Car Insurance Coverage

Understanding the Basic Types part 1

The typical car insurance policy consists of five basic types of coverage:    

                                         --Liability (which includes bodily injury)

                                        --Medical payments

                                        --Collision

                                        --Uninsured motorist

                                        --Comprehensive

 Liability Coverage 

Liability coverage pays for injuries and property damage that you (or someone using your car) cause as a result of negligent driving.  Liability coverage is mandatory in nearly all states; and is the most expensive type of coverage and the most necessary.  Failing to carry adequate liability insurance can cost current and future assets. There are two types of liability coverage: bodily injury and property damage.   Most states mandate minimum limits for liability coverage. Some states have no-fault laws. This means that an injured party will receive compensation from his or her own insurance company, regardless of who is at fault.  States with no-fault laws may require you to carry personal injury protection (PIP) coverage which is a more comprehensive form of medical payments coverage that covers medical bills, lost wages, and some funeral expenses for injuries to you or any passenger, regardless of who is at fault.

 There are several liability exclusions:

 • Intentionally inflicted bodily injury or property damage.

 • Property owned by the insured, rented by the insured, or in the care and custody of the insured.

 • Business usage of the car.

 • Use of the car by persons without authorization to do so.

The Bodily Injury coverage pays for the medical expenses and associated litigation fees for losses resulting from injury or death in an accident in which you were at fault. These losses can be medical bills, lost wages, and pain and suffering. There are two types of bodily injury coverage: single-limit and split-limit (or multiple-limit).  Single-limit coverage pays a maximum single amount per accident, regardless of the number of individuals injured.  Split-limit coverage is more common. It pays a maximum amount to each person injured in an accident, subject to a maximum limit per accident.

Medical

Medical Payments are the section of your policy that provides for the payment of reasonable medical expenses or funeral expenses caused by an accident and sustained by an insured.  The policy usually covers:  

 • The insured and family members of the insured   

 • Injuries while occupying the covered auto, including getting into and out of the car   

 • The insured and named family members while pedestrians

 • Other persons while occupying your covered automobile

If you already have medical and hospital insurance, you may choose to forgo this duplicate coverage. However, a small amount of additional coverage may make sense because medical payments coverage often includes a funeral benefit.  

Special note on Out-of-State Coverage:

If you purchase insurance that satisfies the financial responsibility laws in your state, there is usually a provision in the standard policy form that automatically adjusts your coverage for out-of-state limits. The clause also automatically adjusts to required compulsory statutes. Check your policy to make sure you have the clause entitled “Out-of-State Coverage.”  Driving in Canada or Mexico also requires different/additional coverage.

Collision coverage

The main reason you buy collision coverage is to reimburse you if your car is seriously damaged in an accident. Your policy will pay you to fix the car and attempt to bring it back to its condition before the accident. Most policies will pay your repair bills in full, less the deductible. If the repairs total $2,000, for example, you receive a check for $2,000. Policies, however, reimburse you only for the book value of the damaged property. In this case, the insurance company would rather pay you what the car was worth before the accident (assuming plenty of depreciation), knowing that this amount could not bring it back to a usable condition. No insurance settlement pays enough for a new car. Therefore, try to obtain a policy that reimburses you for replacement cost, not the book value.

Collision coverage pays for physical damage to your car regardless of who caused the damage. It accounts for approximately 30 percent of the total insurance premium on a new car and carries a deductible (an amount you must pay before the coverage becomes effective). You choose the size of the deductible, which normally ranges from $50 to $1,000; the higher the deductible, the lower the premium. A higher deductible removes the temptation to claim small losses, but remember that you must report all accidents to your insurer.

For cars that are four to five years old, the decision to carry collision coverage depends on the risk you are willing to bear.  If you borrowed to buy your vehicle, the bank or financial institution that holds the title may require collision coverage.