How do personal property and liability insurance work?

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You can take every precaution to protect your property using alarms, locks, etc., but some losses are simply unavoidable.  Fires and natural disasters strike without warning, and even the best locks and alarms won’t always protect you from a professional thief.  There are also situations in which you may be personally liable to another person for injury caused by you or your property. 

The three most common types of insurance used to protect against personal property and liability risks are homeowner’s or renter’s insurance, automobile insurance, and personal umbrella insurance.

Homeowner’s insurance will cover most types of damage to your home and most types of personal property (excluding cars), as well as liabilities for occurrences such as someone tripping on your steps and incurring medical bills.  Numerous exclusions apply; damage due to flooding, for example, typically must be covered by a separate policy, and high-value items such as jewelry and paintings will require an appraisal and a “rider” (an addendum to the policy).  Homeowner’s insurance is required if you have a mortgage.  Renter’s insurance will similarly cover your personal property and liabilities. 

Even if you think your personal property is not worth insuring, liability insurance is an important and often overlooked type of coverage.  When it comes to homes it is up to the homeowner to decide whether he wants to risk losing everything he owns in order to pay someone else’s medical bills, or if he would prefer to invest in personal liability insurance.  Don’t forget to look at the policy limits before deciding on a liability insurance plan: if your liability exceeds the policy limit, you will be on the hook for the shortfall.  Umbrella insurance provides extra liability coverage and can be purchased for homeowner’s, auto, and business policies, etc.

In fact, liability insurance is so important when it comes to automobiles that every car is required to be covered by some amount of liability insurance due to the high risk of vehicles causing harm to others.  However, it’s up to you whether you want to pay extra premiums for “collision” insurance, which covers repairs for damage you cause to your own car in a collision, or whether you want to risk paying any necessary repair or replacement costs out of your pocket.  As to injury you may cause to yourself in a collision, state laws require even the cheapest automobile liability policies to provide some coverage, but not nearly enough to pay the medical bills for catastrophic injury. 

Before buying property insurance, make sure you read and understand your policy.  Make sure you are aware of the following at a minimum:

  • What items are covered and for how much?
  • What items are excluded from coverage?
  • What causes of harm are covered or excluded?
  • What are the policy limits?