Car insurance provides financial protection for drivers in case of an accident, vehicle damage, personal injury or theft. Without car insurance, drivers would be at serious financial risk every time they drive their car because collisions can cost thousands of dollars in property damage and bodily injuries. Auto insurance is something that everyone needs but few people feel confident that they fully understand how does car insurance work.
Various types of car insurance coverage work slightly differently, depending on which driver is found to be at fault, what type of damage is caused, and what state the accident occurs in.
An auto insurance policy is a contract between you and your auto insurance carrier. In exchange for your paying a premium, your insurance company agrees to pay your losses as outlined in your policy.
What are the types of car insurance and what do they cover?
What is covered depends on your coverage. The first thing to do when trying to get a clearer understanding of what your insurance policy covers is to identify what type of coverage you have. There are main types of car insurance, depending on the state:
Bodily injury liability insurance
Bodily injury liability insurance protects you if you’re liable for the damage to another driver’s vehicle in an accident. This type of coverage is required in almost every state.
Property damage liability insurance
Property damage liability coverage or insurance covers damage that you cause to other people’s property with your car. It is required in most states.
Collision insurance covers the repair or replacement of your vehicle, less your chosen deductible, no matter who is at fault in an accident. It is optional, but most lienholders require owners purchase collision insurance if you lease or finance your vehicle.
Comprehensive insurance covers damage to your vehicle, less your chosen deductible, that was not caused by an accident. Examples include: rodent damage, fallen limb coverage, and more. It is optional coverage.
Personal injury protection (PIP) insurance
Personal injury protection insurance pays for direct and indirect medical bills if you’re involved in an accident, regardless of who is at fault. It is required in some states.
Uninsured/underinsured motorist coverage
Uninsured/underinsured motorist coverage pays property damage and medical bills after an accident with an uninsured or underinsured driver. This type of insurance is required in 20 states.
Medical payments (MedPay) coverage
Medical payments coverage helps pay for your medical related expenses after an accident. It is required in some states.
Gap insurance helps drivers pay off the rest of their car loan if their vehicle is totaled or stolen. It is optional.
Roadside assistance coverage reimburses you for services like towing and flat-tire replacement. It is optional.
Rental reimbursement covers the cost of a rental car while your damaged car is being repaired after a collision. It is optional.
What does car insurance not cover?
You definitely want to double-check your car isurance policy to make sure you have all the coverage you need (with no surprising gaps). Finding out you weren’t covered for something essential after an accident is not a fun position to be in.
While each carrier and policy is different, below are some common situations that typically are not covered by a standard auto policy:
Personal items left behind in your vehicle (theft of those belongings)
If your computer, purse, or other valuable item is stolen from your vehicle, you may have to turn to homeowners or renters insurance to have those items replaced.
A person who lives with you but isn’t on your auto insurance policy
Letting your roommate drive your car? If that’s a common occurrence, you may want to add them to your policy. Otherwise, you won’t be covered if they cause an accident while driving your vehicle.
Making deliveries (and ridesharing – business use)
If you work for Lyft, Grubhub, or any other company that requires you to drive your own vehicle, you need a commercial auto policy in order to be covered. Your regular policy will not cover anything that happens to you or your vehicle when driving for business purposes.
Using the wrong fuel
Not paying attention while filling up your gas tank? Using the wrong kind of fuel could damage your vehicle, and your car insurance policy won’t cover the repairs.
Condensation in your gas tank
Condensation in your gas tank can cause corrosion, which is expensive to reverse. Unfortunately, your car insurance policy probably does not cover this type of damage, unless you can prove that it happened due to vandalism.
Routine car maintenance/wear and tear
Most of us know that if your car starts making a funny sound after driving it for a couple years and you have to get a part replaced, that’s not covered by insurance. The same goes for routine maintenance like getting your oil changed, or having the tires rotated.
Driving outside of the US
Check with your auto insurance carrier to see what your auto insurance will and won’t cover before you go on an international trip in which you plan to drive. Most car insurance companies’ policies do not cover you if you are driving outside of the US.
How car insurance works when you are at fault
When you are at fault in an accident, the other driver will file a claim with your insurance company using your liability car insurance to have their medical expenses and vehicle repairs covered. Your medical costs and property damage will be paid using your own collision coverage, personal injury protection, or MedPay.
You’ll need to pay a deductible before you can have your collision insurance cover your vehicle repairs. Deductibles are the amount of money you have to pay before your insurer will cover the rest of a claim. Personal injury protection, uninsured motorist, and comprehensive insurance all usually have a deductible associated with them.
