Auto Insurance Basics

Auto Insurance Coverage

There are many kinds of coverage that you can purchase to protect yourself and others. Below are descriptions of some of the more common types.

Keep in mind that, with Physical Damage Coverage, you usually are responsible to pay a certain amount, called a deductible before your insurance company will begin to pay. These are often referred to as “1st Party” claims, but typically not true for liability coverages unless your coverage specifically states otherwise as with some business coverages. Also, deductibles do not apply if the claim is a “3rd Party” claim. These claims are when another party’s insurance company accepts liability and is paying you for your damages.

Also, insurance companies may define these coverages slightly differently and with different exceptions and limitations within and between States.. Therefore, before you purchase a policy, make sure you know exactly what the policy will and won't cover. Insurance is regulated by each State, so if you have moved from one State to another, the requirements and policies will typically be different to some extent.

Liability Insurance
In most states, auto owners are required by law to have liability insurance, which pays for damages and injuries to others if you're at fault in an auto accident. The minimum amount of coverage required varies by state. You can choose to buy more than the minimum, and is often suggested. The amount of your liability coverage is the maximum amount your insurer will pay. So, for example, if you purchase a $50,000 limit liability policy, and  you cause an accident in which another individual is injured and that person's medical bills and lost wages total $100,000. Your auto insurance company will only pay the first $50,000. You may then be held personally responsible for paying the remaining $50,000.

It is important to remember that liability insurance only covers other people. It does not cover you, your vehicle, or your property. However, as part of your liability coverage, your insurer is responsible for providing your legal defense if you are sued because of an auto accident.

Physical Damage Coverage
Physical damage coverage includes collision and comprehensive coverage, which you purchase separately. Collision coverage pays for damages to your vehicle from an auto accident, regardless of who caused it. Comprehensive coverage pays for damage to your vehicle caused by theft, vandalism, severe weather, etc. Depending on your policy, these coverages may also pay for certain items that were in your car at the time of the accident and were damaged as a result of it.

Medical Payments Coverage (also called "med-pay")
Med-pay coverage pays reasonable and necessary medical expenses for you and your passengers if you're injured in an accident, whether the accident was your fault or not. It may also pay medical expenses if you're hurt as a passenger in someone else's vehicle and they don't have insurance that covers your injuries or their insurance will not pay any medical bills until your medical treatment is completed. Med-pay coverage also covers funeral expenses where fatal injuries occur in an auto accident. These payments are limited to the extent of your policy limits purchased.

Personal Injury Protection (PIP)
PIP pays for expenses related to injuries you and other individuals insured by your policy suffer in a car accident, regardless of who was at fault. In some states, you are required by law to carry this coverage.

Uninsured/Underinsured Motorist Coverage (UM/UIM)
This coverage pays for property damage and medical bills resulting from an accident caused by an uninsured driver or a driver without enough coverage to pay all of your damages. Some states require you to carry UM/UIM coverage, or to turn it down in writing when you buy your policy.

Rental Car Coverage
This coverage will pay rental car expenses if your car is damaged or stolen based on the limits of the policy purchased. This coverage is usually a very inexpensive option that should be considered if you would need a vehicle if your vehicle was involved in an accident and in for repairs. These coverages usually have a dollar value per day for a set maximum days per claim.

Towing and Labor Coverage
Pays for towing expenses if your car is disabled.

Audio & Non-OEM (Original Equipment Manufacturer) Coverage
Covers loss or damage to special items you may have installed on your vehicle such as audio equipment, wheels, and hub caps. These items are not usually covered by standard policies. This is very important to consider if you have modified or purchased a modified vehicle. In most cases any items modified from original equipment by the vehicle manufacturer will not be covered under a standard policy unless the items are listed and coverage accepted. This includes tires, wheels, paintwork, ground effects, stereo, etc.

Gap Coverage
Pays the remainder of your car loan if your vehicle is totaled and the insurance payout does not cover it. This insurance type is often offered from the finance company since it is common that the actual cash value of the vehicle will be less than the loan payoff in the early stages of the loan. If your vehicle is totaled the standard insurance policy only pays for the fair market value of the vehicle at the time of the loss, not considering your loan balance.