In many jurisdictions it is compulsory to have vehicle insurance before using or keeping a motor vehicle on public roads. Most jurisdictions relate insurance to both the car and the driver, however the degree of each varies greatly.
Vehicle insurance, in the United States and elsewhere, is designed to cover risk of financial liability or the loss of a motor vehicle the owner may face if their vehicle is involved in a collision resulting in property or physical damages. Some states require a motor vehicle owner to carry some minimum level of liability insurance.
Insurance companies provide a motor vehicle owner with an insurance card for the particular coverage term which is to be kept in the vehicle in the event of a traffic collision as proof of insurance. Recently, states have started passing laws that electronic versions of proof of insurance can now be accepted by the authorities.
Coverage generally
Consumers may be protected by different levels of coverage depending on which insurance policy they purchase. Some states require drivers to carry at least liability insurance coverage to ensure that their drivers can cover the cost of damage to other people or property in the event of an accident. Some states, such as Wisconsin, have more flexible "proof of financial responsibility" requirements.
In the United States, automotive liability insurance covers claims against the policy holder and usually any other operator of an insured vehicle, provided they do not live at the same address as the policy holder and are not specifically excluded on the policy. Thus it is necessary, for example, when a young adult reaches driving age that they be added to the policy. Liability insurance sometimes does not protect the policy holder if they operate any vehicles other than their own. When you drive another person's car you are not necessarily covered under their policy. Non-owners policies are also available. These policies insure drivers on any vehicle they drive, even if it belongs to someone else. This coverage is available only to those who do not own their own vehicle and is sometimes required by the government for drivers who have previously been found at fault in an accident. Non-owners policies are also known as Named Operator Policies. These policies are useful for people whose drivers' license has been suspended and they have to have insurance for their license to be reinstated.
Liability coverage
Liability coverage is offered for bodily injury (BI) or property damage (PD) for which the insured driver is deemed responsible. The amount of coverage provided (a fixed dollar amount) will vary from jurisdiction to jurisdiction. Whatever the minimum, the insured can usually increase the coverage (prior to a loss) for an additional charge.
An example of property damage is where an insured driver (or 1st party) drives into a telephone pole and damages the pole, liability coverage pays for the damage to the pole. In this example, the drivers insured may also become liable for other expenses related to damaging the telephone pole, such as loss of service claims (by the telephone company), depending on the jurisdiction. An example of bodily injury is where an insured driver causes bodily harm to a third party and the insured driver is deemed responsible for the injuries. However, in some jurisdictions, the third party would first exhaust coverage for accident benefits through their own insurer (assuming they have one) and/or would have to meet a legal definition of severe impairment to have the right to claim (or sue) under the insured driver's (or first party's) policy. If the third party sues the insured driver, liability coverage also covers court costs and damages that the insured driver may be deemed responsible for.
In some jurisdictions: Liability coverage is available either as a combined single limit policy, or as a split limit policy:
Combined single limit
A combined single limit combines property damage liability coverage and bodily injury coverage under one single combined limit. For example, an insured driver with a combined single liability limit strikes another vehicle and injures the driver and the passenger. Payments for the damages to the other driver's car, as well as payments for injury claims for the driver and passenger, would be paid out under this same coverage.
Split limits
A split limit liability coverage policy splits the coverages into property damage coverage and bodily injury coverage. In the example given above, payments for the other driver's vehicle would be paid out under property damage coverage, and payments for the injuries would be paid out under bodily injury coverage.
Bodily injury liability coverage is also usually split into a maximum payment per person and a maximum payment per accident.
The limits are often expressed separated by slashes in the following form: "bodily injury per person"/"bodily injury per accident"/"property damage". For example, California requires this minimum coverage:
- $15,000 for injury/death to one person
- $30,000 for injury/death to more than one person
- $5,000 for damage to property
Another example, in the state of Oklahoma, drivers must carry at least state minimum liability limits of $25,000/$50,000/$25,000. If an insured driver hits a car full of people and is found by the insurance company to be liable, the insurance company will pay $25,000 of one person's medical bills but will not exceed $50,000 for other people injured in the accident. The insurance company will not pay more than $25,000 for property damage in repairs to the vehicle that the insured one hit.
