Automotive Liability Insurance Limits - What You Need to Know

Monday, March 20, 2017 - 8:00am
image of injured man on street by car collision

Choosing auto insurance coverage is a complicated matter. Somehow it became common knowledge for consumers to ask their insurance agent for "Full Coverage," and that would take care of all their insurance needs. I am not sure where the term "full coverage" originated from, but I am not a fan of it. In the insurance industry, there is no such thing as "full coverage." The insurance company will always limit the amount of coverage they offer. So when someone asks me for "full coverage," all they are telling me is that they do not know what they need or want. Instead of asking for a non-existent superfluous term, it is important to ask for specific coverages and protection. This will indeed help you compare coverages evenly and equally. This week I would like to focus on the most important part of the auto insurance policy, the liability limits. Liability insurance is the part of the auto policy that the government requires all automotive owners carry. It is also the insurance coverage that protects you from other individuals. So, what do you need to know about auto liability? This article will discuss the idea of split limits, combined single limits, and the benefits and risks of each.

The split limit:

Split limits are the most common type of insurance purchased for auto insurance. It is also one of the most confusing limits to understanding. Therefore we need to break this coverage down bit by bit to gain a good knowledge of how it works. The federal government requires every automobile that is licensed for road use. However, it is up to each state to determine what the minimum amount of coverage is necessary for each vehicle to carry. States determine the minimum coverage using split limits. For instance, in the state of Oklahoma, the minimum amount of coverage every vehicle is required to carry by law is 25/50/25. I would like to take the state minimums and use these to break down the proper way to read split limit coverage.

I also want to use an example throughout this article to help illustrate how the coverages are used. In this article, our example is that the insured driver runs a red light and t-bones the driver side section of a mini-van traveling the intersecting direction. The minivan had one driver and three passengers. Everyone in the minivan was severely injured and rushed to the hospital.

Let's first look at the first number of the split limit. This is the first 25 in the row when using Oklahoma's 25/50/25. The first number represents, in thousands, the amount of coverage that the insurance company will pay for any one person's injury that the insured caused. Using our example, the driver will only be eligible to receive a maximum of $25,000 for their wounds. The front passenger will be entitled to receive a maximum of $25,000, and both passengers in the rear of the minivan are eligible for $25,000 each for their injuries.

However, the insurance company is going to limit the total amount that is paid out. The second number in the split limits represents the total amount, in thousands, that the insurance company will pay for injuries involved in a single accident. Therefor Oklahoma's minimum amount that they will pay for any one accident is $50,000. Let's look at our example again. Let's assume that the driver's injuries create a total of $15,000 in medical bills. The front passenger has medical bills of $27,000. The rear passengers have medical bills of $5,000 and $2,000. What does the insurance company pay? In this example, the total cost of the liability is $49,000. However, notice that only $47,000 is spent, why? The front passenger's medical bills exceed $25,000. Therefore the most the insurance company will pay for that rider is $25,000. However, all the other individuals injured have bills below $25,000 and the maximum amount paid out is below $50,000.

Injured Party Medical Bills Amount Paid
Driver $15,000 $15,000
Front Passenger $27,000 $25,000
Rear Passenger 1 $5,000 $5,000
Rear Passenger 2 $2,000 $2,000

However, let's change the numbers. Let's say that the front passenger's injuries are $25,000 and rear passenger two had $7,000 instead of $2,000. Now the total cost of all medical bills exceeds $50,000. Even though every passenger has less than $25,000 in medical bills; the total cost exceeds $50,000.

Injured Party Medical Bills Amount Paid
Driver $15,000  
Front Passenger $25,000  
Rear Passenger 1 $5,000  
Rear Passenger 2 $7,000  
Total Bill $52,000 $50,000

Combined Single Limits:

Now there is an issue because there is not enough coverage to pay for all the medical bills. This presents a problem because the insured is now subject to a lawsuit because they do not have enough insurance to cover the cost of the medical bills. The final number in the split limit 25/50/25 represents the cost to repair or replace any property. In our scenario, the insurance company will have $25,000 to repair or replace the minivan. It will also pay for damaged property inside the vehicle, buildings, signs, and/or equipment.

The other type of insurance is typically purchased at high limits. Combined single limits typically start at $500,000 in liability coverage. The good news is that this coverage is much easier to understand. If you purchase a $500,000 combined single limit policy, you will have $500,000 to pay for both medical bills and property damage. Think of combined single limits in this analogy. The insurance company takes $500,000 and puts it in a bucket. When the insured is involved in an accident and is at fault for the crash, the insurance company will spend the money in the bucket regardless if it is for property or bodily injury.

Benefits and Risks of Split Limit and Combined Single Limit:

I am often asked which coverage is better to carry. Typically split limits used for lower coverage and combined single limits are used for higher limits, but each has their benefits and risks. Let's look at a few examples using a split limit and combined single limit. In this example, we will consider a split limit of 250/500/250 and a combined single limit of $500,000. Example 1: The insured is driving down the highway at 70mph. His passenger tire blows out, and he loses control of the vehicle. He hits the car next to him, and they spin out into a retaining wall head on. The claimant's vehicle consists of an injured driver and an injured passenger. The plaintiff's vehicle is a brand new Audi A3 valued at $45,000. The driver sustained major injuries, and their liability payment is $300,000. The passenger sustained injuries of $150,000. How is this accident paid for? Split Limit - Driver -$250,000 Passenger - $150,000 Vehicle - $45,000 Combined Single Limit - Driver $300,000 Passenger - $150,000 Vehicle - $45,000 In this scenario, there is not enough insurance to cover the driver's liability when the insured carries split limits. However, the combined single limit covers the entire bill. Therefore the combined single limit is better in this accident. However, let's look at one more example. Example 2: Same scenario but the driver's injuries are $250,000, the passenger's injuries are $200,000, and the vehicle is a custom A3 costing $60,000. In this situation the payout is as follows: Split Limit - Driver - $250,000 Passenger - $200,000 Vehicle - $60,000 Combined Single Limit - Bills - $510,000 Payment - $500,000 In this scenario, the total bills exceed $500,000. This means that the combined single limit does not have enough insurance to pay for the entire claim. However, the split limits do cover the entire claim because of the split coverage. This means that split limits would be better in this scenario.

Conclusion:

Both split limits and combined single limits have their benefits and risks. It is up to the insured to determine which kind of coverage they would like to purchase. Understanding the coverages and the types of liability insurance available to you is the first step to making an educated decision on your liability coverage. My best advice to you is regardless of split limit or combined single limit coverage; it is best to purchase the maximum amount of liability coverage that your premiums can afford. Liability insurance is inexpensive and the more you have, the less chance there is to run out of coverage.

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