Understanding The Terms of Your Auto Insurance Policy - Your auto insurance binder is a long and wordy document, drawn up by actual lawyers whose job it is to outline everything the policy covers and what it doesn't cover, along with every other detail about insurance for your car.
If you understand all the terms and language in that document, then congratulations. You're already ahead of the curve. But for most there are so many different terms and conditions and abbreviations and who knows what all else that it seems almost impossible to understand everything you're paying for and what exactly those terms mean.
While we certainly are lawyers or legal advisors, we can give you a better explanation of all those terms and their meaning.
This coverage consists of Bodily Injury and Property Damage (BI/PD), which covers your legal liability up to the limit you select for damages caused in a covered vehicle accident.
Under BI/PD, the insurance company then pays for damages to an injured person and for property damage that you are legally obligated to pay as a result of an accident. Many insurance companies also provide a lawyer to represent you as part of your liability coverage if you are sued because of an accident or because of property damage.
This is important to consider because if you have very small coverage through your insurance company but a lot of assets such as a boat, vacation home, and so on, you may lose those assets if you're sued after an accident you've caused.
Personal Injury Protection (PIP)
PIP is available in some states and is what most call "no fault insurance." PIP covers your medical expenses and lost wages if you are disabled or cannot work because of an accident. PIP typically also covers the cost of personal services that you need to have done for you because of your injuries, such as physical therapy. There are limits to PIP, which is specified in your policy.
This coverage applies no matter who is at fault and covers the cost of reasonable and necessary medical care provided to you as the result of a car accident. Notice that is specifies reasonable and necessary; you certainly can't have plastic surgery after an accident and tack that onto your insurance claim!
The coverage is often limited to a specified time period following the accident (usually three years) and the amount of coverage you chose when you purchased the policy, so again, there are limits to what the insurance company pays out.
Uninsured/Underinsured Motorist (UM/UIM)
UM/UIM coverage pays for damages that you are legally entitled to recover for your bodily injury.
In general, this coverage provides what you would have received from the other person's insurance company had that person been insured. UM/UIM may also protect you if the person who caused the damage does not have enough insurance to cover the cost of your vehicle repairs, medical coverage, and so on.
Uninsured Motorist Property Damage coverage is available in some states and provides protection for damage to property caused by a person without insurance.
If your vehicle overturns, or if it collides with another vehicle or object, Collision coverage pays for the damage to your vehicle.
Collision involves a deductible amount you select when you purchase your policy. This amount, typically $250 or $500, is the amount you are required to pay in the event a claim exceeds the deductible amount. Your deductible often affects the amount of your insurance bill, but we'll discuss this in more detail in a later section, along with some things to consider if you're thinking of raising or lowering your deductible.
Comprehensive coverage pays for damage caused by an event other than a car collision, such as fire, theft, vandalism, and hail or flood damage.
Comprehensive also typically covers damage from an animal hit. Additionally, if your car is stolen, Comprehensive will cover the cost of a rental up to a daily limit. Like Collision coverage, a deductible usually applies for Comprehensive coverage.
Comprehensive is an option when it comes to auto insurance and one that you must choose, or can elect to omit if you so desire. Many who are leasing their cars or who are still paying a loan company with the car as security for that loan may be required to carry Comprehensive to protect the car itself. It's important to understand this since for many, Comprehensive is one of the first things they can omit from their car insurance policy in order to save money, but we'll go into more detail about that in a later section.
Custom Parts or Equipment (CPE)
Collision and Comprehensive coverage each provide up to $1,000 of coverage for custom parts or equipment, which are accessories and enhancements permanently installed in or on your vehicle.
Parts and equipment offered by the manufacturer or installed by the dealer at the point of sale are not custom parts or equipment, but they are included under your standard Collision and Comprehensive coverage.
CPE might be something additional that you've done to improve your car, such upgrading the engine, adding front guards, and so on. CPE is not always offered by every insurance company and is not typically required when it comes to insurance coverage, but you need to consider it depending on whether or not you've added some extra things to your car. It may be something to consider if those parts are expensive, difficult to replace, or make your car a target for theft or vandalism.
Additional Custom Parts or Equipment (ACPE)
This coverage is available if you have more than $1,000 of custom parts or equipment on your vehicle.
If you purchase ACPE, the insurance company will pay for custom parts or equipment damaged as a result of a covered incident, up to the amount shown on the declarations page of your policy.
ACPE is also not always available from every insurance company but is something you need to consider if those extra parts or toys you add to your car are worth more than $1,000.
If you buy Rental Reimbursement coverage, the insurance company reimburses you for rental car charges you have while your vehicle is being repaired after a covered accident.
You can typically only buy Rental Reimbursement if you buy Collision and Comprehensive coverage.
Rental Reimbursement usually has a limit of 30 to 60 days and is subject a the maximum per day amount; this means that you can't go out and rent a beautiful luxury car and charge it back to your insurance company, unless you're willing to pay the difference in what the insurance company covers and that cost.
This coverage protects you when your covered vehicle has been deemed a total loss and you owe a lender more money than the vehicle is worth. For example, if you're leasing a car and still have $8,000 left in lease payments and the vehicle has a resale value of about $10,000 but your vehicle is so damaged that it would cost over $10,000 to repair, the insurance company obviously would not pay the amount to repair it because that's more than the vehicle is worth. However, the company you are leasing the vehicle from still expects their $8,000 in lease payments, so this is where this coverage would come into play.
