Understanding Car Insurance Coverage

Automobile insurance policies are legal contracts, and consequently they are confusing at best and sometimes downright indecipherable to non-lawyers. In fact, many lawyers and judges have difficulty interpreting auto policies. So, we believe that a simple explanation of the basics of automobile insurance will be helpful to most people.

Your Policy

Your auto policy is going to consist of three documents or groups of documents, and it is important that you understand each. The first document is the basic policy. It is typically bound in some fashion, and it is amended only every few years. Between printings, the insurance company will invariably make changes to the policy, and these will be sent to you as amendments to your policy. They may have slightly different names, but they change the terms of your policy in some way. You should always read these amendments to understand how your coverage has changed.

The third document is called the “declaration of coverages.” It is typically one page, and it is sent to you each time you renew your policy. This document lists all of your coverages, the dollar amount of the coverage, and the premium you are paying for the coverage. You should review this document every time you receive a new one to make sure that you have all of the coverages you want and need.

Auto policies offer protection, as do all insurance policies. So, you must decide what you wish to protect, and to what extent. But to do that, you must first understand the protection that auto policies offer.

Liability Coverage

Let’s start with liability protection for bodily injury (BI). This protects you if you cause and accident and someone else is hurt. You are protected up to the dollar amount of your coverage, commonly called the “limit of liability.” For example, if you have liability coverage of $100,000, your insurance company will pay up to $100,000 to an injured party but no more. If the injured party has “damages” in excess of $100,000, they can sue you and collect the excess amount of their damages from you personally. Thus, to protect yourself and your family, you should be sure to have enough coverage. With the rising cost of medical care, it is not unusual for a seriously injured person to incur $100,000, $200,000 or more in medical expenses. If they are out of work, factor in their lost wages. This can add up quickly, and could wipe out your savings if you are not adequately protected.

Split-limit coverage: Sometimes liability and uninsured motorist coverage is written with “split limits” of liability. This will be stated on your declaration of coverages page. Examples are: $100,000 per person/ $300,000 per occurrence, or $50,000 per person/ $100,000 per occurrence. In the first example, your policy will pay a maximum of $100,000 to each person injured in an accident and a maximum of $300,000 total for each accident, regardless of the number of persons injured.

We recommend liability insurance of $250,000 with a personal umbrella policy on top of that. More about umbrella policies later.

Personal Umbrella Policy

We recommend that everyone purchase a personal umbrella policy. This increases the dollar amount of insurance coverage you have under more than one basic or “underlying” policy–for example, your auto policy, your homeowners policy, and a policy you may have on a boat. Umbrella policies are ordinarily written in multiples of $1 million. So, let’s say you have an auto policy with $250,000 in liability coverage. If you purchase a $1 million umbrella policy, it will add $1 million to your “underlying” $250,000 coverage so that you have a total of $1.25 million in liability coverage.

Umbrella coverage is relatively inexpensive, considering what you get for the premium. The reason that it is cheap is that it is rarely used. The majority of claims do not exceed one’s underlying coverage. However, some claims do, and that is why you should definitely purchase this coverage.

Medical Payments

Medical payments coverage is no-fault coverage to pay medical expenses resulting from a motor vehicle crash. It is most typically written for $5000. However, it can be written in larger amounts of $10,000, $25,000 or even $100,000. This coverage will pay accident related medical expenses up to the limit of coverage, regardless of who is at fault. It can be used instead of health insurance, or it can be used to supplement health insurance-that is to cover deductibles, co-pays, or things that health insurance will not pay for.

Property Damage

If you cause an accident, this pays to repair or replace the other vehicle. You should give careful consideration to the amount of property damage insurance you pay. If you are in an accident that “totals” a Honda, that’s one thing. But what if the other car is an expensive Mercedes or BMW? Replacing that kind of car could wipe out your savings if you do not have enough insurance!

Comprehensive Coverage

This coverage pays you if your car is stolen or damaged by means other than a collision. It is generally subject to the “deductible” that you have chosen.

Collision Coverage

This coverage pays you if your car is damaged in a collision. It is generally subject to the “deductible” that you have chosen.

Disclaimer: This is a simple explanation of the basic provisions of most automobile insurance policies. Its purpose is to help you understand your policy and to enable you to make informed decisions when purchasing coverage. But remember that insurance policies vary, and many policy provisions are subject to complex court rulings. If you have a coverage question, you should consult a lawyer.