Auto insurance is mandatory in almost every state in the United States, the District of Columbia and Puerto Rico, with the exception of New Hampshire. Each state and jurisdiction makes its own determination of which types of insurance, options, and policy limits are required to meet their state’s minimum car insurance laws. Most states require liability insurance, but in some states with no-fault regulations, liability coverage is optional. Other forms of coverage, such as comprehensive, collision, GAP, and personal injury protection, are offered as additional policy options.
In this comprehensive guide, you will learn about every type of car insurance coverage available. Consider this “Car Insurance 101” and your first step to learning how to compare policies, companies, rates, and quotes.
Liability Car Insurance
“Liability” is a legal term which refers to fault, or being responsible for a debt. In the case of auto insurance, liability arises out of a negligent act or omission by an insured person which causes damage or injury to a third party. A negligent act could be speeding in a school zone and an omission could be failure to stop at a stop sign or red light. Simply put, liability car insurance offers you protection in the event of an at-fault accident.
If an accident which causes damage to a party occurs as a result of these circumstances, the insured driver is legally obligated to pay for the party’s incurred damages. It should be noted that deliberate acts with the intent to cause bodily injury or damage are excluded by liability coverage.
Liability auto insurance is an agreement by the insurance company to assume your legal obligations and expenses in a covered car accident, up to the limits of your policy. In the case of auto repairs, your carrier will pay the mechanic or body shop for parts and services rendered. For litigation, the company stands in your place, hires attorneys to defend legal actions by third parties and pays for your legal costs. If your litigation costs exceed the limits of your policy, you are then personally responsible for the excess amount and those become “out-of-pocket” expenses.
There are two components of liability coverage: bodily injury (BI) and property damage (PD). Although liability can be bought as a single limit to cover all losses in an accident, it is most often sold as separate coverages with separate limits.
Bodily injury coverage (BI) pays third parties injured by your negligence for medical expenses and bills, lost wages, pain and suffering and permanent disability. The limits of bodily injury are usually shown separate, for example 25/50. This means your carrier will cover a maximum claim of $25,000 for each person injured in an accident with a maximum of $50,000 to cover all persons injured in the accident.
Property damage liability coverage (PD) is a single limit amount for each accident, although it may be shown as the last number with the BI limits as 25/50/10. The first two figures represent the limits on bodily injury, while the last indicates this policy offers $10,000 in property damage protection for each accident. Property damage can include cars, houses, street signs, fences or any other property, public or private, damaged in a car accident for which you are at-fault.
Is Mandatory State Minimum Car Insurance Enough?
Since you are still financially responsible for claims which exceed the limits of your policy, state minimum car insurance is often not enough to fully protect you and your assets. Anyone with financial assets, such as cash, equity in a house, an investment portfolio or even a healthy bank account, should buy more than the minimum state requirements.
High-income households or individuals who earn reasonably high salaries should consider that courts may garnish income to satisfy court-ordered judgments or settlements arising from auto accidents. This is another reason drivers should carry enough liability insurance to protect their future earnings, but does not mean you need to buy a $1,000,000 plan.
Comprehensive insurance pays for damages to your vehicle caused by theft, vandalism, arson, acts of God, natural disasters (hail, fire, floods, and/or earthquakes) and collisions with wildlife (deer) or livestock. Comprehensive coverage does not pay out for claims related to an auto accident unless the accident occurred while your car was stolen.
Although comprehensive car insurance is not mandatory, it is often required by banks and lenders as a condition for a car loan, new or used. Comprehensive policies will best benefit drivers with a financed or leased car, or a newer vehicle in good condition that you may want to replace or repair in case of loss. Comprehensive coverage is not beneficial for drivers with older cars that have low replacement values.
Comprehensive Insurance Deductible
You may choose a deductible amount between $250 and $1,500. You will have to pay the deductible when your claim is approved in order for the car insurance company to pay the rest of the claim. For example, you choose a $1,000 deductible and your car sustains $1,500 in damages, you will pay $1,000 out-of-pocket and the company will pay $500. Generally speaking, higher deductibles mean cheaper rates.
