Understanding the Auto Insurance Policy
Types of coverage:
Liability Coverage in No-Fault States
Generally, in no-fault states, your insurance pays for your bodily injuries and the other driver’s insurance pays for that person’s bodily injuries, regardless of who caused the accident.
In most no-fault states, you cannot sue for your own injuries unless:
- your expenses arising from bodily injuries exceed the dollar amount listed in the no-fault statute;
- you or someone in your automobile suffers a specific injury listed in the no-fault statute; or
- a death is caused by the accident.
In most no-fault states, the person who caused the accident is still responsible for paying for everyone’s property damage. (See Property Damage Coverage) The amount of your no-fault protection depends on your personal financial circumstances. But it should be sufficient to cover the potential losses you would experience.
Liability Coverage in Fault States
This pays, up to the dollar limits of your coverage, for the other driver’s injuries and property damage when you are at fault in causing an accident.
Liability insurance should cover:
- the victims’ present and future medical bills;
- the victims’ property damage;
- the victims’ present and future loss of earnings;
- the victims past and future mental and physical pain and suffering;
- the victims’ other damages resulting as a consequence of an accident; and
- your legal expenses and costs if you are sued as a result of an accident.
Amount of Liability coverage to buy.
If you are ever on the hook for damages in a serious accident, you had better have enough liability insurance to protect your assets. Add up those assets – equity in a home or other property, stocks, bonds, retirement accounts, art, savings, spouse’s assets – everything. In a serious accident, with liability for past and future medical treatment, loss of income, loss of earning capacity, past and future pain and suffering your exposure could easily be in the millions of dollars. If your liability insurance is not sufficient to cover that, you will have personal exposure. And it will ruin your and your family’s life.
Collision Coverage pays for damages you cause to your car as a result of a collision with anything (car, pole, fence, wall, etc.). It pays up to the limits of this coverage, minus your deductible. For example, if you back into a wall causing $2500 in damage and you have collision coverage with a $1000 deductible, your company will pay $1500.
Comprehensive Coverage pays for damage to your automobile when the damage is caused by anything other than a collision, such as theft, fire, tornado, lightning, etc. Again, it only pays up to your limits and is subject to your deductible.
Medical Payment and Physical Injury Coverage
This pays, up to your limits, for your own medical expenses and those of anyone else in your car.
Physical Injury Coverage usually does not pay for the other driver’s personal injuries or those of his or her passengers. (See Liability Coverage.)
In a “fault” state, if the other driver was responsible for the accident, you may elect to file a claim with his or her insurance company. This is called a third party claim. Third party claims pay for more types of losses because the victim is entitled to “all damages actually caused,” including lost wages, pain and suffering, and other damages.
Uninsured Motorist (UM) Coverage
Uninsured Motorist Coverage (UM) pays, up to the policy limits, for your injuries caused by an uninsured driver. In other words, if you have an accident and the other driver has no auto insurance at all, your UM coverage would step up and provide that coverage. Some states require UM coverage.
Underinsured Motorist Coverage (UIM)
Underinsured Motorist Coverage pays you for damages you suffer that are in excess of the policy limits of the other driver. For example, if the driver that caused the accident has only minimal insurance coverage, your UIM insurance would raise those limits to the level of your UIM coverage. Your insurance company may seek to recover as much as possible from the underinsured driver, but it must pay you directly up to the policy limits of your UIM coverage. Some states require UIM coverage.
Miscellaneous Auto Insurance Coverage
Additional types of coverage may also be purchased, such as towing, labor coverage and rental reimbursement. For every type of coverage listed above, you must realize that there are many exceptions, exclusions and limitations . For now, remember that the mere fact that you have a particular kind of coverage does NOT mean that the insurance company will pay any or all of your costs. For example, Auto Rental Reimbursement may not pay all of your car rental expenses. It may cap the amount you receive per day and the number of days you may receive it. Always read the exceptions, exclusions and limitations listed in a policy before you purchase. Sometimes it seems that what is covered on one page is limited or subject to exclusions on another.