What Does Your Car Insurance Policy Cover?
Car insurance covers all those nasty expenses that arise when something unexpected and unintended happens related to your vehicle and your driving – namely the costs that come up after car accidents, theft or vandalism. These expenses can be based on liability when you cause an accident, or for damage to your car whether you’re at fault or not. Beyond these basics, a few car insurance endorsements can add extra coverage that’s nifty but optional. Let’s look at 1) the insurance you have to carry by law, 2) the insurance you might want to buy for yourself, and 3) a few endorsements some people like to carry.
Every state but New Hampshire insists that you carry car insurance. And even in New Hampshire, you still have to show that you have the financial means to pay for damages if an accident happens – which usually means carrying insurance… So it’s always best practice to carry certain essential types of insurance that will cover your financial behind should an accident happen.
Bare Bones Car Insurance Coverage
The first and most essential form of car insurance is Liability coverage. This pays for injuries and lawsuits resulting from a car accident you or the person driving your car might cause. Liability coverage is critically important because injuries and lawsuits are very expensive–one accident could literally bankrupt you if you’re not covered. This was the first type of car insurance ever offered, a carryover from the horse-and-carriage days when wagon drivers had to insure against injuries their horses might cause if spooked.
Minimum Liability Limits
The minimum Bodily Injury Liability (BI) limits you must carry are dictated by your state. Florida has the lowest BI limits, mandating $10,000 per person and $20,000 per accident, usually expressed as a fraction. So, Florida’s minimum BI limits would be 10/20. Compare that to Maine and Arkansas, where the minimum limits are 50/100. Per-accident limits are almost always double the per-person limit.
Minimum Property Damage Limits
Most states also require minimum coverage for Property Damage (PD). This is for damage you might cause to someone else’s car – or heaven forbid – house. Anyone else’s property you strike with your car is protected under PD. Surprisingly, the lowest required PD limits in the nation don’t reside in Florida. Massachusetts, New Jersey and Pennsylvania hold a tie for the lowest required limits at $5,000 per accident.
Many states also require you to carry Personal Injury Protection (PIP) coverage to pay for injuries to you, your passengers or pedestrians (bicyclists included). It covers items like medical expenses, lost wages, funeral expenses, replacement services and more. The required PIP coverage can range from limits as low as $2,500 (Maryland) up to ‘unlimited’ (Michigan). PIP is seriously complicated insurance that varies widely from state to state.
Only two states require Medical Payments (MedPay) coverage. This insurance is a little more freeform than PIP, and is limited to medical expenses. New Hampshire, although it doesn’t expressly require car insurance, says you have to carry $1,000 of MedPay coverage if you do buy car insurance.
Uninsured / Uninsured Property Damage / Underinsured Motorists
These coverages are usually lumped together, so I’ll present them that way here. Uninsured Motorists (UM) insurance is pretty cut-and-dry. If you’re in an accident that is the fault of someone who had no car insurance, UM coverage will pick up the tab for your injuries. In some states, there is also Uninsured Motorists Property Damage (UMPD) coverage to pay for damage to your car. But, sometimes you have to be able to identify that other driver in order to prove he has no insurance before you can invoke this coverage.
Finally there is Underinsured Motorists coverage (UIM), which is slightly more complicated. Essentially, this coverage only kicks in if your UIM limits are higher than the BI limits of the at-fault driver. If you have lower or equal limits, you’re out of luck. That’s why some states require UIM limits to be higher than minimum BI limits.
The only other required coverage you have to worry about is in New York, where the law requires death benefit coverage of 50/100. Outside of the types we’ve covered so far, all other car insurance is optional.
Optional Car Insurance
Now that we have the necessities out of the way, let’s discuss higher limits. It’s almost always recommended that drivers carry more than the minimum required coverage. But keep in mind that only you can decide how much insurance is right for you. After all, you’re the one paying the bill. Even so, your best bet is usually to buy the highest limits available. Here’s what I recommend:
Bodily Injury: 100/300 to 250/500, or as much as you can afford. Higher bodily injury limits are very cheap, and sometimes even cheaper than minimum limits (go figure). So get a quote with higher limits to be better protected and possibly save money.
Property Damage: $25,000 to $50,000. Really, you should get $50,000 if you can afford it, but $25,000 will be enough for most accidents, assuming you don’t cause a total loss to a new Mercedes. If you opt for the lower coverage, remember that you could be personally liable for damages above your policy limit.
PIP/MedPay: If you have good health insurance, you don’t need any more medical coverage. Otherwise, buy the highest limits you can afford. Remember, this covers injuries to you and the loved ones that ride along.
Uninsured/Underinsured Motorists: Like Bodily Injury, it’s a good idea to buy as much coverage as you can afford. 100/300 and 250/500 are good targets.
Physical Damage Coverage
With the big policy limits out of the way, we can talk about damage to your car. You can buy Collision coverage accompanied by Comprehensive coverage to protect your vehicle. These two are often listed separately, although they really belong together. You cannot buy Collision coverage without Comprehensive. You can, however, buy Comprehensive without Collision if you have an unregistered car in storage.
Collision pays for accidental damage caused by – you guessed it – a collision. It could be a collision with another car or a stationary object, and it doesn’t matter whether you are at fault or not. A deductible usually applies, unless you add an endorsement that we will discuss a little later on. You can read more detailed information about Collision coverage here.
Comprehensive is for everything else that can cause damage to your car. A rock cracking your windshield, hitting a deer in the road, or having your car stolen can all be reasons to file a claim under Comprehensive coverage. The deductible is usually the same as Collision coverage. To get a thorough understanding of how quirky Comprehensive coverage can get, read my article Little-Known Quirks in Comprehensive Insurance.
We’re almost done. We’ve already covered the required essentials and the optional basics. Outside of these, you can add small endorsements to your car insurance policy which make things a little easier. Here are some examples of classic add-ons that have been around quite some time:
Waiver of Deductible: Available in only a few states, this allows the insurance company to pay your full damages after an accident if the other party is at fault.
Towing and Labor: This add-on to Comprehensive coverage does just what it says. It pays for towing and labor costs should your car break down. It does not cover mechanical parts, though.
Rental: This add-on for Collision and Comprehensive coverage pays for you to rent a car while yours is being repaired because of a covered loss. Generally, it covers up to 30 days of rental expenses.
Newer Car Insurance Endorsements
In the past few years, we’ve seen car insurance carriers get more creative with their endorsements. These days, you can get “Accident Forgiveness” and keep the same car insurance premium, even after an at-fault accident. You can buy a “Vanishing Deductible” endorsement that lowers your deductible for every year of safe driving until it gets to zero. New Auto Replacement coverage is another endorsement that’s popped up in the last few years. It’s the insurance industry’s response to unhappy customers who had total losses on new cars and no gap insurance to cover the difference between the loan amount and the total loss settlement.
It will be interesting to see what else insurers will come up with. To be sure, we’re living in the Age of the Consumer, and insurance companies have to be ever-more creative to keep us all happy.