Like comprehensive coverage, collision insurance is optional and may be required by a bank or lender as a condition for an auto loan. Collision coverage protects and pays out on claims relating to your vehicle during a collision or accident with another car or stationary object. Similar to liability and comprehensive, collision also forces you to choose a deductible.
Collision insurance pays for the repair or replacement of your vehicle regardless of which driver was at fault for an accident. Although neither the collision nor comprehensive option is state-mandated, insurance companies may be legally obligated to notify the lender who financed or leased your vehicle if the coverage lapses.
A lapse in full coverage car insurance (meaning all 3 types of protection) could void the loan agreement and result in repossession of the vehicle. The deductible for collision insurance works the exact same way as it does for comprehensive coverage, and benefits the same types of drivers – ones who lease or finance their cars and want to protect their vehicles from total loss.
Uninsured / Underinsured Motorist (UM and UIM)
Uninsured motorist coverage is mandatory in 20 states. It acts as liability protection against other drivers who have no insurance. Your auto insurance company will pay for your repairs, litigation expenses, medical bills, lost wages, and pain and suffering if the other driver is at-fault, but does not have car insurance.
The other uninsured driver can still be held responsible for damages and may have to reimburse your carrier for their payments. All legal penalties for driving without insurance are still assessed against the uninsured driver. UM and UIM coverage is intended to provide protection for you, the policyholder, not for the uninsured driver breaking the law.
In some states, the UM/UIM policy add-on can be used as a supplement when the opposing driver involved in an accident did not buy high enough limits to cover all of your expenses. If the other driver’s liability limits are exhausted, you can submit a claim against your own provider for the balance. Your carrier will payout and cover the difference.
Uninsured Motorist Limits
In most states, the limits of UM policies are equal to liability limits. If you have a $50,000/$100,000/$50,000 policy, the uninsured motorist coverage limits would be UM-BI $50,000/$100,000 and UM-PD $50,000.
The property damage portion of UM coverage does have a deductible which must be paid. As a rule, the deductible on this part of your policy is lower than the deductible on collision and comprehensive insurance. If your carrier is able to recover a portion of the claim from the other party, they will refund you the deductible.
Personal Injury Protection (PIP)
Personal injury protection (PIP) insurance covers you, family members living in the same household, and passengers in your vehicle. Personal injury protection pays for medical, hospital, and funeral expenses, without regard to fault. PIP coverage may extend in some states to cover pedestrians or passengers in another car.
As a rule, PIP is attached to you, the policyholder, and reimburses for injuries incurred in most types of auto accidents. Some no-fault statutes cover all injuries arising from the use, ownership or maintenance of a vehicle. Under these laws, medical bills for an injury sustained while changing a tire are covered under PIP insurance, too.
Who Is Covered?
- The policyholder (you)
- Your relatives living in the same household
- Passengers in your automobile
- Other authorized drivers on the policy
- In some states, the policyholder and family members when injured riding in someone else’s car as a passenger
Currently, 12 states have no-fault laws and the provisions of the laws vary widely between the states. PIP insurance coverage pays medical bills arising from an auto accident up to the policy limits in all twelve states, but not all the states have provisions for other losses, such as lost wages or essential services benefits which cover the expense of hiring someone to perform household tasks while an insured is disabled.
Some states even provide for funeral expenses and have a death benefit while others do not. PIP is mandatory coverage in most states with no-fault laws, but may not be mandatory in states with no-fault choice laws.
In the states where no-fault insurance is mandatory, health insurance companies may not pay for medical bills arising out of a car accident covered by PIP insurance, since in these states, PIP coverage is considered to be the primary medical coverage. As a result, you are not allowed to submit a claim and collect a payout under two different policies (auto and health) for the same medical expenses. However, in certain cases, one may supplement the other.
