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Hi, I'm an insurance agent.
Yes, this is typical. Don't worry- the difference in cost between the basic amount of liability coverage ($100,000) and $500,000 is only about $36 per year. A HO-4 (Renter's Insurance Policy) most likely will cost between $150 and $300 per year depending on coverage selected, credit, and prior losses (among other factors).
Liability coverage could be used for certain kinds of property damage or for injuries your family member causes.
For example, let's say that your family member leaves a pot on the stove and falls asleep. This pot catches fire and burns the whole building down. The landlord's dwelling fire policy will pay for the damage to the building- but they will then subrogate, and go after your sister for every penny they paid to the landlord. Trust me, it's better that she have the liability coverage when this happens than have her wages garnished for the rest of her life.
Her liability coverage can also be used in myriad other situations. For example, let's say she's a golfer, and she accidentally leaves a putter on the front porch. The postman trips on the putter and breaks his neck. He's going to sue, and the liability coverage could end up paying him a lot of money.
Hope this helps...