A split-second error in driving judgment or simple bad luck can result in many thousands of dollars of automobile-related property damage and personal injury losses. Automobile insurance combines the liability and property insurance coverages needed by automobile owners and drivers into a single-package policy. It is illegal to operate a motor vehicle without assuming financial responsibility for any losses you might cause. Most states require automobile owners to purchase automobile insurance to meet this responsibility
Losses Covered
Automobile insurance combines four distinct types of coverage: (1) liability insurance, (2) medical payments insurance, (3) protection against uninsured and underinsured motorists, and (4) insurance for physical damage to the insured automobile. Each coverage has its own policy limits, conditions, and exclusions. Table 10.4 summarizes the coverage provided by automobile insurance policies for people not specifically excluded in the policy.
Coverage A Liability Insurance
Liability insurance covers the insured when he or she is held responsible for losses suffered by others. Two types of liability can arise out of the ownership and operation of an automobile. Automobile bodily injury liability occurs when a driver or car owner is held legally responsible for bodily injury losses suffered by other people, including pedestrians. Automobile property damage liability occurs when a driver or car owner is held legally responsible for damage to the property of others. Such damage can include damage to another vehicle, a building, or roadside signs and poles.
The most common type of automobile insurance policy is the family auto policy (FAP). A FAP covers the vehicle owner, relatives living in the vehicle owner’s household, and people who have the owner’s permission to drive the vehicle. In addition, any other vehicle that the owner borrows with permission is similarly covered for all family members.
The policy limits for FAPs are quoted as a series of three numbers, such as 100/300/50, with each number representing a multiple of $1000 (Figure 10.2). The first number gives the maximum that will be paid for liability claims for one person’s bodily injury losses resulting from an automobile accident ($100,000 in our example). The second number indicates the overall maximum that will be paid for bodily injury liability losses to any number of people resulting from an automobile accident ($300,000 in our example). The third number specifies the maximum that will be paid for property damage liability losses resulting from an accident ($50,000 in our example).
In some policies, the liability limits are stated as a single figure, such as $250,000. Under such policies, all property and bodily injury liability losses resulting from an accident would be paid until the limit is reached. These policies are referred to as personal auto policies (PAPs). Family members of the vehicle owner may or may not be covered under a PAP when driving the vehicle, depending on the policy provisions. Liability insurance covers only the insured for losses suffered by others. It does not pay for bodily injury losses suffered by the insured or for property damage to the insured’s
The most common type of automobile insurance policy is the family auto policy (FAP). A FAP covers the vehicle owner, relatives living in the vehicle owner’s household, and people who have the owner’s permission to drive the vehicle. In addition, any other vehicle that the owner borrows with permission is similarly covered for all family members.
The policy limits for FAPs are quoted as a series of three numbers, such as 100/300/50, with each number representing a multiple of $1000 (Figure 10.2). The first number gives the maximum that will be paid for liability claims for one person’s bodily injury losses resulting from an automobile accident ($100,000 in our example). The second number indicates the overall maximum that will be paid for bodily injury liability losses to any number of people resulting from an automobile accident ($300,000 in our example). The third number specifies the maximum that will be paid for property damage liability losses resulting from an accident ($50,000 in our example).
In some policies, the liability limits are stated as a single figure, such as $250,000. Under such policies, all property and bodily injury liability losses resulting from an accident would be paid until the limit is reached. These policies are referred to as personal auto policies (PAPs). Family members of the vehicle owner may or may not be covered under a PAP when driving the vehicle, depending on the policy provisions. Liability insurance covers only the insured for losses suffered by others. It does not pay for bodily injury losses suffered by the insured or for property damage to the insured’s
car. Injured passengers of an at-fault driver may collect under the driver’s liability coverage, but only after exhausting the coverage provided under medical payments (discussed later) and only after reimbursement is made to people injured in other vehicles or as pedestrians. Driving a rental car exposes you to the same potential liabilities as driving your own vehicle. If you have automobile liability insurance, such liabilities will usually be covered while you drive a rented car. Check your coverage before you rent a car.
Coverage B Medical Payments Insurance
Automobile medical payments insurance covers bodily injury losses suffered by the driver of the insured vehicle and any passengers regardless of who is at fault. Medical losses occurring within one year and as a direct result of an accident will be reimbursed up to the limits of the policy. Automobile medical payments insurance also covers insured family members who are injured while passengers in any car or who are injured by a car when on foot or riding a bicycle. Medical payments coverage is subject to a single policy limit, which is applied per person per accident.
In such states that have adopted some type of no-fault automobile insurance, insureds collect first (and possibly only) from their own insurance companies for bodily injury losses resulting from an automobile accident. In these states, the medical payments coverage, which is often referred to as personal injury protection (PIP), covers the driver and any passengers for bodily injury losses as well as possibly lost wages and rehabilitation expenses. Under medical payments or PIP, drivers and their injured passengers collect directly from the driver’s insurance. If the driver was not at fault, then the driver’s insurer pays the claims and subsequently may choose to exercise subrogation rights against the at-fault party. Subrogation rights allow an insurer to take action against a negligent third party (and that party’s insurance company) to obtain reimbursement for payments made to an insured. Subrogation rights are limited in no-fault states.
