Anatomy of an Automobile Insurance Policy

We all dread writing that check to our auto insurance company. It is outrageously expensive, rarely needed, and the language in the policy would confuse even a legal scholar. Yet without insurance, you are not only breaking the law, you are vulnerable to financial ruin in the event of a serious claim. It is therefore important that you understand the basic terms contained within your auto policy. This article helps to explain some of the more significant terms you will find in your policy.

There are usually four broad categories of coverage in an auto policy. These include Liability Coverage, Medical Benefits, Physical Damage, and Uninsured/Underinsured motorist coverage.

Your liability coverage is critical for your financial protection in the event of a claim. This coverage protects you when you are found to be negligent in causing an accident, resulting in injury and/or vehicle damage. Your protection will be up to the “limit of liability” stated in your policy. Many people make the mistake of buying only minimal protection, which currently is $15,000 per person/$30,000 per accident under California law (California Insurance Code §11580.1b). You should get a quote from your agent to learn how little it costs to substantially increase your liability protection.

Medical Payments Coverage provides the occupants of your car, including yourself, coverage for medical bills for treatment related to an accident up to the limit that you have purchased. It is recommended that you purchase this coverage even if you have health insurance since many private insurance policies have large deductibles and copays. There are no deductibles or copays in the medical payments coverage in a typical auto policy (although some companies will pay only after your health insurance has first paid a portion of the bill, usually called Excess Only). This will also allow you or your occupants to seek medical care from a professional, even if he or she is not covered under your health plan.

Physical Damage Coverage on your auto policy applies to the damage to your vehicle. Associated under this category of coverage you will see the terms, “comprehensive” and “collision“. This coverage includes a deductible that you will have to pay before the insurance kicks in. Selecting a higher deductible will obviously save you more money on your annual premium. Comprehensive Coverage applies to damage to your car from something other than a car accident, such as a tree falling on your car. Collision Coverage obviously applies in the event that you are in a crash and suffer damage to your car. Also included under the physical damage coverage often is car rental reimbursement.

The last category of coverage, which is extremely important, is usually entitled Uninsured Motorist and sometimes Uninsured/Underinsured Motorist. Again, many make the mistake of buying the cheapest and lowest level of uninsured motorist protection. This coverage protects you and the occupants of your car in a crash where the other party is either totally uninsured or has small liability limits on their insurance that is less than your underinsured coverage. Since this coverage protects you and your loved ones, it is extremely important to get a quote for a higher level of coverage as it is common for negligent motorists to carry no insurance or have small limits of coverage.

Purchasing automobile insurance is expensive and essential. Remember that cost is certainly one factor to consider, but the quality of the insurance company is another very important factor. You want your insurance company to be by your side when you need them the most, and that’s where a quality insurance company makes a huge difference.

In a later article, I will discuss what happens under your auto policy when you get sued as a result of an accident.