So I've been debating the appropriate level of liability for bodily injury and property damage car insurance and was wondering if there was a semi-objective way of determining what to set levels for. Everything I find online seems to have been written for overextended, risk-averse consumers by people who are usually tightly connected with the insurance industry.
Generally speaking, I'm risk-neutral and against most forms of insurance, jewelry insurance, pet insurance, life insurance if you have no dependents or stashe, dental insurance, vision insurance, lost income insurance, credit card insurance, extended warranties, etc. If you can afford to pay for something on your own and it wouldn't bankrupt you, it's probably best not to insure against it. It's only catastrophic things that you absolutely could not afford to lose that insurance is worth buying, like health insurance, and even then, only up to the amount that exceeds what you could be able to pay. Insurer's almost certainly know the likelihood you'll be in an accident better than you will and price their plans to make a profit. It's basically like playing the lotto- you'll lose money on average.
Collision insurance and comprehensive coverage can be thrown out pretty easily. I drive an old sedan that I bought for $5k. If it crashes, I'll fix it or get a new one. The same goes for getting more than my state's minimum for uninsured motorist coverage of $20k for property and $25k for bodily injury. Property more than covers my vehicle, and the limits for bodily injury would cover almost 5 years of my health insurance deductible.
My issue is with bodily injury liability and property damage liability. VA minimum for injury is $25k per person/$50k per accident, for property it's $20k. I think I'm struggling with this determination because you're dealing with something where the potential costs are incredibly difficult to estimate and the value of the policy itself can affect the amount of damages. With all the other policies, you know the value of the thing you're insuring and generally also can exist without paying to replace something. If another party wins a judgement, you more or less have to pay them however much they win and they can potentially seize any assets you have. So what should the limits be?
So sure, you can make the argument that you'll need a $1,000,000 policy for injury because $25k is way too low. Why is $25k way too low?
1. "Damages could totally be greater than the minimum!" What if you kill someone or cause an accident that paralyzes a small child and the jury decides to award pain and suffering and the cost of future medical care for the rest of the kid's life?
Let me ask you this, do more English words start with the letter r or have r as the third letter? Think about for a minute. If you guessed start with the letter r, you're wrong, big time. Almost three times as many words have r as the third letter. But because you can easily think of examples of something you assume it's much more probable than it really is. It's a perfect example of the sort of availability heuristic raised in the issue above. In the end, do you know better than the insurance company that the amount in damages that you'll probably have to pay for injuries you'll cause in the next 6 months is less than your premiums?
2. "But you'll be completely screwed if you get hit with a massive judgment and are seriously under-insured!" Ok that's fair. No one wants to lose their house and stash, and that could potentially cause a significant amount of stress, lost time, marital problems etc. that well exceeds the value of the loss. But following that reasoning, why stop at $1,000,000? A single person's future medical expenses, lost wages, pain and suffering could definitely exceed $1,000,000. And what if you seriously injured or killed 4 people in the car you hit? Do you need a $5,000,000 policy then? $10,000,000? What if you hit a school bus? Or zone out and plow through a farmer's market, killing and injuring dozens? That's happened.
And why stop at auto insurance then? You can definitely negligently kill and injure people in other ways. What if you forget to put the toilet seat down and a coworker slips and dies? Or your peanut butter sandwich at work kills your coworker who you forgot was violently allergic to even the whiff of the stuff? Or your neighbor's kid gets paralyzed from a rock under your slip-and-slide that you forgot to check for? Or you adjusting your glasses at the gas station acts as a magifying glass, igniting some droplets of gasoline you negligently spilled while filling up your car and this turns into a blazing inferno which eventually blows up the gas station? Does everyone NEED a ten, no $100,000,000 umbrella insurance policy? If not, we all surely need at least some sort of small umbrella policy then, right?
Clearly not. In reality, most victims go away under-compensated for absurdly high-damage accidents. Cases will frequently settle at whatever insurance policy limits are. The average American household has $80k in net worth, and a large percent of American adults have less than $1000 in liquid or liquidatable assets. That's really why underinsured motorists compensation even exists in the first place, because such a situation like this does occur fairly often and it's not even possible to recover anything. No one demands a McDonald's employee's wages be garnished for decades to pay off a 500k judgement. Most tort lawyers won't even take a case like that because of the difficulty of collecting after obtaining a judgement. Sometimes if two people are negligent in causing an accident, only the richer party will actually be sued, even if that person was less negligent.
