Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Written by Shuman Roy
Content Writer & Entrepreneur Shuman Roy

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jun 28, 2022

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First and foremost, it is important to understand how to read a homeowner’s insurance policy in order to understand what general types are available to you. It’s easy to just choose a policy that seems to give you what you need. The problem is many homeowners find out when it’s too late that the policy they choose doesn’t actually cover their needs.

This could mean finding out your homeowners coverage won’t cover the rebuilding of your home after a fire. It could also mean finding out you don’t have enough liability coverage on your homeowners policy when someone falls down your stairs. These are just a couple of the possibilities.

Your homeowners policy consists of property coverage for the physical dwelling (other structures and contents as well) and liability coverage for any bodily injury or property damage you may cause to others. Generally, things like personal property coverage and coverage for other structures like detached garages and storage sheds are set based on the replacement cost of your home. Your policy limits for liability coverage are up to you.

What are my liability limit options?

Depending on the state in which you reside, the company you purchase from, and the type of policy, you can select liability limits from $25,000 to $500,000 and more. Generally, companies offer options in multiples of $100,000. Then you choose the amount you want from a dropdown menu.

If you have “a lot to lose,” you may even consider a personal umbrella insurance policy to extend your limit of liability up to $1,000,000 and beyond. This is more common for homes with pools, larger homes, and otherwise homes where the residents have more assets they could lose.

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What liability limits should I choose?

Insurance allows you to be prepared for the unexpected. When you think about personal property, you can value every item you own. If you’re furnishing a whole house, $50,000 could evaporate very quickly.

Liability coverage is similar in many ways. It is generally recommended that a homeowner carry at least $300,000 in liability coverage. While $50,000 or $100,000 may seem like a lot, liability coverage is meant to cover any settlement with an injured party as well as legal and other fees. If you don’t have enough coverage, you’d be on the hook to personally pay the remainder of any claim. While homeowners insurance policies can cover hundreds of thousands of dollars in liability, some homeowners opt for umbrella policies for extra protection.

If your net worth is high, you may want to take advantage of umbrella policies that go up into the millions.

If you are highly risk tolerant, meaning you aren’t terribly worried about getting sued and having to personally pay for damages awarded to an injured party, you may choose lower limits. This is more common for condos and other small homes. If you’re considering going with lower personal liability coverage limits, you may want to discuss your actual risk with a professional.

Why do I need homeowner’s liability insurance coverage?

Simply owning a home puts you at risk for severe financial loss as a result of being found liable for someone’s bodily injury or property damage. This can happen to single income households with a small condo, people who own a multi-million dollar mansion, and everybody in between. Let’s look at an example of each:

Bodily Injury

Suppose a child visiting your home suffers a concussion while running around on a slippery pool deck.

The child may need to be taken to the hospital via ambulance and spend a couple of days participating in a series of tests to make sure they are not more seriously injured.

If the amount of damages exceeds your medical payments limit, you might have to file a claim to pay for the hospital costs.

In the unfortunate event there was serious head trauma (or worse, death) as a result of the accident, costs could easily surpass $100,000. Unfortunately, this could also lead to legal action, attorney fees, etc.

Property Damage

Keep in mind, if your neighbor’s house is damaged, they would file a claim with their policy. By definition, you cannot make a claim on property you have no ownership interest in. However, if other property is damaged as a result of your negligence, your homeowners policy may kick in the same way auto liability coverage would kick in if you hit another car or a pedestrian with your car.

Renter’s insurance policy coverage types are similar, with the exception of the coverage for the dwelling, in that they provide you liability and contents coverage. Not covering the dwelling replacement costs makes renters policies much cheaper than homeowners policies. Renters also aren’t liable for the full range of things a homeowner would be. Even renters can benefit from strong personal liability coverage to cover medical expenses, property damage, and more.

Contact an independent insurance agent if you are not sure what your homeowner’s liability limits are or if you are thinking about increasing or changing your coverage.

Read more: How much homeowner’s insurance do I need?