Medical Payments Insurance
Medical payments insurance is an optional coverage offered in states where personal injury protection (PIP) is not mandatory. You select the policy limits, which are typically between $1,000 and $5,000. Medical payments coverage pays for medical bills arising from a vehicular incident. The bills may include emergency room treatment, x-rays, doctor visits, necessary prescription drugs and other medical costs up to the policy limit.
Persons covered by medical payments insurance coverage include you, members of your household and passengers in your car. The policy limit is applied per person, so each covered person would have their medical bills from an accident covered up to the policy limit. Unlike PIP insurance coverage, you can collect under both medical payments and health insurance coverage in most cases.
How No-Fault Accident Laws Work
Under pure no-fault accident state laws, each party assesses their own damages and collects retribution from their own insurance company, with no right to sue or litigate against another driver. Unfortunately, no state has pure no fault regulations, although some states like Florida and Massachusetts limit the rights of parties to make claims against other drivers for injuries or damages.
In some limited claim states, the medical bills of an injured person must exceed a certain amount, for example $2,000, before that party can file a lawsuit against another driver. Other limited states restrict tort claims to people whose injuries are permanent, disfiguring or disabling.
Meanwhile, other states allow individuals to choose the option of suing a third party for injuries at the time they buy their auto insurance. These are called “choice” states and you can receive cheaper quotes in exchange for legally relinquishing your right to make an injury claim against a responsible third party. If you give up the right to make a claim against others, you gain the right not to have any tort claims made against you for auto accidents. New Jersey, Kentucky and Pennsylvania all have this combination of no fault and tort law for claims.
Since each state has vastly different and intricate no-fault laws, drivers in each state should review their policies or ask their representatives to understand the provisions of the laws in their state. To illustrate my point, New Jersey’s law is among the most liberal with coverage for medical bills, lost wages, essential services, funeral expenses and a death benefit. On the other hand, Florida’s basic PIP insurance only covers medical bills up to $10,000.
PIP and Commercial Vehicles
Some no-fault statutes limit PIP coverage to private passenger vehicles. Private passenger vehicles cannot be used for commercial purposes such taxis and limos or delivery vehicles. Vehicles with commercial registration are automatically excluded from PIP.
Vehicle owners should be aware that most private policies contain exclusions for commercial use of a personal vehicle and this includes delivering pizzas or newspapers for compensation. Individuals who use their private vehicles for commercial purposes must have this option checked on their policy, either personally or through their employer, or they may be in violation of their state’s laws. The exclusion applies in all U.S. states.
GAP Insurance – Loan/Lease
GAP insurance is another type of optional coverage for individuals who have a car loan or lease. Without GAP insurance, in the event that your car is a total loss, your carrier is only required to pay the actual cash value of your vehicle. Unfortunately, due to the depreciation of cars and the interest on the auto loan, the balance owed on the loan may be more than the actual cash value of the car. This may require you to make a lump sum payment to your lender or continue making monthly installments even though you are not driving your vehicle because it is totaled.
GAP insurance requires your provider to pay the difference between the actual cash value of the vehicle and the balance of the loan so you aren’t liable. GAP avoids an out-of-pocket expense. With GAP insurance, car owners don’t end up making loan payments on cars they no longer own or can’t drive due to damage. It does not pay finance charges or excessive wear and tear charges on leased vehicles.
This option may be purchased as a separate rider (add-on to your policy), but it is usually less expensive to add it as an endorsement to an existing contract. Most standard insurance companies offer a GAP endorsement, but some carriers that specialize in minimum limits may not, forcing you to buy the coverage separately.
Custom Car Insurance – Custom Parts and Equipment
Custom car insurance can be added to a policy with comprehensive and collision coverage and is used to cover non-factory or after-market parts and equipment such as stereos and sound systems, rims, high performance engines or parts, custom paint jobs, decals, truck bed liners, camper tops, specialty lights and other legal after-market items. Items which are not legal in a jurisdiction, which may include tinted windows or undercarriage neon lights, are not protected or reimbursed.
