About 25 million auto accidents occur in the United States each year. Approximately 5 million people are injured in these accidents; some 50,000 are killed. Auto insurance of course cannot reduce the deaths, the injuries, or the damages, but it does offer protection against the financial risks of auto ownership and operation.
Auto Insurance Coverages
Auto insurance includes several different forms of protection. Some of the coverages may be required by state law; some are valuable even though they are not compulsory; and some may be desirable for certain motorists but not for others.
Auto accidents often result in lawsuits in which one party seeks reimbursement for bodily injury or property damage caused by the negligence of another. Auto liability insurance protects against the financial consequences of such claims. The insurer promises to provide legal defense if an insured is sued and promises to pay damages for which the insured is legally responsible. In other words, liability coverage defends against damage claims and pays amounts needed to settle the claims. Some policies have two separate liability coverages, one for bodily injury (Bl) claims and the other for property dam¬age (PD) claims; other policies have a single liability coverage for both Bl and PD claims. The amount of liability insurance is indicated by a “limit of liability” stated in the policy. It is the maximum that the insurer will pay to others for Bl or PD claims. The protection extends to the person in whose name the policy is written, relatives who are members of that person’s household, and other people who have permission to use the insured’s car. It also applies while an insured person is using someone else’s car with their permission.
Medical Payments Coverage
Auto medical payments insurance pays for medical ex¬penses arising from auto accidents. It covers 1) the insured and relatives who are members of that person’s household and 2) other people who are riding in the insured’s car. Notice that this coverage does not pay the medical expenses of people in another car that is struck by the insured car. If such persons sue, the insured of course will be protected by the liability coverage.
Uninsured Motorists Coverage
This coverage is designed to protect people who have valid bodily injury liability claims against drivers from whom they cannot collect be¬cause the latter are uninsured. To illustrate, an insured man is badly injured when his car is run into by a car driven by a drunken driver. The drunken driver has no auto liability insurance. If the injured man has purchased uninsured motorists coverage, his insurer will pay him the damages for bodily injury that he is legally entitled to collect from the drunken driver. Uninsured motorists coverage also pays damages that the insured is legally entitled to collect from hit-and-run drivers and from drivers whose in¬surers are insolvent. In most states the protection does not apply to claims for property damage liability.
Coverage for Damage to Your Auto
This insurance, called physical damage coverage on some policies, has two parts. One part pays for damage caused by collision; the other, commonly called comprehensive coverage, pays for other damage to the insured auto. Types of loss paid for by the comprehensive coverage include glass breakage, vandalism, flood damage, fire damage, and theft of the car or any part of it. Collision insurance always is written subject to a de¬ductible amount that is subtracted from each loss payment. If the deductible is $200 and repairs to an auto damaged in a collision cost $1,000, the insurer pays $800. If repairs cost $200 or less, nothing is paid. Comprehensive coverage commonly has a deductible also, but it usually is a smaller amount. Note that these coverages pay for damage to the insured’s car; they should not be confused with property damage liability coverage, which protects against claims from other people who allege that an in¬sured has damaged their property.
Personal Injury Protection (PIP)
About one third of U.S. states have adopted auto no-fault laws. Those laws permit lawsuits for injuries resulting from auto accidents only if the injuries are serious enough to exceed a certain “threshold” level. Compensation for less serious injuries is required to be furnished on a no-fault basis, meaning without regard to who caused the accident. Each motorist in the states that have auto no-fault laws must buy insurance that provides the required no-fault benefits. The benefits usually are for the motorist, the motorist’s family, other occupants of the motorist’s car, and pedestrians; they commonly are furnished by a Personal Injury Protection page attached to the motorist’s regular auto insurance policy. In most states the PIP benefits apply to bodily in¬jury only and pay the insured persons’ medical expenses and lost income up to maximum amounts stated in the law.
Buying Auto Insurance
The principal decisions to be made by auto insurance buyers are what coverages to buy, what amounts of insurance to buy, and what agent and com¬pany to buy from.
Auto liability coverage is essential. No one should drive a car without protection against the potentially high cost of lawsuits. In some U.S. states liability insurance is required by law. Because the size of lawsuits cannot be predicted, there is no way to know in advance how much protection will be needed. In deciding upon the amount, consumers should realize that the extra cost of high limits is relatively small. Doubling the cost of the limits, for example, does not double the cost of the protection. Agents should be asked the cost of several different limits for the buyer to choose among. Reasonably high amounts of liability protection should be a high priority objective.
Medical payments coverage is less important than liability protection. It is least important in the states with strong and effective auto no-fault laws; there the mandatory PIP provides sufficient coverage for medical expenses. Medical payments insurance also is unnecessary for people who have adequate health insurance protection. The minimum amount of medical payments insurance in the United States is $500 per person. If the protection is needed, higher amounts should be purchased.
Uninsured motorists coverage costs only a few dollars a year, because covered losses are infrequent. The protection is important, though, because accidents with uninsured drivers can be costly. Most people should buy the coverage and should request high limits of liability.
The advisability of buying coverage for damage to the auto (collision and comprehensive) usually depends upon the value of the auto. Most people insure relatively new cars against such damage, but as a car ages its value declines and at some point it becomes no longer worth insuring. For example, if $200 deductible collision insurance is carried on a car that is worth only $800, the maximum loss payment is $600. If the cost of repairs after a collision would exceed $600, the insurer will consider the car a total loss and pay the owner $600. In view of the cost of the protection, many owners prefer not to insure older cars against collision damage.
When collision and comprehensive coverages are carried, the amount of insurance automatically equals the value of the auto minus the deductible amount. The greater the size of the deductible, the lower is the cost of the insurance. Collision coverage often is written with a $100 or $200 deductible. Comprehensive may have no deductible amount, but $50 and $100 deductibles are common. Substantial deductibles make good sense because they eliminate coverage for minor losses. Insuring such losses is uneconomical for two closely related reasons. First, because small bumps and scratches happen frequently, premiums on policies covering them must be high in order to pay for the large number of minor repairs. Second, the premiums also must be high enough to allow for the overhead costs of handling the numerous small claims. If an insurer’s cost of processing a $40 claim is $20, then the company must spend $60 to pay a $40 loss. For these reasons, it is more economical to pay small losses out of one’s own pocket and to buy insurance for large losses only.
Auto buyers usually shop before they buy, comparing the prices and service of several auto dealers. Shopping for auto insurance is also advisable. Prices vary among insurers and the differences may be substantial. Price should not be the only basis for choosing an insurer, though. Service is equally important. The agent from whom one buys auto insurance should give helpful advice about the kinds and amounts of coverage to buy, should see that the policy is properly prepared, and should assist with claims.
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