Coverage B Medical Payments Insurance
Automobile medical payments insurance covers bodily injury losses suffered by the driver of the insured vehicle and any passengers regardless of who is at fault. Medical losses occurring within one year and as a direct result of an accident will be reimbursed up to the limits of the policy. Automobile medical payments insurance also covers insured family members who are injured while passengers in any car or who are injured by a car when on foot or riding a bicycle. Medical payments coverage is subject to a single policy limit, which is applied per person per accident.
In such states that have adopted some type of no-fault automobile insurance, insureds collect first (and possibly only) from their own insurance companies for bodily injury losses resulting from an automobile accident. In these states, the medical payments coverage, which is often referred to as personal injury protection (PIP), covers the driver and any passengers for bodily injury losses as well as possibly lost wages and rehabilitation expenses. Under medical payments or PIP, drivers and their injured passengers collect directly from the driver’s insurance. If the driver was not at fault, then the driver’s insurer pays the claims and subsequently may choose to exercise subrogation rights against the at-fault party. Subrogation rights allow an insurer to take action against a negligent third party (and that party’s insurance company) to obtain reimbursement for payments made to an insured. Subrogation rights are limited in no-fault states.
Coverage C Uninsured and Underinsured Motorist Insurance
Sometimes the driver at fault in an automobile accident carries no insurance or has insufficient liability insurance coverage. To protect against such uncovered losses, an insured can purchase uninsured and underinsured motorist insurance as part of his or her own automobile insurance policy. When the medical payments coverage is exhausted, the uninsured and underinsured motorist coverage will provide protection. Uninsured motorist insurance protects the insured and the insured’s passengers from bodily injury losses (and, in a few states, property damage losses) resulting from an automobile accident caused by an uninsured motorist. It provides protection above that extended under the automobile medical payments insurance. Underinsured motorist insurance protects the insured and his or her passengers from bodily injury losses (and, in some cases, property damage losses) when the at-fault driver has insurance but that coverage is insufficient to reimburse the losses.
The limits for uninsured motorist insurance are quoted in a manner similar to that for automobile liability insurance. For example, uninsured motorist protection with limits of 50/100 would provide a maximum of $50,000 for any one injured person and a maximum of $100,000 for multiple bodily injury losses in the same accident. Most states require insurers to offer uninsured and underinsured motorist insurance. Such insurance is a smart risk-management choice and carries a very low premium often less than $50 per year.
Coverage D Physical Damage Insurance
The limits for uninsured motorist insurance are quoted in a manner similar to that for automobile liability insurance. For example, uninsured motorist protection with limits of 50/100 would provide a maximum of $50,000 for any one injured person and a maximum of $100,000 for multiple bodily injury losses in the same accident. Most states require insurers to offer uninsured and underinsured motorist insurance. Such insurance is a smart risk-management choice and carries a very low premium often less than $50 per year.
Coverage D Physical Damage Insurance
A number of perils can cause property losses to an insured automobile. Automobile physical damage insurance provides protection against losses caused by damage to your car from collision, theft, and other perils. The most common peril is, of course, a collision with another vehicle or an object. The next most common peril is theft
Collision insurance reimburses an insured for losses resulting from a collision with another car or object or from a rollover. The insurer pays the cost of repairing or replacing the insured’s car, regardless of who is at fault. When the other driver is at fault, subrogation rights may allow the insurer to obtain reimbursement through that driver’s property damage liability protection. Collision insurance is written with a deductible that usually ranges from $100 to $1000. If you carry collision insurance coverage on your own car, you are generally covered when you drive someone else’s car with that person’s permission. Most automobile insurance policies provide for collision coverage on rental cars if such coverage applies to your owned vehicle. Again, check with your agent before you rent a car.
Collision insurance reimburses an insured for losses resulting from a collision with another car or object or from a rollover. The insurer pays the cost of repairing or replacing the insured’s car, regardless of who is at fault. When the other driver is at fault, subrogation rights may allow the insurer to obtain reimbursement through that driver’s property damage liability protection. Collision insurance is written with a deductible that usually ranges from $100 to $1000. If you carry collision insurance coverage on your own car, you are generally covered when you drive someone else’s car with that person’s permission. Most automobile insurance policies provide for collision coverage on rental cars if such coverage applies to your owned vehicle. Again, check with your agent before you rent a car.
Comprehensive automobile insurance protects against property damage losses caused by perils other than collision and rollover. Covered perils include fire, theft, vandalism, hail, and wind, among many others. Comprehensive insurance is written on an open-perils basis, and it often includes a deductible ranging from $100 to $500. When you have a loss that qualifies under collision and comprehensive insurance, an estimate of the repair cost will be made. If this estimate exceeds the value that the insurance company puts on the vehicle, the lower of the two figures is paid, less any deductible. Insurance companies set vehicle values based on the average current selling price of vehicles of the same make, model, and age and the vehicle’s mileage and condition prior to the occurrence of the damage.
Other Protections
Other Protections
Two other inexpensive but helpful coverages are available to automobile insurance buyers. Towing coverage pays the cost of having a disabled vehicle transported for repairs. It usually pays only the first $25 or $50 per occurrence but will cover any towing need not just assistance needed due to an accident. Rental reimbursement coverage provides a rental car when the insured’s vehicle is being repaired after an accident or has been stolen. It often has a daily limit of $20 to $30 and, therefore, may provide only part of the funds needed to obtain replacement transportation.
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