Know Your Limits: Why Your Auto and Home Insurance Underlying Limits Matter

You’re driving home from work, and you witness another driver running a red light and crashing into another car. You breathe a deep sigh of relief because 10 seconds sooner, and it could’ve been you. But what if it were you, your spouse or your teenage driver in the car that was struck and you subsequently learn the other driver was uninsured? Are your auto policy uninsured/underinsured limits sufficient to cover your medical expenses, lost wages, etc.?

What if the shoe was on the other foot and you, your spouse, or your teenage driver were the at-fault driver? Are you confident your auto insurance policy will cover all the costs associated with the injured party’s medical costs, lost wages, etc. as well as any potential damages assigned to you?

The risks don’t stop on the road. What if someone gets hurt on your property, or your dog causes damage after getting loose? Would your homeowners’ insurance be able to help cover those costs?

Many drivers and homeowners may not realize these are the kinds of risks tied to their insurance policies’ basic “underlying limits.”

If your underlying limits aren’t set high enough, you might face out-of-pocket costs that could affect your savings, assets, and financial plans. Taking time to understand and adjust these limits may help you better protect what you’ve built and support your financial future. 

What are Underlying Limits?

Underlying limits help define the level of financial protection your insurance provides. They represent the maximum amount your primary policy could pay if a claim arises. These limits are set amounts, and once they’re used up, you may be responsible for any additional costs.

If you’re involved in a serious auto accident, something happens on your property, or a significant liability claim comes up, costs could exceed these limits. Medical bills, legal fees, and property damage could add up to hundreds of thousands — or even millions — of dollars, especially if a lawsuit is involved.

The Risk of Insufficient Coverage

Here’s another example of how having insufficient limits can affect you. Let’s revisit that initial at-fault car accident and look at the damages:

• The other party’s medical bills, lost wages, and damages totaled $750,000.
• If your auto insurance liability limit is only $500,000, that leaves a $250,000 balance.
• Without other coverage to fill that gap, you could be responsible for the remaining $250,000.

Now, imagine if the other driver sues for additional damages like “pain and suffering,” the financial impact could be even greater, potentially affecting your assets and financial plans.

This is just one example of a possible shortfall from an accident. Distracted driving, other accidents, and homeowner property damage do occur and may result in significant claims or lawsuits.

Sharing the Road with Uninsured and Underinsured Motorists

You arrive at a four-way intersection at the same time as three other drivers. The rules of the road say the driver on the right has the right of way, or that those going straight have the right of way over those turning. But do all drivers know that?

Just like not everyone knows all the rules, not everyone carries insurance. In fact, about one in three drivers are uninsured or underinsured, according to the Insurance Research Council — even though 49 states require some form of coverage. Some studies also suggest uninsured or underinsured drivers may be more reckless behind the wheel.

So, what stops that one driver from ignoring the rules and running through the intersection, possibly causing an accident?

What many people don’t realize is that if an uninsured driver causes an accident, you, as the insured driver, could face significant out-of-pocket expenses. That’s why auto insurers typically offer two types of coverage, this may vary by state, to help protect policyholders when at-fault drivers have limited or no insurance:

• Uninsured motorists (UM) coverage helps cover injuries or damage caused by a driver without liability insurance or by a hit-and-run driver.
• Underinsured motorists (UIM) coverage helps cover costs that exceed the at-fault driver’s insurance limits.

For example, if your medical bills and damages total $200,000 but the at-fault driver’s insurance only covers $100,000, your underinsured motorist coverage could help pay the remaining $100,000, up to your policy limits. If costs are higher than your coverage, you may be responsible for the difference.

How Excess (Umbrella) Liability Policies Help Minimize Risk

Because underlying limits may sometimes be insufficient, many insurance advisors suggest that homeowners and drivers consider adding excess (often called “umbrella”) liability policies. These policies provide an extra layer of coverage above your underlying limits. Think of them as a financial safety net that can help when your primary insurance liability limits are reached.

For example, if your auto policy has a $500,000 limit, an excess policy could add another $1 million to $10 million — or more, depending on your assets and other coverages you have.

Going back to the earlier example of the at-fault car accident where the other party’s medical bills and damages totaled $750,000, and your auto insurance liability limit covered only $500,000: If you have an excess policy, it may help cover the remaining $250,000. This helps protect your assets from unexpected costs.  

In addition, excess UM/UIM coverage offers protection beyond the limits of your primary auto insurance UM/UIM coverage. For instance, if your primary policy’s uninsured motorist coverage limit is $300,000 and your excess policy adds another $1 million in UM/UIM coverage, you have a larger safety net to help cover costs if an uninsured or underinsured driver hits you.

An excess liability policy typically covers:

Bodily injury, personal injury, and property damage liability: If you’re legally responsible for causing injury to others or damaging their property, and the costs go beyond your primary policy limits, excess liability insurance could cover the additional amount, up to its own limits and policy terms.

Legal defense costs: Lawsuits may be costly, and legal fees could add up quickly. Excess liability policies often cover defense costs beyond the policy limits, helping reduce the financial impact of legal proceedings.

Coverage for uninsured/underinsured motorists: Many excess liability policies include — or may be endorsed to include — uninsured and underinsured motorist coverage, which could help if you’re in an accident with a driver who doesn’t have enough insurance.

Additional liability risks: Depending on the policy, excess liability insurance may cover certain liability exposures not included in your primary policies, providing broader protection.

By having an excess or umbrella policy, you could reduce the risk of paying large amounts out of pocket. It offers peace of mind knowing that if the unexpected happens, you have an extra financial safety net to complement your basic coverage and help protect your assets.

Request a No-Cost Risk Review

If you’re unsure whether your home, auto and other policy underlying limits adequately protect your assets, a personal risk advisor from our team is able to help review your coverage and explore your options. Don’t hesitate to reach out to your insurance advisor. Protecting your future starts with understanding your liability limits, how they work, and whether you might need additional coverage to safeguard your assets and lifestyle.