Car insurance protects against financial loss in the event of an accident. It is a
contract between the policyholder and the insurance company. The policyholder agrees to pay the premium and the insurance company agrees to pay losses as
defined in the policy.
Auto insurance provides property, liability and medical coverage:
Property coverage pays for damage to, or theft of, the car.
Liability coverage pays for the policyholder’s legal responsibility to
others for bodily injury or property damage.
Medical coverage pays for the cost of treating injuries, rehabilitation
and sometimes lost wages and funeral expenses.
Most states require drivers to have auto liability insurance before they can legally drive a car. (Liability insurance pays the other driver’s medical, car repair and
other costs when the policyholder is at fault in an auto accident.) All states have
laws that set the minimum amounts of insurance or other financial security
drivers have to pay for the harm caused by their negligence behind the wheel if
an accident occurs. Most auto policies are for six months to a year. A basic auto
insurance policy is comprised of six different kinds of coverage, each of which is
priced separately (see below).
1. Bodily Injury Liability
This coverage applies to injuries that the policyholder and family members listed on the policy cause to someone else. These individuals are also covered when
driving other peoples’ cars with permission. As motorists in serious accidents
may be sued for large amounts, drivers can opt to buy more than the staterequired minimum to protect personal assets such as homes and savings.
2. Medical Payments or Personal Injury Protection (PIP)
This coverage pays for the treatment of injuries to the driver and passengers
of the policyholder’s car. At its broadest, PIP can cover medical payments,
lost wages and the cost of replacing services normally performed by someone
injured in an auto accident. It may also cover funeral costs.
3. Property Damage Liability
This coverage pays for damage policyholders (or someone driving the car with
their permission) may cause to someone else’s property. Usually, this means
damage to someone else’s car, but it also includes damage to lamp posts, telephone poles, fences, buildings or other structures hit in an accident.
This coverage pays for damage to the policyholder’s car resulting from a collision with another car, an object or as a result of flipping over. It also covers
damage caused by potholes. Collision coverage is generally sold with a deductible of $250 to $1,000—the higher the deductible, the lower the premium. Even
if policyholders are at fault for an accident, collision coverage will reimburse
them for the costs of repairing the car, minus the deductible. If the policyholder
is not at fault, the insurance company may try to recover the amount it paid
from the other driver’s insurance company, a process known as subrogation. If
the company is successful, policyholders will also be reimbursed for the deductible.
This coverage reimburses for loss due to theft or damage caused by something
other than a collision with another car or object, such as fire, falling objects,
missiles, explosions, earthquakes, windstorms, hail, flood, vandalism and riots,
or contact with animals such as birds or deer. Comprehensive insurance is usually sold with a $100 to $300 deductible, though policyholders may opt for a
higher deductible as a way of lowering their premium. Comprehensive insurance may also reimburse the policyholder if a windshield is cracked or shattered.
Some companies offer separate glass coverage with or without a deductible.
States do not require the purchase of collision or comprehensive coverage, but
lenders may insist borrowers carry it until a car loan is paid off. It may also be a
requirement of some dealerships if a car is leased.
6. Uninsured and Underinsured Motorist Coverage
Uninsured motorist coverage will reimburse the policyholder, a member of the
family or a designated driver if one of them is hit by an uninsured or a hit-andrun driver. Underinsured motorist coverage comes into play when an at-fault
driver has insufficient insurance to pay for the other driver’s total loss. This coverage will also protect a policyholder who is hit while a pedestrian.