In the state of Indiana, the minimum liability limits are $25,000/$50,000/$10,000, so there is a greater property damage exposure for only carrying the minimum limits.
Rental coverage
Generally, liability coverage purchased through a private insurer extends to rental cars. Comprehensive policies ("full coverage") usually also apply to the rental vehicle, although this should be verified beforehand. Full coverage premiums are based on, among other factors, the value of the insured's vehicle. This coverage, however, cannot apply to rental cars because the insurance company does not want to assume responsibility for a claim greater than the value of the insured's vehicle, assuming that a rental car may be worth more than the insured's vehicle.
Most rental car companies offer insurance to cover damage to the rental vehicle. These policies may be unnecessary for many customers as credit card companies, such as Visa and MasterCard, now provide supplemental collision damage coverage to rental cars if the rental transaction is processed using one of their cards. These benefits are restrictive in terms of the types of vehicles covered.
Full coverage
Full coverage is the term commonly used to refer to the combination of comprehensive and collision coverages (liability is generally also implied). The term full coverage is actually a misnomer because, even within traditional full coverage insurance, there are many types of coverage, and many optional amounts of each. "Full coverage" is a layman's misnomer that often results in drivers and vehicle owners being woefully underinsured. Most responsible insurance agents or brokers do not use this term when working with their clients.
One common misconception in the United States is that vehicles that are financed on credit through a bank or credit union are required to have "full" coverage in order for the financial institution to cover their losses in case of an accident. While most states do require additional coverage to be purchased, some such as Pennsylvania only require Comprehensive and Collision to be purchased in addition to liability and not "full" coverage. Vehicles purchased with cash or paid off by the owner are generally required to only carry liability. In some cases, vehicles financed through a "buy-here-pay-here" car dealership‒in which the consumer (generally those with poor credit) finances a car and pays the dealer directly without a bank‒also only require liability coverage.
Collision
Collision coverage provides coverage for vehicles involved in collisions. Collision coverage is subject to a deductible. This coverage is designed to provide payments to repair the damaged vehicle, or payment of the cash value of the vehicle if it is not repairable or totaled. Collision coverage is optional, however if you plan on financing a car or taking a car loan, the lender will usually insist you carry collision for the finance term or until the car is paid off. Collision Damage Waiver (CDW) or Loss Damage Waiver (LDW) is the term used by rental car companies for collision coverage.
Comprehensive
Comprehensive, also known as other than collision, coverage provides coverage, subject to a deductible, for cars damaged by incidents that are not considered collisions. For example, fire, theft (or attempted theft), vandalism, weather, or impacts with animals are types of comprehensive losses.
Additionally, the majority of insurance companies list "Acts of God" as an aspect of comprehensive coverage. By definition, it includes any events or occurrences that are beyond human control. For example, a tornado, flood, hurricane, or hail storm would fall under this category.
Uninsured/underinsured motorist coverage
Uninsured/Underinsured coverage, also known as UM/UIM, provides coverage if an at-fault party either does not have insurance, or does not have enough insurance. In effect, the insurance company pays the insured medical bills, then would subrogate from the at-fault party. This coverage is often overlooked and very important. In Colorado, for example, it was estimated in 2007 that 24% of drivers did not carry the state minimum liability limits required by law. Unfortunately, this number goes up significantly during recessions. In some areas, it is estimated that 1 out of every 3 drivers doesn't carry insurance. Usually the limits match the liability limits. Some insurance companies do offer UM/UIM in an umbrella policy.
Some states maintain unsatisfied judgment funds to provide compensation to those who cannot collect damages from uninsured drivers. Typically, the payout is not more than the minimum liability limits and the negligent driver remains responsible for reimbursing the state's fund.
