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In over your head: What happens if accident damage exceeds your car insurance?

car insurance drowning in paperWhen you’re getting a car insurance quote, it’s very important to consider whether your policy's liability limits are high enough to pay for damages if you’re held responsible for an auto accident. Buying coverage that meets only your state’s minimum liability requirements may not be enough to adequately protect your assets. If you are judged to be responsible for a serious accident, you could be required to pay out hundreds of thousands of dollars for bodily injuries and property damage, regardless of the limitations of your policy.

If you cause an accident and the victim's attorney sees an opportunity to collect money, you could face years of unpleasant legal maneuvering, a damaged credit rating and even bankruptcy. The purpose of liability car insurance is to provide financial and legal protection following your at-fault accidents.  If you are underinsured, your savings and future earnings could be at risk. Instead of moving on with your life after a terrifying accident, you could spend years reliving the experience as you struggle to pay for damages that weren’t covered by your auto insurance.

Sizing up your finances

When a lawyer is deciding whether or not to file a lawsuit on behalf of his client against an at-fault driver, he looks at how likely the injured party is to be compensated. Drivers with few personal assets often are not pursued into court.

"If you have no assets or savings, nothing, you are judgment-proof," says Robert Hunter, director of insurance for the Consumer Federation of America, a nonprofit advocacy group. "No one is going to sue you if you are judgment-proof. No lawyer would take the case."

But to be “judgment-proof” you truly must be without assets. An experienced attorney has the means to uncover hidden wealth. Jeffrey A. Rudman, a personal injury attorney based in Los Angeles, explains that car accident victims do not have to settle for an at-fault driver's car insurance policy limits if he discovers that the at-fault driver has the ability to pay more. Hiring a private detective to look into someone's finances is not unusual.

"If I am suing a driver and they only have a minimal policy, I have to determine whether that driver has any assets," Rudman says. "I will usually have a private investigator do an asset check before I will consider settling."

Using car insurance to shield your assets

In some cases, when a defendant claims not to have money, a debtor examination is conducted to make sure that he isn’t hiding any money. If you are the subject of such an examination, you will be asked to describe your job and property. You could have your wages garnished or be could be driven to file bankruptcy.

In some cases, drivers with inadequate car insurance policies will have liens placed against their homes that cloud the titles, says Rudman. He advises his clients to not only to carry adequate liability coverage but also to purchase policies to protect themselves against uninsured and underinsured drivers.

The short-sighted auto insurance purchase

Buying minimal coverage in order to reduce your car insurance rates is short-sighted. Hunter says that having adequate insurance is especially important for affluent drivers: "The more assets you have, the more likely you are to be sued," he says. He recommends that motorists go a step further and buy umbrella insurance policies that provide supplemental coverage when their standard homeowner and auto policies reach their limits. To find the lowest car insurance quotes, be sure to shop around.

Minor accidents and small car insurance claims aren’t the problem. "Probably 85 to 90 percent of the people nationally involved in accidents have insurance and most claims are well under their limits," Hunter estimates. It’s the big disasters that you really need to insure against.

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