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What is an adequate limit for liability and underinsured motorist coverage?

The Advisors @ Guthrie Insurance Brokers

What is an adequate Auto Liability and Underinsured Motorist limit?

Like most things to do with insurance, there is no standard or easy solution. One must consider many factors such as the maximum value (economic + pain and suffering) of the worst possible injury to yourself and others, the amount of assets you need to protect, and of course premiums need to be balanced with your budget. Where you drive, how often, the type of car, and other similar factors are not relevant to this and pertain more to the premium, not the risk. You could drive your car once a month or even be a passenger in someone else's car, and that might be just the time you need the right limit of coverage.

In Ontario the minimum automobile liability and underinsured motorist insurance limit required by law is $200,000. It would be fair to say the majority of motorists carry more and typically limits of $1,000,000 or $2,000,000 are most common. Higher limits are often available and some motorists and businesses carry limits of $5,000,000., $10,000,000 or even higher.

When deciding what is an appropriate limit for you, your family or your business, many people consider only the premium without giving due consideration to their risk and the loss involved or financial consequences of a serious accident.

We all like to think we are exemplary drivers and the chance of getting involved in a serious crash is remote. Yet, it is almost a daily occurrence. Even the very best drivers, those that have never had an incident, could suffer considerably in the event of a major accident while at the fault of another.

Consider this hypothetical and very tragic scenario -

Car stopped at a red light is struck from behind and pushed into the intersection where struck by other vehicles. The 4 occupants, consisting of 2 adults and their 2 children, are injured, two severely. Fortunately, all survive and are left with a variety of injuries including permanent disability, long term pain and suffering, unable to continue university, inability to return to profession, loss of income, loss of enjoyment of life, and more physical and economic long-term injury. Certainly their automobile accident benefits will cover the majority of their expenses but their future has now been severely impacted.

They had never considered the consequences of such a serious accident and now, being left in dire circumstances, are left with little choice but to seek damages for their injuries from the at-fault motorist. Their lawsuit is a combined total of $6,000,000 and the award is granted after several years of litigation. They had been advised by their legal counsel that the motorist who caused the injury only has $1,000,000 of automobile liability and has no other assets they could force to sell to recover their damages.

It looks like this family will have a shortfall of $5,000,000 (+ legal expenses) as they can only recover $1,000,000 from the at-fault motorist. However, their own policy includes $2,000,000 of Underinsured Motorist protection which "increases" the limit available from the "underinsured motorist" under their own policy. Even though they are blameless for this accident their own insurer pays them the full $2,000,000 limit. Of a $6,000,000 award, their total recovery than will be $3,000,000 less considerable legal fees. There is nowhere else to recover the $3,000,000 shortfall.

The financial outcome of this tragic accident could have been much different with some foresight into their families risk situation and a small investment in higher limits. The typical premium for a 2-car, one home family to increase automobile liability, under-insured motorist and personal liability to at least $5,000,000 is about $20 monthly. In this example, a $5,000,000 under-insured motorist limit would have resulted in a $6,000,000 settlement ($1,000,000 from the at-fault motorist and $5,000,000 from their own insurer), less legal expenses.

The illustration above focuses on the importance of adequate under-insured motorist coverage. Now, consider this from a legal liability perspective. If the at-fault motorist above had the same $1,000,000 auto liability limit but also owned a home, cottage, investments, shares in a business, or other assets, they would have been sold to pay for the shortfall in the amount of liability insurance carried to the $6,000,000 judgment awarded. Again, instead of being forced to come up with the $5,000,000 liability shortfall, adequate liability limits, such as with an umbrella policy, could have been arranged for about $20 monthly.

When it comes to insurance, you only have once chance to get it right. Getting it wrong can be very expensive!

Talk to the RIBO licensed and bonded professionals at Insureplus by Guthrie Insurance today!