dog liability insurance may cover any ensuing medical costs.


There are also less common types of liability coverage, which may be included in special event insurance or cyber insurance policies. These commercial policies protect business owners if they’re found responsible for an injury at an event they’re hosting, or if they’re hacked and customer data is stolen.

What to keep in mind about liability insurance

Liability coverage is an important type of insurance, and in the case of auto insurance in most states, it’s required. However, it’s optional for homeowners and renters in most cases.

Also keep in mind that while it provides valuable protection, liability insurance doesn’t cover everything. Most insurance policies will include other types of coverage that may pick up where it leaves off:

  • Homeowners policies also include dwelling and personal property coverage

  • Auto policies may include uninsured motorist or personal injury protection coverage

Having a comprehensive policy helps to keep your savings safe if the unexpected happens.

That said, you’ll also want to keep costs in mind as you’re pricing out insurance coverage. The average cost of liability coverage will vary by state, the insurer and the amount of coverage you choose. However, for context, average premiums for auto liability coverage are around $653 per year or $54 per month.[5]

The cost of personal liability coverage associated with a homeowners or renters policy is harder to quantify, as this coverage is typically bundled together with other coverages.


What’s the difference between full coverage and liability insurance?

Though liability insurance is typically included as part of a full coverage auto policy, it’s just one component. Full coverage policies usually include collision, comprehensive, bodily injury and property damage liability coverage. Each type of coverage serves an important purpose, keeping you and others safe while you’re on the road.

Is it bad to only have liability insurance?

While having liability insurance is definitely a good idea, other auto insurance coverages may also be required depending on which state you live in. Some states require that you have uninsured motorist coverage or personal injury protection. If you’re registering a new car, be sure to research coverage requirements in your state. This information will likely be included on your state’s official website or its Department of Motor Vehicles website.

What’s a good amount of liability coverage?

For homeowners insurance, the Insurance Information Institute (III) recommends that you carry around $300,000 to $500,000 worth of coverage. Auto insurance experts also recommend having at least $100,000 worth of liability coverage per person or $300,000 per accident bodily injury liability coverage, and at least $50,000 worth of property damage liability coverage.[4]

Article Sources
  1. “Liability Insurance Coverage,” Cornell Law School Legal Information Institute, July 2020, https://www.law.cornell.edu/wex/liability_insurance_coverage.
  2. “Automobile Financial Responsibility Laws By State,” III, Jan. 1, 2019, https://www.iii.org/automobile-financial-responsibility-laws-by-state.
  3. “How Much Homeowners Insurance Do I Need?” III, https://www.iii.org/article/how-much-homeowners-insurance-do-you-need.
  4. Aaron Besson, “How Much is Liability Car Insurance in 2022?” QwoteWizard, Jan. 29, 2021, https://quotewizard.com/auto-insurance/cost-of-liability-insurance
  5. “How Much Auto Insurance Coverage Do I Need?” National General Insurance, https://nationalgeneral.com/learning-center/insurance-basics/how_much_coverage.asp.

About the Author

Jess Ullrich

Jess Ullrich

Jess Ullrich is a personal finance writer who's been creating online content since 2009.

Full bio

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