So where does that leave us? I'm not quite sure. As Mustachians, we have significant staches that can be easily seized. Lots of attorneys do asset checks to estimate net worth, and they can frequently pull up quite a bit of information, including property records, an absence of bankruptcy judgments or anything to suggest limited credit. We'd probably be prime targets for a law suit and attorneys would be less likely to settle, knowing they could collect very easily just by seizing our accounts or putting a lien on our almost- to paid-off houses. Juries typically award more damages when the defendant is very rich vs. very poor.
Insurance companies might not be as interested in representing us for a large claim if it's almost certain that it will exceed our policy limits. I just had a minor fender bender that ended up causing $15k in damages (funny how that works) and I only had a $5k property policy. The other party filed suit and while my insurer assigned an attorney who was ethically bound to represent me for the full amount of the claim and she did, I could definitely imagine insurance companies having more money at stake could still impact the outcome. The types and number of attorneys they'll assign is probably drastically different for say, a $250,000 claim if you have a $25,000 policy or a $100,000 one. In the end, under the $100,000 policy, your assigned attorneys may have the resources to pull in tons of expert witnesses and get you off entirely or establish contributory negligence to reduce the damages significantly or even get you off. Whereas that effort might not occur with the $25,000 policy, even if your attorney is in fact representing you to the best of his abilities. So the size of your policy might potentially affect the total amount of the judgement against you positively.
On the other hand a big policy could affect you negatively. Insurers typically release the size of your policy to opposing parties before suit is filed (with your permission). A tiny policy might suggest limited means and deter tort lawyers. Depending on what their asset check finds or doesn't, they might be more willing to just settle at your insurer's limits. This didn't help me in my accident, and I was told by my car insurance company that while settling at policy limits is usually quite common, this had significantly shifted over the last two years so that now most insurer's will attempt to sue or settle with the tortfeasor for the remaining balance. I just settled a $10k balance for $5k- which brings up another point: your costs usually will not be as great as you think since insurers are generally willing to settle for about 40-50% on the dollar of uninsured balances.
Despite this prejudice in the court room, I'm wondering if insurers might be ignorant of our Mustachian ways and giving us overly generous quotes. While home ownership is taken into account, I don't think mortgage balance is necessarily considered. And anyways, we're typically in lower-income areas than our stash would suggest and low-income areas equal low claims. Our stash is substantially larger than might be guessed from our occupation or income, again equaling lower claims. We aren't driving flashy sports cars, which is both going to suggest we're more responsible drivers less likely to get in an accident and also not the type of people juries are biased against. Do you think the guy driving the 2001 Toyota Prius who mowed down a kid gets a harsher judgment or the guy driving a shiny red Ferrari under identical circumstances?
So all this quite frankly boggles my mind. My unscientific thought here is to insure yourself up to your stash plus maybe a year's future earnings/savings. This guy seems to agree
http://www.commonsenseadvice.com/how_to_buy_auto_insurance.html . He says that juries never award damages that exceed a person's net worth unless the person was either reckless or drunk. He doesn't cite anything saying this, but I guess I'll go with tha. Insure yourself up to your stash, no more, probably not too much less is his rule.
Is that still cost effective? If juries will award at most your net worth, insuring up to that just ensures $0 liability for you, when you could definitely tolerate losing a small amount if it meant lower premiums overall. Unfortunately, the increments of most policy limits don't allow you to tweak your coverage by just few thousand, so I guess you should just cover yourself.
Considering I own a corporation, have about $200k in easily liquidatable assets and drive a $5k LEXUS (omg!!! It has an L instead of a T, it's so much better!!!) Sue him!) I decided to up my policy from 25k/20k a year to $1,000,000 for injury and $300k for property. Insurance jumped a whole $10 to $35 a month. It's probably a negative expected value money-wise and intellectually unsatisfying, but the satisfaction my reptilian brain gives me from knowing I've preventing an unlikely but catastrophic event is worth it. Plus I can probably get drunk and run some people over too.