Car Insurance Coverage Definitions
Auto insurance is mandatory in all 50 states in the U.S., the District of Columbia and the U.S. territory of Puerto Rico. Each jurisdiction makes its own determination of which type of insurance, minimums, 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 insurance, liability car insurance is optional, not mandatory. However, other forms of car insurance coverage are not required by mandatory car insurance laws, but are offered as optional coverage to provide drivers with additional protection.
Liability Insurance – Coverage
“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.
If an accident which causes damages to a party occurs as a result of these circumstances, the insured driver is legally obligated to that party for their damages. It should be noted that deliberate acts with the intent to cause bodily injury or damages are excluded by liability coverage.
Liability insurance is the agreement by the car insurance company to assume the policyholder’s legal obligations and expenses in a covered auto accident up to the limits of the policy contract. The auto insurance company stands in the insured’s place, hires attorneys to defend legal actions by third parties and pays the insured’s legal obligations to third parties. If the legal obligations of the insured exceed the limits of the policy, the policyholder is then personally liable, or responsible, for the excess amount.
Liability Limits
There are two types of liability auto insurance, bodily injury coverage (BI) and property damage coverage (PD). Although auto liability insurance can be bought as a single limit policy to cover all losses in an accident, it is most often sold as separate coverages with separate limits.
Bodily Injury
Bodily injury coverage (BI) pays third parties injured by the insured’s negligence for medical expenses and bills, lost wages, pain and suffering and permanent disability. The limits of bodily injury liability insurance are usually shown split, for example 25/50, meaning that the insurance company 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
Property damage liability coverage (PD) is usually a single limit amount for each accident, although it may be shown with the BI limits as 25/50/10. The first two figures represent the limits of the bodily injury insurance and this policy would have $10,000 in property damage liability coverage for each accident. Property damage can include a third party’s car, house, street signs, a fence or any other property, public or private, damaged in a car accident for which the insured driver is at-fault.
Under Michigan’s no-fault car insurance law, drivers are required to carry personal property insurance which covers stationary objects or parked cars damaged due to the negligence of an insured driver.
Is Mandatory State Minimum Liability Car Insurance Enough?
Since the policyholder is still financially responsible for claims which exceed the limits of the auto insurance policy, state minimum car insurance is often not enough to protect the assets of the driver. Anyone with financial assets, like equity in a house, an investment portfolio or even a healthy bank account, should buy more than the minimum car insurance.
Consumers who earn reasonably high salaries should consider that courts may attach salaries to cover court ordered judgments or settlements arising from auto accidents, and drivers should carry enough liability insurance to protect their future earnings.
Comprehensive Coverage
Comprehensive insurance pays for damages to the insured driver’s vehicle caused by a variety of causes including theft, vandalism, arson, acts of God/nature like hail, fire, floods, and/or earthquakes and collisions with wildlife (deer) or livestock. Comprehensive coverage does not pay for damages caused in an auto accident unless the accident occurred while your car was stolen.
Although comprehensive coverage is not mandatory in any state, it is often required by banks and lenders as a condition for a car loan, new and used. Comprehensive insurance coverage will best benefit a policyholder 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.
The policyholder may choose a deductible amount of between $250 and $1500. The insured has to pay the deductible at the time of a claim for the car insurance company to pay the rest of the claim’s expense or bill. For example, if a driver chooses a $1000 deductible and his car sustains $1500 in damages, he will pay $1000 out of pocket and the auto insurance company will pay $1500. Generally speaking, higher car insurance deductibles mean cheaper car insurance rates for comprehensive insurance coverage.
Collision Insurance
Like comprehensive, collision coverage is an optional type of auto insurance which may be required by a finance company, bank, or lender as a condition for a loan. It also has a deductible chosen by the insured and it covers the vehicles listed on the policy for damage caused by a collision or accident with another car, or with a stationary object.
