Avoiding the Danger of Split Liability Limits

From Insurance for Dummies by Jack Hungelmann

Most liability coverage for homes, boats, recreational vehicles, and other personal policies is sold by insurance companies as a single limit (such as $300,000) that applies to all injuries and property damage you cause in a single accident, no matter how many persons are injured or how much property is damaged. In other words, if you’re in an accident, you have one pool of money to pay for all your liability. Liability coverage for car accidents is also available as a single limit, but just as commonly it’s sold with split limits.

With split limits automobile liability coverage, you select three limits. You select one limit — the maximum your policy pays — for injuries you cause to a single person. You select another limit for all injuries you cause in a single accident involving two or more people. And you select a third limit for all damage to property you cause in a single accident.

Examples of three of the most typical combinations of split limits are shown below:  

If you buy a single liability limit of $300,000 on your home, cabin, and boat policies, you should get the same $300,000 limit on your car insurance. If you request that limit from an agent selling only split limits, instead of a single limit of $300,000, here are the split limits the agent may suggest as an alternative:

• $100,000 per person for injuries you cause
• $300,000 per accident for injuries (two or more people injured)
• $50,000 per accident for all property damage you cause

The danger of buying split limits coverage is a false sense of security given to you by the injury limit per accident. The limit you are actually most likely to exhaust in a car accident is the injury limit per person.

Suppose you buy the limits shown in the second column in the above. Your policy limits you to $100,000 per person and $300,000 per accident for injuries you cause. Here are some hypothetical injury claims, what a jury may award, and what your policy pays with those split limits.

• You rear-end a car ahead of you with only one occupant, resulting in injuries to the driver’s neck and back. Jury award: $250,000. You have a $300,000 limit per accident for injuries, so you’re fine, right? Well, your limit per person that you injure is $100,000, so you’re out $150,000.
• You rear-end the same car, but with two occupants. Both have neck and back injuries, one more serious than the other. Jury awards: $200,000 to one, $50,000 to the other. You guessed it. The policy pays the full $50,000 for the less-seriously injured person but only $100,000 for the more-seriously injured person, and you’re out $100,000 ($200,000 less the $100,000 per person limit).

None of the scenarios involve catastrophic lawsuits, permanent serious injuries, or death. They are, in short, relatively ordinary. But look at what you would owe with split limits coverage!

In both accident examples, the total amount of jury awards is within the $300,000 per accident limit. But because the policy also has a per person limit, the judgment costs you astronomical sums of money that you would not have owed if you had a $300,000 single limit coverage.

Don’t forget about legal fees. Legal fees in an accident defense case can run $50,000, $100,000, or more! Once you’ve used up your liability limit per accident, those legal costs come from your pocket. Every time you are sued for more than your policy limits, you will receive a friendly letter from your insurance company (certified mail, of course) that tells you once their policy limits have been reached, you are on your own.

So, how can you avoid the per person pitfall of split limits coverage? Since the vast majority of car accidents involve cars occupied by only one person, I recommend one of three strategies:

• Select a per person limit high enough to meet your lawsuit coverage needs for one person’s injuries. In the two accident examples I just gave, for example, $250,000 to $500,000 of liability coverage per person would have saved you hundreds of thousands of dollars out of pocket for as little as $100 a year in additional insurance costs, if you’re insuring two cars.
• Buy single limit coverage — one pool of money large enough to cover all injuries and property damage without a limit on the amount paid to any one person. Since this includes property damage, and any amount spent to pay for property damage reduces the amount left to pay for injuries, be sure to buy a little extra coverage. $300,000 to $500,000 is the least amount of coverage you should consider.
• Buy a second layer of liability insurance, called an umbrella policy, of $1 million or more.