Car Insurance Coverage Types: Explaining the Auto Policy
Many of you have car insurance coverage, but which among you knows what all the names and numbers mean?
If we are at a fortunate starting point, you know what liability insurance is and what it does. True serendipity would have it that you also know what we mean by “physical damage” coverage. Assuming you do not, we are here to help.
In reality, however, an auto insurance policy is much more than just liability coverage and physical damage coverage in a broad sense. There are multiple components to each. What are the components of car insurance coverage, and what does it mean to you?
Car Insurance Coverage Types Listed on Declarations Page
Depending on where you live, your declarations pages (the front pages of your policy listing what is covered and for how much) will have some different components. The basics include liability coverage and physical damage.
Liability coverage, for those in blissful unawareness, is bodily injury or property damage you cause to a third party. For example, if you hit someone with your car – and may it be that you never do – that is bodily injury. An example of property damage liability is you hitting someone’s fence with your car and causing a $2,000 casualty.
Whereas liability coverage is damage you cause to someone else, physical damage coverage is for your vehicle. This is why it is referred to as a “first-party” coverage.
You might now be saying, “Is that it? Is that all my auto policy does for me?” In a general sense, that is what it is intended to do, but in modern times it can do more.
Car Insurance Coverage Type: Liability
You can expect to see these coverage sections under liability on your personal auto policy.
Compulsory Bodily Injury (BI)
Some states manifest this in different ways, but these are the bodily injury (BI) liability limits your state requires you to carry. Down at the bottom of this page, we go further into what your state requires, if you live in the United States. The vast majority of states mandate a certain amount of coverage, but these limits are often pitiful.
For instance, in Massachusetts, the compulsory bodily injury requirement is $20,000 per person and $40,000 per accident. On personal auto policies, these are manifested as “split limits” per person and per accident, but as you can see, that is not much. In a serious accident where you have hit a car with multiple passengers, you would likely blow through your compulsory limits with ease.
Personal Injury Protection (PIP)
Not every state requires PIP. If you must purchase it or just want to purchase it, this is a small amount of no-fault coverage that contributes to any medical expenses and other payments incurred by the insured and/or their passengers.1 Since it is a no-fault coverage, even if you caused the accident, you may still be eligible for benefits under PIP.
In Massachusetts, for example, the mandated amount of coverage is $8,000 per person.
If you are not at fault for an accident, any expenses paid out under PIP may be subject to subrogation. Put it another way: your insurance company is going to go after the other person’s insurance for what they lost.
Optional Bodily Injury (OBI)
This is where the liability limits can pile up. In your state, you start at the compulsory amount of liability coverage, assuming there is one. From there, the insurance company will offer higher limits. In personal lines, you may see such OBI splits as $50,000 per person/$100,000 per accident, $100,000/$300,000, or $250,000/$500,000. You may be able to get even higher than these, but it is uncommon on a personal auto policy. Each is more pricey than the last, but may not be as expensive as you think — consult with your insurance agent.
While we at Insurophile cannot tell you what to do with regards to your insurance, it is advisable to seek higher OBI limits. Compulsory limits are unlikely to protect you in the event of a major incident.
Property Damage Liability (PD)
This is the coverage you will see listed for damage to the property of others that you cause. This could be a dwelling, a possession, or another person’s vehicle if you were at fault.
If your state has requirements for bodily injury coverage, then they will have them for this as well. However, if you thought some of those state minimums were pathetic, then wait until you see property damage. Some states only mandate as little as $5,000 in coverage per accident. Needless to say, if you put value on insurance and protecting your finances, the minimums are not enough.
This appears as a separate limit from bodily injury on the personal car insurance policy. Business insurance customers can split their limits or get a “combined single limit” to cover everything between BI and PD, usually for $1,000,000.
Auto Medical Payments
This is sometimes referred to as “med pay” in the insurance world. Medical payments coverage functions in a similar fashion to PIP, however med pay is not a no-fault coverage.2
Typical limits for this coverage are $5,000 (most common) or $10,000. Since it is an optional coverage in most places, there is no requirement to purchase. Yet, be aware that the premiums are also small.
Uninsured Motorist (UM)
This and underinsured motorist coverage are unusual for liability. By definition, liability pays out to a third party you harm in some way. With UM, you as the insured can draw against your own policy. You never know if someone driving near you has no insurance, in particular in states where it is not a requirement. If you have this, your own policy can pay out in cases when you are not at fault but the other party has no liability coverage.
Underinsured Motorist (UIM)
Very much like it sounds like, and similarly to uninsured motorist coverage, this gets involved with claims with drivers lacking adequate limits. As in, other drivers who are at fault for your accidents. Uninsured motorist kicks in when the other party has no coverage. Underinsured motorist is for those instances when the other party does not have enough. You know, those people who decided that 20/40 compulsory bodily injury limits are plenty. We are not describing you, of course, because no Insurophile reader would cheap out in such a way.
