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You own a car or
are about to purchase one.
If you drive, auto insurance is a fact of life, especially if you live in one of
the many states that requires insurance for each automobile. Insurance companies
provide auto insurance through a personal auto policy (PAP).
Each state has
its own version of the PAP, so discussing every state variation is impossible in
this short space. Within this, and all discussions on auto insurance,
generalizations will be made based on the "standard" insurance policy form. Your
insurance representative can give you more information on your state's specific
auto insurance practices. Auto insurance isn't a "should I or shouldn't I"
proposition in most states. Most states have what are called "financial
responsibility" laws to ensure that you're able to pay a liability claim against
you. These laws typically require you to purchase a minimum amount of liability
insurance. Assuming that you want to be a law-abiding citizen, the only real
choices for auto insurance are what type of insurance you should buy and how
much. There are many options. An in-depth discussion of policy coverage options
is located in Premiums and Coverage. A brief discussion of these options
follows. In addition to coverage options, there are also general policy options.
These include setting the policy period (including canceling the policy) and
deciding how you want to make the premium payments.
The personal auto
policy
In general
The PAP is broken
into several sections. The first four sections cover the four main coverages you
can purchase with a PAP. The other sections cover various provisions and duties
under the policy.
Part A--liability
coverage
Liability
coverage is the single largest auto insurance concern. Compared to collision
coverage, which is limited to the value of your vehicle, liability claims for
pain and suffering can be virtually limitless. The Part A-- Liability Coverage
section of the PAP separates liability coverage into two sections: bodily injury
coverage and property damage coverage.
Liability
coverage insures you against injuries you cause to other people and property in
an automobile accident. This is one area in which you do not want to be
underinsured.
Part B--medical
payments coverage
Medical payments
coverage ("med pay") pays medical expenses up to a specified limit resulting
from an automobile accident. The purpose of "med pay" is to provide payment for
immediate medical treatment of people who are injured in an auto accident
without waiting to see who is at fault and ultimately liable.
Med pay is
required coverage in a few states and optional in most states. The Part B--
Medical Payments Coverage section of the PAP governs this coverage.
Part
C--uninsured/underinsured motorist coverage
Uninsured
motorist coverage insures you against losses caused by someone who is completely
uninsured or who has less than adequate insurance to cover the loss
(underinsured). Like med pay, uninsured motorist protection is required coverage
in some states.
Part D--coverage
for damage to your auto
Part D of the
standard PAP provides coverage for damage to your auto. This coverage actually
consists of two separate coverages--collision and comprehensive. You can
purchase either or both of these coverages for each vehicle you own.
In general,
collision coverage insures the value of your car if you have an accident.
Comprehensive coverage insures you against all other physical damage to your car
caused by such things as fire, theft, flood, wild animals, and vandalism. These
coverages can be written with or without a deductible (i.e., the amount of money
that you are required to pay before your insurance takes over). Deductibles can
be in any dollar amount but are generally $100, $250, $500 or $1,000. The higher
the deductible, the less expensive the premium.
Part E--duties
after an accident or loss
Part E of the PAP
deals with the specific procedures that you must follow to have your claim
covered by the insurer. It contains a list of general and specific duties that
you must comply with. It's essential to follow these duties carefully, since
payment of your claim will depend on it.
Part F--personal
auto policy provision
Part F of the PAP
contains various provisions that limit and qualify the coverage provided in
other sections of your PAP. If the conditions set forth in these provisions are
not met, the insurer can deny coverage.
Other coverages
included in your policy
In addition to
the above types of coverage, your insurer offers other miscellaneous coverages
to handle almost every situation. Miscellaneous coverages include towing and
labor coverage, loss of income protection, and rental reimbursement insurance.
See Premiums and Coverage for more information.
No-fault
insurance
In the world of
auto insurance, no-fault is a perpetual hot topic. At one time, all states were
fault-based states. In a fault-based system (also called a tort system), the
driver who is at fault in an accident is liable for the damages that he or she
causes. There are currently 12 states plus Puerto Rico that have forgone the
fault-based system and adopted some form of no-fault auto insurance.
When you have an
accident under a no-fault insurance system, your insurer automatically pays your
medical bills, regardless of fault, up to a specified limit. In exchange for
this guaranteed payment, you must forgo some or all of your rights to sue the
other driver involved in the accident. By the same token, you are also protected
from being sued in the event that you are at fault in an accident. There are
elements of no-fault in all auto insurance policies. Medical payments coverage
and property damage coverage are typically paid regardless of fault.
Choosing your
coverage and policy
Choosing
insurance coverage
State law or your
lender may require that you purchase a certain amount of auto insurance. These
required coverages are only a minimum, and you may need more coverage.
There are many
other types of coverages for you to consider. Because there's no optimum amount
for every individual, how much auto insurance you need depends partly on your
tolerance for risk. Can you afford to pay the cost of a claim out-of-pocket, or
would even a small claim threaten your finances? Your insurance agent or
financial planner can recommend coverage limits that you should carry to
adequately protect yourself and your property. See Premiums and Coverage for
more information.
Purchasing a
policy
Before purchasing
auto insurance, you should evaluate and compare the various products offered. In
addition, because your personal and financial obligations change, you will
occasionally need to review your current PAP to ensure that it adequately meets
your needs. If it doesn't, you may have to increase or replace your policy.