Collision insurance pays for the repair or replacement of the insured vehicle regardless of which driver was at fault for an accident. Although neither collision nor comprehensive insurance is state mandated, insurers may be legally obligated to notify the company who financed or leased your vehicle if the coverage lapses, which could void the car loan agreement and result in repossession of the vehicle.
The car insurance deductible for collision coverage works the exact same way as it does for comprehensive coverage, and collision coverage benefits the same types of drivers – ones who lease or finance their cars or want to protect their vehicles from total loss.
Uninsured / Underinsured Motorist Coverage (UM and UIM)
Uninsured motorist coverage is mandatory in twenty states. It acts as liability insurance for drivers who have no insurance and who are involved in an accident with an insured driver. The car insurance company makes payment to the injured party to cover medical bills, lost wages and pain and suffering. Uninsured motorist coverage also pays for damages to the insured’s car.
The uninsured driver can still be held responsible for damages and may have to reimburse the auto insurance company for their payments. All legal penalties for driving without insurance are still assessed against the uninsured driver. The coverage is intended to provide protection for the policyholder not for the uninsured driver.
In some states, uninsured motorist coverage can be used as additional liability car insurance when an underinsured driver involved in an accident does not have enough auto insurance to cover all the other party’s damages. If the liability limits of the driver’s policy are exhausted, but the damages are not fully covered, the other, insured driver can make a claim against his own uninsured motorist coverage for the additional amount up to the policy limits, and his own car insurance company will payout and cover the difference.
Uninsured Motorist Policy Limits
In most states the limits of the uninsured motorist (UM) coverage are equal to the liability limits on the policy. If an insured has liability limits of bodily injury for 50/100 and property damage coverage for 50,000, the uninsured motorist coverage limits would be UM-BI 50/100 and UM-PD $50,000. UM coverage is similar in some ways to liability insurance, but the insured has no right to sue his insurance company.
Instead, disputes between the policyholder and the insurance company on uninsured motorist claims are handled in arbitration. In states where UM coverage is not mandatory, the insured may have to sign a waiver to exclude the coverage from the policy. California, Louisiana and New Jersey all require signed waivers to exclude uninsured motorist coverage from an auto insurance policy.
Uninsured Motorist Property Damage Deductible
Uninsured motorist property damage coverage does have a deductible which must be paid by the insured. As a rule, the deductible on uninsured motorist coverage is lower than the deductible on other auto coverage like collision insurance or comprehensive coverage. If the car insurance company is able to recover the amount of the claim from an uninsured motorist, they will refund the deductible to the insured.
Does Uninsured or Underinsured Coverage Replace Collision Coverage?
No, uninsured motorist property damage is not enough to cover all potential damages and expenses, including repair or replacement costs, and only applies to accidents involved with another driver who is without insurance coverage. If you have collision coverage, Underinsured Motorist Property Damage coverage will pay for your collision insurance deductible, in some states.
Personal Injury Protection (PIP) Insurance
Personal injury protection insurance covers the insured policyholder, members of their family living in their household, and passengers in his or her vehicle, offering coverage for medical, hospital, and funeral expenses, without regard to fault. This coverage may extend in some states to cover the insured when he/she is a passenger in another car or if he is a pedestrian struck by a car.
As a rule, PIP follows the insured person and provides coverage 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.
Who Is Covered?
- The policyholder (you)
- The policyholder’s relatives living in the same household
- Passengers in the vehicle
- Other authorized drivers on the policy
- In some states, the policyholder and family members when injured riding in someone else’s car or as a pedestrian hit by a vehicle
Currently, twelve 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, like coverage for lost wages, or essential services benefits which cover the expense of hiring someone to perform household tasks while an insured is disabled.
Some states 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 which use a no fault choice law. Learn more about your state minimum car insurance 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 usually considered to be the primary medical coverage. Insured individuals are not permitted to collect under two different policies (auto and health) for the same medical expenses.
