Accidents always seem to happen when you're short of funds, up to your eyeballs in debt and unable to take time off. However, the threat of a lawsuit or a massive payout to other victims can make a bad situation much, much worse. Fortunately, liability auto insurance can screen you from the worst of the financial fallout by indemnifying you (paying others for bills you're held liable for, up to your coverage limit) and defending you (mounting a legal defense if necessary and covered under your policy). But how much liability car insurance do you really need? The answer depends on where you live, how much you stand to lose, how much risk you expose yourself to and how lucky you feel.

State laws handle liability in one of two ways. In tort law states, the insurer of the person legally found to have caused the accident compensates the other parties for damages. In a no-fault state, your own insurer pays you with no finding of fault taking place. In these states, you would probably carry a Personal Injury Protection policy (PIP) that pays for your medical expenses, rehabilitation, funeral costs, lost wages and so forth. No-fault states limit lawsuits but do not wholly prevent them, so many states allow for additional coverage called Residual Bodily Injury Liability Coverage as a hedge against possible lawsuits or PIP shortfalls.

The amount of liability insurance that you need depends on the value of the assets you're protecting, which can add up quickly if your policy covers a business. Commercial auto insurance policies usually have liability limits of approximately $1 million and may include provisions that cover rented vehicles or employees' cars if driven for company business. If you plan to use your personal liability policy to cover your company's vehicles, beware: Some policy provisions exclude business-related liability. Either way, if you use your vehicle for business, consider carrying a higher liability limit. If you're ever sued, you'll need to protect both your business and personal assets.

When choosing a policy, you should also consider how much risk you regularly carry. More drivers on your policy means more chances for accidents, and transporting more passengers (from a work or school carpool, for example) increases the number of third parties involved in any potential accident, thereby increasing your liability exposure.

Ultimately, there's no all-purpose formula for how much liability car insurance you truly need. One rule of thumb recommends carrying a limit that at least equals to your net worth, balanced against your risk-aversion and how much you can afford to pay in premiums. If the same company insures your car, home and other property, you might also qualify for an umbrella policy -- usually around $100,000 to $300,000 in general liability coverage, with an upper limit of about $1 million. Whatever you decide, find out your options by discussing your specific situation with an insurance agent.

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