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Joseph M. Ghabour & Associates LLC

How Much & Which Types of Insurance Should I Buy?

 
Liability
 
With the exception of the Basic Policy, a minimum amount of liability insurance is required by New Jersey law and virtually every other state. The important question is whether merely buying the minimum amount is enough. The answer? Absolutely not-not for anyone. New Jersey's legally required bodily injury insurance limits of $15,000 (one claimant) and $30,000 (all claimants) are woefully inadequate to protect your financial assets or pay for the possible medical expenses of an injured party. These limits have gone unchanged for the past 30 years, while medical costs have grown exponentially.
 

Let's say...
You run a stop sign and crash into another car. The driver is taken to the hospital for surgery where she stays for over a month. She undergoes rehabilitation and physical therapy, and is unable to work for two years. Even if the driver earns less than $50,000 a year, the total claim could easily hit $1,000,000. Now compare this to the $15,000 of liability insurance required by law.

This scenario may sound extreme, but it's not. The above scenario, in fact, is a moderate one. When imagining a car accident, the majority of people envision the kinds of minor fender benders that many of us have experienced and walked away from unscathed: no serious injuries, only mild damage to the vehicles-nothing that would entail hospital bills or lost wages. The reality, however, is often a great deal more severe.

The precise amount of liability insurance you should buy depends largely upon the extent of your assets. Those with extensive wealth are far more likely to be sued for large sums of money. Understanding car insurance means not only peering into the minds of insurance adjusters, but lawyers as well. Personal injury attorneys are far more likely to go after the assets of high net worth individuals, providing them with a greater payoff if they win on behalf of their client, rather than simply advising their clients to settle for the limit of the other driver's insurance policy.

Let's say...
An attorney accepts a client with injuries whose "value" exceeds $150,000, though the other driver-who was at fault-had a liability limit of only $50,000. Would the attorney immediately advise her client to accept the other driver's policy limit? Very unlikely, at least not until she has performed an "asset check" on the other driver, looking for assets that might be available to satisfy a potential judgment. In other words, how much money the other driver has will go a long way in determining whether the attorney decides it's worth all the time and energy to go after personal assets in order to secure for her client the full cost of their injuries.

In the scenario above, it is easy to see that the result could be financially catastrophic for the defendant. But this result could be avoided with an adequate liability insurance policy. You may have heard that you should buy a liability policy with a limit that more or less equals your total assets, the idea being that you are "covering" your assets in doing so. If your insurance equals or exceeds your net worth, so the thinking goes, you'll never have to worry about having to pay a lawsuit judgment out of your own pocket. This is nonsense, and it's based on a complete misunderstanding of how insurance and personal injury law work. There's nothing that says that someone couldn't sue you for more than your policy limit, requiring you to pay the difference. Your liability insurance is the first line of defense, and a good one at that, but your personal assets remain vulnerable beyond your policy limits.
There is no secret formula to tell you how much liability coverage is enough, but there is a sound principle that can help you make an informed decision. And the principle is this: within reason, and within the confines of your budget, you want the highest possible ratio between your policy limit and your total assets. The smaller your assets look in comparison to your liability coverage, the more likely an attorney would advise her client to settle for your policy limit, leaving your personal assets untouched.

But what about a driver with little or no assets? My advice is to buy a liability policy with as high a limit as you can reasonably afford. Generally, attorneys will not pursue an individual with no assets-the payoff isn't worth the effort-but we should remember that a New Jersey judgment has a life of twenty years and can be renewed. A judgment, though not as serious as a bankruptcy, can affect your financial life for years to come.
For drivers who finance or lease their vehicles, your financing company will require a minimum amount of liability coverage. You should check with your financing and leasing agreement to see the minimum coverages you are obligated to maintain while the car is financed or leased.

Uninsured and Underinsured Motorist Insurance Coverage

These types of coverages, in my mind, are nearly as indispensable as liability insurance. I realize that some resent having to buy these policies, feeling that it's unfair to pay for something that is rightly someone else's responsibility. Many people assume that when one's underinsured motorist insurance pays for injuries someone else caused, it absolves the negligent driver from having to take financial responsibility for their actions. The other driver fails to buy insurance, causes an accident and doesn't suffer the consequences. However, this is not actually the case. By accepting payment for your injuries under your uninsured motorist policy, you give your insurance company the right to sue the person at fault for the money it was obligated to pay you-a right that insurance companies often exercise.
And while this type of principled objection is understandable-I certainly believe we all have a duty to carry adequate insurance-it runs up against an unavoidable reality: there are simply too many drivers on the road either without insurance at all, or with policy limits that are negligible in comparison to a modest personal injury claim. Moreover, suing another driver for their personal assets is a time consuming and uncertain process, and one to avoid if at all possible. Uninsured and underinsured motorist coverage saves you from the protracted and occasionally fruitless ordeal of a lawsuit and gives you the resources you need to recover from your accident.

As with liability insurance, a good rule of thumb when it comes to uninsured and underinsured motorist coverage is to buy a policy with the highest limit reasonably available. This critical coverage, after all, is about protecting you and your family.

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