In the United States, the definition of an uninsured/underinsured motorist, and corresponding coverages, are set by state laws. In some states it is mandatory. In the case of underinsured coverage, two different triggers apply: a damages trigger which is based on whether the limits are insufficient to cover the injured party's damages, and a limits trigger which applies when the limits are less than the injured party's limits. According to a 2009 survey by trade association Property Casualty Insurers Association of America, 29 states have a limits trigger while 20 states have a damages trigger. Another variation is whether a particular state requires stacking of policy limits of different vehicles or policies.
Loss of use
Loss of use coverage, also known as rental coverage, provides reimbursement for rental expenses associated with having an insured vehicle repaired due to a covered loss.
Loan/lease payoff
Loan/lease payoff coverage, also known as GAP coverage or GAP insurance, was established in the early 1980s to provide protection to consumers based upon buying and market trends.
Due to the sharp decline in value immediately following purchase, there is generally a period in which the amount owed on the car loan exceeds the value of the vehicle, which is called "upside-down" or negative equity. Thus, if the vehicle is damaged beyond economical repair at this point, the owner will still owe potentially thousands of dollars on the loan. The escalating price of cars, longer-term auto loans, and the increasing popularity of leasing gave birth to GAP protection. GAP waivers provide protection for consumers when a "gap" exists between the actual value of their vehicle and the amount of money owed to a bank or leasing company. In many instances, this insurance will also pay the deductible on the primary insurance policy. These policies are often offered at auto dealerships as a comparatively low cost add-on to the car loan that provides coverage for the duration of the loan. GAP insurance does not always pay off the full loan value however. These cases include but are not limited to:
- Any unpaid deliquent payment due at the time of loss
- Payment deferrals or extensions (commonly called skips or skip a payment)
- Refinancing of the vehicle loan after the policy was purchased
- Late fees or other administrative fees assessed after loan commencement
Consumers should be aware that a few states, including New York, require lenders of leased cars to include GAP insurance within the cost of the lease itself. This means that the monthly price quoted by the dealer must include GAP insurance, whether it is delineated or not. Nevertheless, unscrupulous dealers sometimes prey on unsuspecting individuals by offering them GAP insurance at an additional price, on top of the monthly payment, without mentioning the State's requirements.
In addition, some vendors and insurance companies offer what is called "Total Loss Coverage." This is similar to ordinary GAP insurance but differs in that instead of paying off the negative equity on a vehicle that is a total loss, the policy provides a certain amount, usually up to $5,000, toward the purchase or lease of a new vehicle. Thus, to some extent, the distinction makes no difference, i.e., in either case the owner receives a certain sum of money. However, in choosing which type of policy to purchase, the owner should consider whether, in case of a total loss, it is more advantageous for him or her to have the policy pay off the negative equity or provide a down payment on a new vehicle.
For example, assuming a total loss of a vehicle valued at $15,000, but on which the owner owes $20,000, is the "gap" of $5,000. If the owner has traditional GAP coverage, the "gap" will be wiped out and he or she may purchase or lease another vehicle or choose not to. If the owner has "Total Loss Coverage," he or she will have to personally cover the "gap" of $5,000, and then receive $5,000 toward the purchase or lease of a new vehicle, thereby either reducing monthly payments, in the case of financing or leasing, or the total purchase price in the case of outright purchasing. So the decision on which type of policy to purchase will, in most instances, be informed by whether the owner can pay off the negative equity in case of a total loss and/or whether he or she will definitively purchase a replacement vehicle.
Towing
Vehicle towing coverage is also known as roadside assistance coverage. Traditionally, automobile insurance companies have agreed to only pay for the cost of a tow that is related to an accident that is covered under the automobile policy of insurance. This had left a gap in coverage for tows that are related to mechanical breakdowns, flat tires, and gas outages. To fill that void, insurance companies started to offer the car towing coverage, which pays for non-accident related tows.
Personal property
Personal items in a vehicle that are damaged due to an accident would not be covered under the auto policy. Any type of property that is not attached to the vehicle should be claimed under a homeowners or renters policy. However, some insurance companies will cover unattached GPS devices intended for automobile use.
Sources:
http://en.wikipedia.org/wiki/Vehicle_insurance
http://en.wikipedia.org/wiki/Vehicle_insurance_in_the_United_States
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