Medical Payments Coverage
Medical payments insurance is an optional coverage offered in states where PIP insurance is not mandatory. The policy limits are selected by the insured and are usually between $1000 and $5000. Medical payments coverage pays for medical bills which are incurred due to an injury in an auto accident. The bills may include emergency room treatment, x-rays, doctor visits, necessary prescription drugs and any other related medical expenses up to the policy limit.
Persons covered by medical payments coverage include the insured, members of the insured’s household and passengers in the insured 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, insured individuals can collect under both their medical payments coverage and their health insurance coverage in most cases.
How No Fault Car Insurance Laws Work
Under pure no fault car insurance laws, each party would collect their damages from their own auto insurance company and have no right to sue or litigate against another driver, but no state has pure no fault car insurance. 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, perhaps $2,000, before that party can file a lawsuit against another driver in that state. Other limited states restrict tort claims to people whose injuries are permanent, disfiguring or disabling. See Accidental Death & Dismemberment (AD&D) Life Insurance.
Some states allow individuals to choose the option of suing a third party for injuries at the time they buy their auto insurance policy. These are called choice states and the insured can receive cheaper car insurance rates in return for legally relinquishing his or her right to make an injury claim against a responsible third party.
If the individual gives up his right to make a claim against others, he gains the right not to have any tort claims made against him for auto accidents. New Jersey, Kentucky and Pennsylvania all have this combination of no fault and tort law for auto insurance claims.
Since each state has vastly different no fault laws, drivers in each state should review their car insurance policies to understand the provisions and coverages of the laws in their state. The New Jersey law is among the most liberal with coverage for medical bills, lost wages, essential services, funeral expenses and a death benefit. Florida’s basic PIP insurance covers medical bills up to $10,000. Both states offer optional coverages which raise the limits of the policies and extend additional coverage.
PIP Insurance and Commercial Vehicles
Some no fault statutes limit PIP coverage to private passenger vehicles. Private passenger vehicles cannot be used for commercial purposes such as livery vehicles (taxis and limos) or delivery vehicles. Vehicles with commercial registration are automatically excluded from PIP in these states.
Vehicle owners should be aware that most auto insurance policies contain coverage exclusion 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 commercial auto insurance coverage, either personally or through their employer, or they may be in violation of their state mandatory insurance laws. The exclusion applies in all U.S. states.
GAP Insurance – Loan/Lease
Gap insurance is another optional coverage for individuals who have a loan or a lease on an insured car. In the event that a car is a total loss, the car insurance company pays the actual cash value of the vehicle. Unfortunately, due to the depreciation of cars and the interest on the loan, the balance owed on a car loan may be more than the actual cash value of the car.
Gap insurance coverage pays the difference between the actual cash value of the vehicle and the balance of the loan so the policyholder isn’t found liable and doesn’t have an out of pocket expense. The auto insurance company will not pay the insured’s deductible. 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. Gap insurance does not pay finance charges or excessive wear and tear charges on leased vehicles.
Gap insurance may be purchased as a separate policy, but it is usually less expensive to add it as an endorsement to an existing auto insurance policy. Most standard car insurance companies offer a gap insurance endorsement, but some carriers that specialize in mandatory minimum limits coverage may not offer gap insurance, forcing policyholders to buy the coverage separately.
Customized Parts and Equipment Coverage
This coverage can be added to a policy with comprehensive and collision coverage to cover non-factory or stock parts and equipment added to a car by an insured. Collision and comprehensive coverage only pay for stock, factory equipment on a vehicle and they will not cover after market items like stereos, rims, high performance engines and custom paint and decals.
The customized parts and equipment endorsement will pay for the repair or replacement of aftermarket items which are installed on the vehicle including tires and rims, custom paint and decals, performance items, sound systems, truck bed liners and 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 covered.
Emergency Roadside Assistance – Towing and Labor
Emergency Roadside Assistance coverage is offered through both automobile clubs (AAA) and through standard auto insurance companies. Towing following a loss covered by collision or comprehensive insurance is usually paid under collision or comprehensive coverage. Emergency roadside assistance insurance covers towing and other expenses due to lock outs, roadside breakdowns, flat tires, dead batteries or even running out of gas.