How car insurance works when you are not at fault
If you are not at fault for a car accident in most states, the at-fault driver’s liability car insurance pays to cover your medical expenses and vehicle repairs.
No-fault states are the exception, requiring you to use your own car insurance (personal injury protection) to pay for your medical bills after an accident. The at-fault driver’s insurance will still pay for your vehicle repairs, though.
If the at-fault driver does not have any insurance, or if their liability insurance is not enough to cover your costs, you can file a claim with your own uninsured motorist insurance.
How car insurance works when fault is unclear
When you file a claim, either with your own insurance company or with someone else’s, the insurance company will send an adjuster to investigate the incident and make an official determination of fault. This process can sometimes take some time, so if you need your vehicle repairs covered before fault can be determined, you can still file the claim with your own collision insurance. If you are later found to not be at fault, your insurance company will use a process called subrogation to try to recover those costs, including your deductible, from the other driver’s care insurance company.
If both drivers share fault in an accident, which insurance company pays for the claims is determined by the state’s negligence laws.
What is the difference between a premium and a deductible on a car insurance policy?
An insurance premium is the amount you pay for an insurance policy. Simply put, premiums are what you pay insurance companies in exchange for coverage. When you hear “insurance premium,” think “the price of insurance.”
You typically pay premiums monthly, semiannually, or annually, depending on the policy. Insurers sometimes offer a discount for bundling your policies or paying your premium annually. The price of your premium depends on the type of insurance you buy.
When you make a claim, your insurance deductible is the amount you are responsible for before your insurance company will chip in. With car insurance policies, you’ll pay a separate deductible for each individual claim. Typically, your car insurance deductible is due to the shop at the time the repairs are complete
With collision and comprehensive coverage, you are usually able to choose your own deductible amount. Insurance deductible amounts are typically written into your policy in one of two ways:
- As a specific dollar amount.
- As a percentage of the policy’s total insurance amount.
Regardless of how the deductible is applied, your car insurance company will start to contribute once you reach your deductible. If your damages are found to be less than your deductible, your insurance carrier will not be able to issue any payments.
Do I have to have car insurance?
While nearly all states require liability coverage to register and drive a car, all states have financial responsibility laws. In states where liability insurance is not a requirement, you need to have proof of sufficient assets to pay damages, medical bills, and more if you cause an accident.
In many states, driving without insurance can lead to legal penalties like a suspended drivers license, and financial risk from your vehicle being impounded. Worse, if there is an accident, you could be financially responsible for the damages, destroying your financial future.
You’ll want to protect yourself and your assets with car insurance. The insurance industry and consumer groups generally recommend a minimum of $100,000 of bodily injury protection per person and $300,000 per accident, since accidents may cost far more than the minimum limits mandated by most states.
In short: liability coverage covers the costs of an accident that you caused. These may include the other driver’s vehicle repair costs, as well as lost wages and medical expenses for them, their passengers, and any pedestrians or bystanders who were involved in the accident.
Full coverage combines a variety of different policy types, including options like collision coverage, comprehensive coverage, and liability insurance. There are additional coverage options as well, which can take care of things like rental reimbursement costs and towing expenses.
How much car insurance do you need?
Car insurance is required in 48 of the 50 states, except New Hampshire and Virginia. Anyone who owns and drives a car needs to prove that they have coverage in order to avoid costly penalties. If you’re caught driving without insurance, you can face fines, lose your license, or even go to jail. Many states do allow you to make a cash deposit in place of buying car insurance, but it usually has to be between $25,000 and $160,000.
Most states only require drivers to have liability insurance, while others require additional coverage like personal injury protection and uninsured motorist coverage. You only have to carry car insurance to meet the state-minimum requirements, but it’s recommended that you buy as much coverage as you can comfortably afford since the minimum coverage limits typically don’t provide enough protection against severe accidents.
How to get car insurance quotes
First: Gather your information
To get car insurance quotes, gather your personal information, such as your driver’s license number, Social Security number, and your car’s VIN. This information helps companies learn about your driving history and any potential risks and benefits associated with your car, like safety ratings. They use your data as a factor in your car insurance priced quote.
Next: Determine what types of coverage you need
Although the more coverage you buy, the more you’ll pay for insurance, it’s a good idea to select as much coverage as you can afford – each coverage protects you from potentially large bills.
Get a quote today and know that you and your vehicle are protected.
Article last updated on June 25th, 2023 at 6:43 pm