If you buy Loan/Lease Payoff and your vehicle is declared a total loss, Loan/Lease Payoff will pay the difference between the vehicle's actual cash value and the amount you owe to the lender. Most insurance companies have a maximum that they would pay back under this coverage. Many companies that sell or lease vehicles require that this coverage be maintained by their customers, so make sure you're familiar with those requirements when shopping for a car and the insurance with it.
This is another type of coverage that is not required under law but one that you should consider carefully. The details of this coverage will vary from insurance company to insurance company, but usually covers the cost of a tow truck in case your car breaks down due to mechanical or electrical failure, if you have a dead battery, flat tire, or are locked out. It may also cover you if you run out of gas or become stuck in snow or mud.
This coverage typically means having a tow truck come to assist you at the scene, or cover the cost of having your vehicle towed to the nearest facility for repair.
Roadside Assistance is another part of insurance that you may consider having if necessary or dropping if you feel that it's not going to be necessary, but we'll discuss that in a later section.
You probably already understand what your deductible is; this is the amount you pay yourself before your insurance "kicks in" to cover what is stated on your policy. For example, if you have a $1,000 deductible and you get into an accident that causes $2,500 worth of damage, you need to pay $1,000 toward your car's repair and the insurance company would pay the remaining $1,500 (assuming you have Collision coverage).
We'll discuss in a later section how the amount of your deductible affects your insurance policy's premium.
A discount offered by some insurance companies for those with more than one vehicle insured on the same policy; most people take advantage of this by having all their vehicles insured with the same company. If your insurance company doesn't offer a multi-car discount and you have more than one vehicle to insure, you may want to shop around for an insurance agency that does offer this.
Years ago it used to be that whoever was at fault for an accident was solely responsible for all the costs incurred when it came to damages and injuries. The insurance company of the innocent party had no responsibility in cases like this.
However this resulted in hundreds of thousands of lawsuits as defendants tried to prove that they were not completely at fault and innocent parties were trying to recoup damages and costs from those who didn't have insurance. The court systems became clogged for years with such cases, many of which were difficult to prove and enforce.
Most states today have enacted what is called no-fault insurance, meaning that a person can collect money for the cost of repairing their vehicle and for medical expenses from their own insurance company regardless of who is at fault.
There are typically still provisions in no-fault insurance that allow a person to sue the individual at fault in an accident if their own insurance does not cover all the damages and costs of an injury, so that they can recover the difference. These lawsuits are not guarantees as to being able to recoup damages as the law still has certain limits on what you can and cannot be granted.
Also, no-fault laws differ from state to state. If you are offered no-fault insurance or are shopping for it be sure you understand what your policy entails and how it affects you.
Any insurance coverage with separately stated limits for different types of coverage. This too is important to understand because it's easy to think that you have the same type of insurance for every vehicle or that you're covered equally whether your coverage is due to an accident, theft, or vandalism.
The length of time for which a policy is in effect. Most policies are written up six months at a time, but you need to understand the term of your policy because often you are paying a monthly premium but may pay two months in advance or have a down payment and then monthly payments after that. You need to know the term of your policy when you are shopping and comparing between different agencies, as the monthly payment itself might not be an accurate reflection of just how much you'll pay over six months, a year, and so on.
This refers to the primary purpose of your vehicle. If you drive you car to and from work the usage is considering commuting. If you drive your vehicle in the course of your business, whether you're a salesperson or have a cleaning company or landscape business, then the usage is considered for business.
Rates change according to the usage of your vehicle because this will affect how much your vehicle is on the road and who may actually sue the insurance company for damages. For instance, if you drive in the course of business and typically have other customers or clients in the car with you, they could sue your insurance company for injuries they sustain in an accident. If you use your vehicle for a business where you are moving equipment or other materials your car may be likely to suffer more damages in the case of an accident, and your insurance company may also be liable for the cost of those materials if they get damaged as well.
Usage also might bring your rate down if you have a second vehicle that you rarely drive or use just on the weekends. If this is the case, make sure your insurance company knows that the vehicle is not driven regularly so they can adjust your rate if they can.
It's Important to Understand…
For every part of your insurance that specifies limits, there are dollar limits to how much the policy pays out. For example, when it comes to personal liability you may have a limit of $40,000. Rarely will you need to cover more than that in the case of an accident; even if you hit someone else's brand new car and your insurance needs to pay for it, and the owner of the other car decides to sue for more money than this, rarely does a judgment get handed down that exceeds your insurance coverage.
It does happen, however, especially in the case of someone being under the influence of alcohol, driving on a suspended license, showing reckless disregard for others, and so on. This is one of the reasons it's important to be careful when you drive; you can hurt someone else and yourself as well.
It's also important to understand these limits when it comes to what your insurance pays for you if you are injured or if your car is damaged. You may easily reach limits on your medical care in the case of serious injury which is why some people purchase supplemental health insurance, and that you understand your medical coverage from your health insurance carrier.
And another aspect of insurance that is important to understand are those that are necessary either by law or by the company with which you have an auto loan, and those that are only supplemental. It's not to say that you should never have any of these additional areas of coverage; we'll discuss them in more detail in a later section. However, those that are not required by law or by your lender are the first ones you need to consider carefully when planning on how to save some money on your car insurance.
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