The coverage generally has a monetary limit which varies between policies and an incident per policy term limit, so a roadside assistance policy may have a limit of $100 per incident and will cover 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 – Reimbursement and Advice
Comprehensive insurance usually pays for a rental car for up to thirty days following the theft of the insured vehicle. There is no provision for a rental car in either the collision or comprehensive insurance coverage while your automobile is undergoing covered repairs.
Most companies offering rental car insurance usually pay a limited amount towards a rental car while the insured vehicle is being repaired following a loss covered by collision or comprehensive insurance. Rental car insurance can only be purchased on policies which have collision and comprehensive coverage.
Some car insurance companies have agreements with rental car agencies which bill the insurance company directly. In these cases, the cost of the auto rental is usually covered in full for a period of up to thirty days. Some rental car insurance will reimburse the insured for a daily rental amount, stated in the policy, for up to thirty days. Rental reimbursement may not cover the full amount of the auto rental cost, and may require an out-of-pocket expense.
Insurance For Temporary Replacement Vehicles
Many insured drivers are unaware that if they rent or borrow a car while their car is in the repair shop, in most cases, the coverage on their car transfers to the temporary replacement vehicle. Standard insurance policies usually have a clause which states that if the insured car is disabled, a temporary replacement vehicle will be covered with the same insurance as the insured car.
If an insured car is undergoing repairs, even those that are not covered under the policy, the insurance policy will usually cover a rental or borrowed car during the time the car is out of commission and not being used.
Accidental Death Benefit (AD&D Life Insurance)
Also known as Accidental Death, Accident Death and Dismemberment Insurance, or Accident Death Indemnity, ADD Insurance provides a death benefit if bodily injury causes the death of you or a covered family member. Learn more about AD&D Life Insurance.
Pet Accident Insurance
Americans love their pets and often travel with pets in the car. Veterinary bills for injured pets can be almost as expensive as medical bills for injured people and some automobile carriers have begun offering pet accident insurance as part of an auto insurance policy package. As a rule, pet accident insurance covers veterinary expenses incurred as a result of an injury to a pet from a car accident.
There is usually a limit on the total amount of covered expenses which may be as low as $500 or as high as $3000. These endorsements may be offered free as an incentive for consumers to purchase their auto insurance from a particular car insurance company. In other cases, the policyholder can request the pet accident insurance as an addition to his or her policy. Not all insurance companies offer pet accident insurance on auto policies.
Umbrella Insurance Policies
Umbrella or excess insurance policies are not specifically automobile policies. Instead these policies offer liability car coverage in excess of the liability limits of any liability insurance held by the insured including auto, home and boat policies. Should an injured person make a claim which exceeds the liability limits of the insured’s auto policy, the umbrella policy would cover the additional amount of the claim up to the policy limit. These policies usually have a single limit often between $250,000 and $1,000,000.
When a claim exceeds the limit of the primary auto liability policy, the company will notify the insured of his or her potential exposure. The insured must then notify the excess insurance company of a potential claim. Like the primary auto car insurance company, the insurance company providing the excess, umbrella coverage 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 the policy purchased.
Insurers who provide excess insurance coverage may require that the primary liability policy have a liability limit of a certain amount before agreeing to underwrite the excess coverage. As a rule, excess or umbrella insurance is less expensive than primary liability insurance since it only covers claims that exceed the primary policy so there is less risk of loss to the insurance company.
Choosing the right car insurance coverage is part of financial planning. Understanding what coverages and policies are available and which are necessary to provide an individual with enough protection and the right kind of protection is important. Mandatory state minimum car insurance does not provide enough coverage for most policyholders seeking to buy adequate car insurance, and include optional coverages like GAP insurance, which can provide financial protection that makes it possible for an insured to replace a car that has been totaled.
Car Insurance Quotes
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