Car Insurance Coverage Type: Physical Damage
Now we get into the damages done to your own vehicle as opposed to damages you may cause for someone else. Collision coverage, as its name suggests, involves paying out when your car hits something else (in most cases). It could be another vehicle or it could be an object, like a pole, tree, or building. Not that we want you to hit a pole, tree, building, or another vehicle. We’re just telling you what this is.
One way to be sure you have collision coverage is to check your auto policy for a deductible. If a deductible is shown, you have it. Most likely, that deductible will be $500 or $1,000. Should the insurance company pay out on a collision claim for you, it will be subject to that deductible UNLESS you have “waiver of deductible.” This is an inexpensive coverage available in certain states which allows for your collision deductible to be waived if you are not found to be a majority at-fault. Here’s a big point: if you are the victim of a hit-and-run accident, you WILL be subject to the deductible. Nobody can prove who hit you, therefore nobody can prove fault.
Your next question is “where do I check to see how much my policy is going to pay me for my collision loss?” That’s not really how that works. Unless you have an “agreed value” endorsement stating the value of the vehicle, the loss will be settled on an actual cash value basis. Whatever your car is worth at the time is the maximum. Since the value of your car changes over time, there is no stated policy limit per se. Not to mention, your collision loss might not be for the total value of the vehicle.
Comprehensive coverage is physical damage for “everything else” not including collision. It may include, but is not limited to, hail damage, theft, a tree falling on it, or hitting a deer. (The latter is an exception to collision coverage applying to hitting an object.) Otherwise, it functions the same way as collision in that you get paid on an actual cash value basis for your loss.
Please note there is no “waiver of deductible” for comprehensive coverage. If you have a comprehensive claim, except as noted below, you’re taking on the deductible.
Another feature of comprehensive coverage: glass losses. This is where you will find your glass coverage, and in some states, there is zero deductible for glass by law if you have comprehensive. Other states may allow you to buy zero-deductible glass coverage. If you do not think you have zero-deductible glass coverage, check with your agent. Many glass losses are $500 or less, meaning if you are subject to deductible, you’re going to eat it out of pocket. Having no glass deductible could save you hundreds.
If, for whatever reason, you are too cheap to pay for collision coverage, limited collision is available. You only get paid under a limited collision claim if you are proven not to be at fault in the accident. This means it was not a hit-and-run AND the other party’s insurance has accepted liability. Your policy will pay out and then the insurance company will subrogate, or financially pursue, the other insurance company.
Specified Causes of Loss
This is essentially a “limited comprehensive” coverage that narrows the scope of coverage from “everything that is not collision” to a handful of perils. It includes, but is not limited to, theft and fire damage.
Loss of Use
This is otherwise known or referred to as rental reimbursement coverage. If your car is damaged in a covered loss, this is an payment from the insurance company to rent a temporary replacement vehicle. It is usually represented by amount of coverage/number of days; for example, $30/30. The amount and number of days can be adjusted.
You may run into problems if you are replacing a 2006 Toyota Corolla with, say, a 2019 Cadillac Escalade. Any insurance company claim representative will balk at you taking the opportunity to upgrade at their expense. The idea of insurance is to make you whole in a way that puts you back the way you were before, not to hook you up with a sweet ride.
Towing and Labor
If you get into an accident (again, a covered loss) and this causes your car to need a tow, there’s coverage for that. Some typical limits you may have offered to you are $50, $75, or $100 per disablement.
This is NOT coverage for your car when it craps out and you call AAA for a tow truck. It has to be as a result of a loss that would otherwise be covered. Needless to say, your car crapping out for no particular or identifiable reason is not covered by insurance here or anywhere.
Other Auto Insurance Policy Enhancements
Check to see if your insurance company offers broadening endorsements. These may also be called enhancement endorsements. Whatever they are named, they do the same thing: expand coverage beyond what you have listed on the policy. These vary widely from insurance carrier to carrier. Some, for example, may give you additional towing coverage or increase your existing rental reimbursement coverage.
You may be eligible for other discounts through your insurance carrier, such as good driver, multi-line (if you have more than one policy with them), or good student. These sorts of benefits, particularly good driver and good student discounts, are not available on business auto policies, only personal.
What Are Car Insurance Requirements in Your State?
We wrote an article about car insurance coverage requirements by state, which you can see here. It would be a lie to say no two states are alike, because they all think along similar lines. Some do not require insurance at all, which is nuts.
1: “Personal injury protection (PIP) insurance” (Nationwide.com website, accessed 5 August 2019)
2: “What Is Medical Payments Coverage?” (Allstate.com website, published November 2017, accessed 5 August 2019)