What Happens If You Cause an Accident Without Enough Liability Insurance?
Learn what’s at risk when your liability coverage falls short of the damages you’re responsible for.
It’s one of the scariest financial scenarios to imagine. You cause an accident—on the road, at home, or in a moment of unintentional negligence—and the injured party sues you. Your insurance kicks in, but the damages exceed your coverage limit. What happens next?
Many people assume their policy will “handle it,” but liability insurance has a ceiling. Once that limit is reached, you are personally responsible for the rest. That gap can jeopardize your savings, property, and even your future income.
This matters when you’re deciding how much liability coverage to carry. It becomes especially important if you’ve experienced major life changes, like buying a home, getting a promotion, or accumulating significant savings.
The Chain Reaction of Being Underinsured
When your liability coverage runs out before a claim is fully paid, the remaining amount becomes your legal obligation. This can lead to serious consequences depending on your financial situation.
| Scenario | What Happens | Impact on You |
|---|---|---|
| Accident damages exceed policy | Insurer pays up to limit | You owe the remaining balance personally |
| Lawsuit is filed against you | Legal defence may be covered | Judgments beyond limit are your responsibility |
| Unable to pay out-of-pocket | Court may seize assets or income | Home, savings, or wages could be at risk |
In the case of a large lawsuit, you could be on the hook for hundreds of thousands of dollars. Even if you don’t have the full amount available, a court may allow the other party to pursue your future wages or place liens on your property.
Caution: Judgments in civil cases can often be enforced for years, meaning today’s mistake could affect your financial future long-term.
Personal Assets That Could Be At Risk
When liability coverage runs out, everything not legally protected could be targeted to satisfy the court’s judgment. This may include:
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Bank accounts and non-registered investment holdings
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Rental income or dividends
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Valuable personal property, such as a second vehicle or collectibles
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Home equity, depending on local laws
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Future income, through wage garnishment
Some assets, like RRSPs or primary residences, may be partially shielded depending on your province or state. But that varies widely.
Note: Not all court-ordered payments are dischargeable in bankruptcy. You could still be obligated to pay a judgment even after insolvency.
How Umbrella Insurance Can Fill the Gap
An umbrella policy is designed to sit on top of your existing auto or home liability limits. It provides an extra layer of coverage, often starting at $1 million, to protect you when your base policies are exhausted.
| Without Umbrella | With Umbrella |
|---|---|
| Auto policy covers up to $500,000 | Umbrella adds another $1–5 million in liability protection |
| Any excess is your financial responsibility | Insurer covers damages above your auto/home limit |
| You risk personal asset exposure | You keep financial stability even after a serious claim |
Tip: Umbrella policies are relatively inexpensive—often less than the cost of a streaming subscription per month—for the peace of mind they offer.
Why It’s Worth Reviewing Your Liability Limits
You can’t predict when an accident will happen, but you can prepare for how much it could cost. If your liability coverage doesn’t reflect your current financial position, you might be unintentionally exposed.
Ask yourself:
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Have my assets or income increased since I last reviewed my policy?
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Would I be able to cover a lawsuit if my insurance ran out?
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Do I host guests, own property, or engage in activities that increase liability risk?
Tip: Consider increasing your liability limits as your net worth grows. If your home, savings, or income would be hard to replace, they’re worth protecting with stronger coverage.
Protecting Your Future Means Planning for the Unexpected
Accidents are unpredictable, but your financial response doesn't have to be. Understanding what happens when liability insurance falls short can help you make smarter, more protective choices. Reviewing your limits, and considering umbrella coverage, are small steps that safeguard everything you’ve worked so hard to build.