Auto insurance coverage options include personal injury protection, collision, comprehensive, uninsured/underinsured motorist and liability coverage, according to Insure.com. Drivers with older cars that are not financed often opt for liability only insurance.

Identification

If you choose to take out liability only insurance, this indicates that you have opted out of other types of coverage. Liability insurance does not cover damage to your own vehicle in the event that you cause an accident. Keep in mind that if your vehicle is financed, your lien holder will require you to maintain other coverages, including collision and comprehensive insurance to protect their interest in your car.

Function

Liability auto insurance "pays for damages you do to others--including bodily injury and property damage," according to Insure.com. Liability insurance also covers the legal bills resulting from an accident you cause.

Types

Liability insurance coverage includes bodily injury and property damage you cause to someone else. Your liability coverage limits are expressed on your policy as three numbers (e.g. 20/40/20) indicating bodily injury coverage per person, bodily injury coverage per accident and property damage coverage per accident, respectively.

Considerations

Most states, excluding New Hampshire and Wisconsin, mandate that drivers must carry liability insurance. New Hampshire and Wisconsin require any driver who opts out of liability coverage to prove he has enough assets to cover damages in the event of an at-fault accident.

Warning

Liability limits on your auto insurance policy may put you at financial risk should you cause more damage than your insurance will pay. If your insurance covers $40,000 out of $65,000 in damages, for example, you could be sued for the difference. Check with your insurance agent to make sure your liability limits are adequate.

Source:

Insure.com: Car Insurance Basics