Making Sense of Your Auto Insurance Policy
What Does Insurance Actually Do?
Often times, whenever I'd have to deliver some not so happy news to an insured, they would often ask me why they even pay a premium every month. They were frustrated because they didn't understand what kind of coverage they had bought. Unfortunately, the sales people they may have spoken with at the time they purchased that coverage probably offered them the lowest coverage possible to seal the deal. So what does your auto policy actually do for you should you have an accident?
Auto insurance is meant to indemnify, or make whole, you and anyone who may have suffered damage due to your negligence. Auto insurance companies are required by law to provide you or someone else with the means to repair property to the way it was before the loss, usually in the form of a monetary reimbursement. This indemnification helps you, the insured, because it can protect you from potential law suits later on down the road (although there are exceptions). No insurance? No protection. If you don't have thousands of disposable dollars available to you, you might be in some trouble.
What Am I Required to Carry?
Most states require you to carry at the very minimum liability insurance (sometimes referred to as Compulsory Insurance), with the exception of New Hampshire, Virginia, and Arizona. Each state has its own rules regarding the minimum limits you must carry. You can find your state's requirements via the National Association of Insurance Commissioners here. You may have to search a little once you are directed to your state's page.
Liability insurance protects third parties from damage or injury that you may have caused. This can include other drivers, their passengers, non-vehicular property, and even passengers in your own vehicle. Bodily Injury (BI), Property Damage (PD), and Uninsured/Underinsured Bodily Injury (UMBI) all fall into this category.
You are not required to carry first party coverages like Collision and Comprehensive coverage, although most insurance companies will encourage you to carry these coverages if you have a lien holder (you financed or leased your vehicle).
Finally, some states require you to carry a first party injury coverage. It can vary in title, but most often you will hear it referred to as "no fault". This coverage protects you and your passengers should you need to seek medical treatment following an accident. This type of coverage varies wildly by state, as does how it's applied. You can find out more about your state's particular coverage via the link provided.
Collision and Comprehesive
People often confuse what these two types of coverage will cover in the event of a loss. I've had customers who thought Collision covered the other person's damages and were panicked when they called to tell me they didn't have Collision.
Collision, as previously stated, is a first party coverage. That means it only applies to you, the insured. Collision is used when you "collide" with something, like a tree, a house, or another vehicle. There is usually a deductible associated with this coverage, so you will be responsible for that deductible in case of damage. Keep in mind, the higher the deducible, the lower your rates. But you are assuming that risk if you hit something. For example, if you have $1500 in damage and your deductible is $1000, your insurer is only going to write a check for $500. You must make up the difference should you get your damages repaired.
In the event of an accident where you are not the at-fault party, you may be able to get that deductible returned to you. Additionally, some states offer a waiver you can purchase that will allow your insurance company to waive your deductible in certain circumstances. You can ask your insurer if your state offers a waiver.
Comprehensive coverage is similar to Collision coverage, but it covers a different type of loss. This coverage applies to things like vandalism, flooding, animal strikes, and hail damage. This coverage also usually carries a deductible, but you aren't likely to get this deductible back. Keep that in mind when setting your deductible for this coverage. Also keep in mind, comprehesive losses are always considered non-fault losses, so no liability will be assessed against you should you hit a deer.
Property Damage and Bodily Injury
Property Damage coverage is your safety net. This is what protects you if you hit other people's property. This coverage will pay for the damage to their property and it carries no deductible. This applies to the other person's vehicle damage, rental car, fence, house, bike, etc. Having sufficient limits on this coverage should be a priority, especially if you own assets.
What does that mean, exactly? Well, think of your policy as a binding contract. The limits you carry are all the insurance company is allowed to pay out. Let's use New York State as an example. New York only requires you to carry $10,000 in Property Damage coverage. One night you're driving home and you slide on black ice and destroy the rear end of a brand new Lexus. The insurance company totals the vehicle and determines its worth to be $15,000. The other driver also needed a rental and ended up having $650 in rental fees. Because you are considered at fault (the black ice isn't going to pay for damages to the other driver, after all), your policy must cover those damages under your Property Damage coverage. The problem is, you only have $10,000 in coverage and the damages are $15,650. Although your auto insurer will do everything possible to settle within your limits and protect you from a potential law suit, you are exposed should the third party choose not to accept your limits. This is important to keep in mind when selecting your policy limits.
Bodily Injury coverage works in a similar manner, but, as the name implies, it applies to bodily injury. If you look at your policy coverage page, you will probably see two numbers for this coverage. There is no deductible for this coverage, so what are those two numbers?
Let's use New York State as an example again. New York requires a minimum of $25,000/$50,000 in Bodily Injury coverage. So this means people injured in the other vehicle, and even passengers in your vehicle, may make injury claims against this coverage. $25,000 is the maximum allowed per person. $50,000 is the maximum allowed per incident. So, if two people have injury claims at $25,000, and a third person is making a claim for $5,000, you may be exposed legally for that outstanding balance. Again, your insurance company will do everything that it can to settle within your limits, but you should try to keep higher limits if you have assets. Also keep in mind, each state has various rules regarding what can qualify as a bodily injury claim. The commercials you see from your local injury attorney are not the norm and most bodily injury claims are settled well within the limits of the policy.
Uninsured/Underinsured Bodily Injury coverage can come into play if you are injured by someone else and they do not have insurance or do not have sufficient coverage on their policy. This coverage is important, but you hopefully won't ever need to use it. Legitimate claims that fall under this coverage are not as common as Bodily Injury claims.
Do I Need the Extras?
Do you need to carry extras, like Rental Reimbursement or towing? The short answer is, no. These coverages are not compulsory by any means. That said, they may be helpful if your tire blows out on a dark road or you have an accident and need a rental car for a few days. If you're looking to cut costs on your policy every month, this should be the place you start. If you can afford a little more coverage, I would encourage anyone to at least carry Rental Reimbursement coverage.
Car Insurance Is Underrated
I wish I could go into all the intricate details of car insurance in a short article. Truthfully, there's a lot more to the insurance world than we've covered here. Each state has its own rules and regulations regarding various components of insurance. I hope I've at least provided you with a guide to understand the most commonly used coverages and what their importance to you, the insured, really is. No one ever wants to have to use insurance, and while it is frustrating to pay for something you might not be using, you'll be so glad you did should something happen down the road.
If you are struggling with your insurance payments, contact your insurer. They can help you find a plan that will work for you. And usually, reducing your limits will only impact your rates by a few dollars every month, so that should be your last resort.
Finally, do your research, read your auto policy every time it renews, ask your insurance company if you don't understand something, and cover your assets! You are paying for coverage every month. Make sure that coverage will work for you when you need it!
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.