Emergency Roadside Assistance – Towing and Labor
Emergency roadside assistance coverage is offered through both automobile clubs (AAA) and auto insurance companies. Towing a vehicle following a loss covered by collision or comprehensive insurance is included. Emergency roadside assistance pays for towing, lock outs, roadside breakdowns, flat tires, dead batteries or even running out of gas. Labor, service and parts are provided without charge.
Roadside assistance generally has a monetary limit which varies between policies, but most allow up to $100 per incident and no more than 3 incidents per year. Emergency roadside assistance may be purchased on polices which do not carry collision or comprehensive insurance as well.
Rental Car Insurance
Rental car insurance can be broken down into two categories – reimbursement and protection for you when driving a rental car.
Comprehensive insurance pays for a rental car for up to 30 days following the theft or damage of your vehicle. Most companies offering rental car insurance contribute a limited amount towards a rental car while your vehicle is being repaired. Rental car reimbursement can only be purchased on policies which have collision and comprehensive coverage.
Some car insurance companies have agreements with rental agencies which bill the insurance company directly. In these situations, the cost of the rental is covered in full for a period of up to 30 days. Otherwise, your carrier may simply reimburse you directly, per the guidelines set forth in your contract. Rental reimbursement may not cover the full amount of your rental and may require an out-of-pocket payment so be wise on how much you spend.
Coverage On Rental Cars
Many drivers are unaware that if they rent or borrow a car, their existing policy transfers coverage to the rental car. Standard insurance policies usually have a clause which states that if your car is disabled, a temporary replacement vehicle will be covered with the same insurance as your actual car.
If your automobile is undergoing repairs, even those that are not covered under your policy, your insurance company will cover a rental or borrowed car during the time your car is out of commission and not in-use.
Americans love their pets and often travel with them in the car. Veterinary bills for injured animals can be almost as expensive as healthcare costs for humans, and some carriers have begun offering pet accident insurance as part of an auto policy package. As a rule, accident-only pet insurance covers veterinary expenses incurred as a result of an injury to a pet from a car accident.
There is a limit on the total amount of expenses, which may be as low as $500 or as high as $5,000. These endorsements may be offered free as an incentive for consumers to purchase their auto insurance from a particular company. Otherwise, the policyholder can request the pet accident insurance as an addition to his/her policy. Not all providers offer pet insurance.
Umbrella or excess insurance policies are not specifically auto policies. Instead, umbrella insurance offers liability coverage in excess of the limits of any liability insurance held by you, including auto, home, life, health, renter’s, and boat insurance. Should an injured person make a claim exceeding the liability limits of your auto insurance policy, your umbrella protection would cover the additional amount of the claim up to the umbrella policy limit. Umbrella insurance can range from $250,000 in coverage to millions.
When a claim exceeds the limit of the primary insurance policy, the company will notify you regarding your potential exposure. You must then notify your umbrella insurance company of a potential claim. This essentially means you will have 2 companies working to protect you. The umbrella insurer will provide legal representation and pay the amount of a legal judgment not covered by the primary liability insurance policy, up to the limit of your policy. For instance, if you bought $100,000 worth of liability protection in your auto policy and $500,000 in your umbrella contract, a $250,000 judgment against you would exhaust your auto policy and your umbrella would pay out the remaining $150,000.
Insurers who provide excess coverage may require that the primary policy have a liability limit of a certain amount before agreeing to underwrite the excess coverage. As a rule, excess or umbrella insurance is cheap compared to primary liability policies since it only covers claims that exceed the first policy, therefore posing less risk of loss to the insurance company.
Car Insurance Coverage
Choosing the right car insurance coverage is part of financial planning. Understanding what types of coverage and policies are available and which are necessary to provide enough protection is important. Mandatory state minimum car insurance does not provide enough coverage for most U.S. drivers seeking to buy adequate car insurance. To find the best car insurance, always research and compare policies, companies and rates before purchasing coverage.