Auto Insurance 101
What is liability coverage?
Liability coverage covers expenses for bodily injury or property damage for which the insured driver is liable. All US states, besides New Hampshire, require a minimum amount of liability coverage in order to drive.
Minimums for auto insurance look something like this: 25/50/25. To better explain, this means your insurance company only covers up to $25,000 per person injured in an accident, a maximum of $50,000 for all people injured, and $25,000 worth of property damage.
Bodily Injury Coverage
Liability coverage also includes bodily injury. It covers the cost of another person caused by the insured driver. This includes basic medical expenses, such as hospital fees and rehabilitation, but it can also cover lost wages and pain and suffering. This type of coverage is required by most states.
Although not every state has explicit laws regarding bodily injury coverage, it is extremely important and highly recommended that you purchase it. Many experts insist that it is best to purchase higher coverage than the state enforced minimum amounts. Healthcare costs have risen significantly and most state minimums regarding bodily damage have not adjusted appropriately.
Understand the difference between Comprehensive and Collision Coverage
Collision coverage covers the cost of your vehicle if it is damaged or totaled in an accident. The collision can be with another vehicle or with an object, such as a telephone pole or guardrail.
Comprehensive coverage, on the other hand, covers the cost of your vehicle if it is stolen or damaged by something other than a collision, such as a natural disaster. This only covers the cost of items that are permanently attached to the vehicle. For example, Comprehensive coverage would not cover the expense if a purse was stolen from your vehicle. It would, however, cover the cost if your tires were stolen.
Neither Comprehensive nor Collision coverage is required by any state, but it is highly suggested that you get it in order to protect your vehicle and avoid having to pay for repairs out of pocket. The only situation in which this coverage might not be ideal is when the car would cost more to repair than it is worth.
Both Comprehensive and Collision coverage are subject to deductibles.
Personal Injury Protection (PIP) and Medical coverage
Personal Injury Protection (PIP) and Medical coverage cover medical expenses and lost wages for the policyholder, as well as any passengers in their vehicle, in the event of an accident. This type of coverage is not required by all states, and it might not be necessary to maximize this coverage if you have a good health insurance plan.
Understand the famous “No Fault” Insurance
Pure no fault insurance is a type of insurance program in which a policyholder uses their insurance to cover their own expenses from an accident, regardless of which party was at fault. No fault insurance works like this: if there is an accident, the victim’s insurance company would pay their claim and the at-fault driver’s insurance company would pay their claim. Despite the fact that both insurance companies had to pay, only the at-fault driver’s premium would increase. The goal of this program is to lower premium costs by avoiding costly and time consuming litigation, resulting in quicker payments.
Currently, no states have a pure no fault program in place. In states with partial no fault laws, there is usually a threshold that must be hit in order for one driver to sue another. Accidents must be extremely severe or expensive in order for litigation to take place.
The following states currently have some form of no fault laws in place:
- New Jersey
- New York
- North Dakota
What is subrogation and how does it help me?
Subrogation is the process of the victim’s insurance company recovering funds from the at-fault party. If you are in an accident where you are not at fault, your insurance company will initially cover the costs of your claim. They will then begin the process of trying to recover the funds from the at-fault driver or, more commonly, their insurance company.
It is important to note that an insurance company can only subrogate if their client had no fault in the accident.
What is Uninsured and Underinsured motorist coverage?
Uninsured and Underinsured motorist coverage provides coverage to the policyholder in the event that the at-fault party doesn’t have sufficient insurance to cover the damages. The policyholder’s insurance company would cover the costs and then use subrogation to recover the funds from the at-fault party. This type of insurance is required by 21 states.
Approximately 1 in 7 US drivers does not have insurance. While not every state requires Uninsured and Underinsured motorist coverage, it is highly recommended that you add it to your insurance plan in order to protect your assets.
There are certain insurance companies that are required by law to issue you this coverage unless you decline it in writing.
Does my auto insurance cover rental cars?
Whether or not your insurance covers your rental car depends mostly upon your policy coverage. If you have Collision and Comprehensive coverage on your own car, then your auto insurance will carry over to a rental car. If not, you could purchase insurance from the rental company.
Some credit card companies will cover damages to a rental car as long as you are using that card to pay for the car. This, however, is secondary to your insurance policy and will not pay for any damages to the other driver.
Will my insurance company cover the cost if my car is stolen or vandalized?
Theft or vandalism is covered under Comprehensive coverage. If you have this included in your policy, your insurance company will cover all costs minus your deductible.
What happens if I am hit by someone without auto insurance?
If you are hit by someone who does not have auto insurance, your next steps depend largely upon what type of coverage you have.
If your insurance policy includes Uninsured and Underinsured motorist coverage, then your insurance company will cover the costs.
If you do not have this coverage included on your policy, then you must file a claim with your insurance company to get PIP or medical payments. If you have Collision coverage, this should cover the cost of repairs. If you do not have collision coverage, you may have to sue the at-fault party in order to recover the money. Unfortunately, it is very unlikely that you will get much money through litigation since the at-fault driver may not have enough money or assets to cover all of your expenses.
What raises insurance premiums?
It is a common misconception that any claims you file will raise your insurance premium. Claims in which you were at fault, however, could result in higher premiums.
Many states have laws in place governing premium increases. Certain smaller violations, such as a parking or speeding ticket, may not raise your premium if they only occur once. Your premium could increase if smaller violations increase in frequency and severity.
How does the car I drive affect my insurance rate?
As a general rule of thumb, the more expensive of a car you have, the higher your insurance rate will be. This is because, on average, claims are higher with a more expensive car. More expensive cars are also more likely to be stolen than less expensive cars.
Other factors also come into play when determining your insurance rate, such as your car’s safety. For example, larger cars tend to have lower insurance rates because they are safer in collisions. Sports cars, on the other hand, have higher rates since they attract people who are more likely to drive fast or in a reckless manner.
Is there any way to lower my insurance rate?
The following factors can possibly lower your insurance rate:
- A clean driving record – this includes safe driving as well as car safety features, such as air bags, seatbelts, anti-lock brakes, and an alarm system.
- Increased deductible
- Good credit score
- Good health insurance policy – this would reduce the amount of medical coverage you need