Car Insurance - Policy Basics
All drivers know they should carry a car insurance policy, and most states even require by law that drivers carry some sort of car insurance. Even though car insurance policies are very common, they are not always straightforward or easy to understand. Here a few basics to help you understand your car insurance policy, the coverage options you have and where to find important policy information.
A car insurance policy consists of four basic parts:
- Declaration Page
- Insuring Agreement
Elements of the Declaration Page:
- Names and contact information for the person who purchased the policy, otherwise known as the policyholder. Also included are the names of other family members covered by the policy. Usually, the second person listed on the policy is a spouse.
- Policy Number – this uniquely identifies the insurance contract.
- Policy Period and Term – these dates indicate the beginning and ending of the policy. Any accident related damages occurring outside of policy term will not be covered.
- Vehicle Description – includes the make, model, year and vehicle identification number (VIN) for each vehicle that is insured on the policy. The garage address, which can be different from the residential address, shows where the vehicle is stored when not in use.
Basic Types of Coverage
- Liability – pays for accidental bodily injury which includes medical bills, loss of income or pain and suffering. Liability also pays for accidental property damage which generally involves damage to someone else’s vehicle, but can also include a building or any other property damaged in an accident.
- Collision – pays for damage to your vehicle caused by collision with another vehicle or object.
- Comprehensive – pays for damage to your vehicle caused by a collision with an animal, such as a deer, or non-collision damage to the vehicle such as theft, vandalism or hail.
- Medical Coverage – pays for medical expenses of the insured driver and anyone in your vehicle, regardless of who was at-fault in the accident.
- Personal Injury Protection (PIP) – this coverage is only available in states that maintain no-fault automobile insurance laws. In the event of an automobile accident, regardless of fault, Personal Injury Protection pays for medical expenses, and in some cases lost wages and other damages, of the insured driver or passengers in your vehicle.
- Uninsured Motorist – pays for medical expenses, lost wages, and other damages sustained by you or passengers in your vehicle caused by a driver who does not have liability coverage or by a hit-and-run driver.
- Underinsured Motorist - pays for medical expenses, lost wages, and other damages sustained by you or passengers in your vehicle caused by a driver who does not have adequate liability coverage.
- Towing and Labor – pays the cost of towing and any associated labor in the event of an accident or a stranded car. Generally this also covers keys locked in a car, flat tires, gasoline delivery and others. This only covers the cost of towing and labor; parts needed for the repair are not covered under this coverage.
- Rental Reimbursement – covers the cost of a rental car while your car is being repaired due to damage caused by a covered collision or comprehensive loss.
- Loan/Lease Gap – covers the difference between the outstanding debt on a loan/lease agreement and the actual cash value of the vehicle.
Know your states requirements before choosing your types of coverage. Most states require liability insurance, and some require personal injury protection as well. Your independent insurance agent is a great resource to help you decipher state requirements and help you get exactly what you need.
- Endorsements – these are additional coverage options based on your particular situation that can be purchased in addition to the normal policy. This information should be carefully reviewed to understand the coverage being provided by the insurer.
- Coverage and Premium –this includes information on the coverage that has been purchased and the amounts purchased. The deductible amounts and the cost of premium are also listed showing how much you will pay per coverage for the term of the policy. Policies can either be for six or twelve months.
- The Insuring Agreement - identifies what the insurance company has promised to do, such as the promise to pay for losses in the event of an accident.
- Exclusions - these take coverage away from the Insuring Agreement. Typically listed are excluded perils or causes of loss, excluded losses, and excluded property.
- Conditions - provisions that place limitations on the insurer’s promise to pay, if unmet the insurer can deny the claim. Typically these include a promise to provide the insurance company with proof of loss, and to cooperate with the company’s investigation.
Whether you are purchasing a new insurance policy or simply reviewing your existing insurance policy, it is important to understand the coverage options you have and how they apply in case of an accident or damage to your vehicle. It is also important to know the vehicles that are covered as well as those who are covered by your policy. That way, if there is a major change, like a child getting a license or the purchase of a new vehicle, you know what and who is covered and whether you will need to make changes to your policy to ensure you have adequate coverage.
References: National Association of Insurance Commissioners: Understanding Your Insurance Policy. Available online at www.naic.org. Accessed April 5, 2010.