It's not the stuff of novels, but understanding your auto insurance policy makes you a better, smarter consumer. Following is an excerpt from TheStreet.com Ratings’ Consumer Guide to Auto Insurance explaining the parts of an insurance policy.
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At its core, auto insurance is simply a contract between you and your insurance company to protect against financial loss in the unfortunate event that you have an accident. Depending on what you purchase, the insurance coverage can provide financial assistance to:
- repair your vehicle or replace it in the event it is damaged or stolen;
- reimburse others if you cause an accident that hurts them or their vehicle; and
- pay for any medical expenses arising from injuries you or your passengers sustain in an accident.
At a minimum, most states require you to have liability insurance coverage to protect others in case you are at fault in an accident. There are two primary kinds of liability coverage that you need:
Bodily injury liability is coverage for injuries you might cause to someone else. Most states stipulate a minimum amount of this coverage, although you can elect to purchase higher policy limits if you’re willing to pay higher premiums. Note that the coverage amount for bodily injury liability is always stated using two numbers, e.g. $100,000/$300,000. The first number is the maximum amount the policy will pay for damages to one person, and the second number is the maximum amount payable for injuries for the entire accident.
Property damage liability is coverage for damage you might cause to someone else’s property. Typically this will be damage done to another person’s car, but it also covers any other object you hit including buildings, fences, or street signs. Again, most states stipulate a minimum amount of this coverage per accident, with more coverage available at higher premiums.
Although purely optional for drivers in most states, some states also require two other types of coverage:
Medical payments or personal injury protection is coverage to treat injuries to you and your passengers, regardless of who is at fault in the accident. This type of coverage may also pay funeral expenses and lost wages in some circumstances. If you have an accident that requires medical payments and you have this coverage, you will be required to pay a certain amount of the cost out of your own pocket, known as the deductible, and the insurance company will pay the remainder of the claim. The higher your deductible, the lower your premiums will be.
Under-insured and uninsured motorist coverage is protection for you, your passengers, and your vehicle in case you have an accident with an uninsured driver, a hit-and-run driver, or a driver with insufficient insurance coverage. This type of insurance also covers you and your family members as pedestrians if you are injured by a hit-and-run driver.
Finally, there are two additional types of auto insurance to cover the cost of repairs to your car. These coverages are never required by the state, but if you have a loan or lease on your car, your lender will usually require both:
Collision insurance pays to repair damage to your car from a collision, regardless of who is at fault. (In the event that you are not at fault, your insurer will generally try to get the other party’s insurance company to reimburse them for the damage to your vehicle.) Collision coverage usually has a deductible between $250 and $1,000 that you must pay toward the repairs before your insurer will pay its portion. The higher your deductible, the lower your premiums will be.
Comprehensive insurance covers your car for everything that is not covered by collision insurance. This includes the cost to replace or repair your vehicle due to theft or damage from things like hail, water, flood, fire, wind, explosion, earthquake, animals, or vandalism. This coverage also has a deductible, which is usually equal to or lower than the deductible on your collision insurance.
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