Car insurance is rather complex and most explanations of how it works use a lot of big words that many people just don’t care to read much less understand. So we’re going to explain it in a fun way that anyone can understand.
Car insurance is a safety net for your wallet and your peace of mind. Think of it like a superhero who’s there to save the day if things go wrong with your car.
You pay a small amount of money regularly, known as a premium, and in exchange, the insurance company promises to help you cover the big costs if you get into a car crash or if your car gets damaged in other ways.
Meet Joe. He’s just an average guy.
Now that you know what car insurance is, let’s bring in Joe, a careful driver with a fresh insurance policy. He drives a blue four-door sedan and pays his insurance company $100 every month to keep his policy active. This policy has different types of coverage:
- Liability Coverage – This is the part of Joe’s insurance that pays for other people’s car repairs and medical bills if Joe causes an accident. It’s required in most places because it makes sure that if Joe is at fault, the other party isn’t left with a huge bill.
- Collision Coverage – If Joe’s car gets damaged in a crash, this coverage helps pay for the repairs.
- Comprehensive Coverage – If something other than a collision damages Joe’s car, like a tree falling on it or someone stealing it, comprehensive coverage helps pay to fix or replace it.
Yeah, we had to use some big words in the list above, but that was really kind of unavoidable.
Now here’s where the actual explanation of how car insurance works actually begins. So buckle up and enjoy the ride!
Joe has an accident
Joe is driving on a rainy day and unfortunately skids into the rear of another car at a stoplight. The other car’s bumper is now a sad, crumpled mess. Joe is okay, and so is the other driver, but both cars are damaged. Here’s where Joe’s car insurance comes into play.
Joe files a claim
Joe calls his insurance company to report the accident — this is called filing a claim. He tells them what happened, where it happened, and provides details about the damage and the other driver.
The insurance company then assigns a claims adjuster, who’s like a detective and judge rolled into one. The adjuster’s job is to look at the evidence, figure out what happened, and decide how much the insurance company should pay to fix the cars based on Joe’s policy.
The adjuster examines the damage to both cars and checks the police report. Joe’s insurance policy has a $500 deductible for collision coverage, which means Joe needs to pay the first $500 of the repair costs for his car.
Joe’s liability coverage, which has no deductible, will handle the other driver’s repair costs and medical bills since the accident was Joe’s fault.
See Types of Car Insurance Coverage: Understanding Your Policy for detailed information on different car insurance coverages as part of our Car Insurance 101 Educational Series.
Joe’s car gets repaired
Let’s say the repair cost for Joe’s car is $2,500 and the other driver’s repair cost is $1,500. Joe pays his $500 deductible, and his insurance company pays the remaining $2,000 for his car and all $1,500 for the other driver’s car.
If Joe didn’t have insurance, he’d have to pay all $4,000 himself, which is a lot more painful than the $500 deductible and his regular premiums.
Poor Joe. It just keeps getting worse.
The first example above is pretty straight forward. Joe has an accident, files a claim, and his car gets repaired thanks to his collision coverage and the other driver’s car gets repaired thanks to Joe’s liability coverage.
Joe’s bad luck is just going to get worse but that’s good for us! It will help us explain that there are a lot of other situations where car insurance pays. So let’s talk a little about those.
A tree branch falls on Joe’s car
Joe’s car was parked at work and a tree branch fell on it. That’s where comprehensive coverage comes into the picture.
Since it wasn’t a collision, Joe’s deductible for comprehensive coverage applies. If it’s also $500 and the damage is $1,500, then Joe again pays the first $500, and his insurance covers the remaining $1,000.
Joe injures a driver in an another accident
Joe is driving home from work and, while trying to brush leaves off the dash, he accidentally rear-ends another car at a stoplight.
The other driver sustains a minor whiplash injury, and their car’s bumper is damaged. Thankfully, no one else is hurt, but the other driver needs medical attention, and their car requires repairs.
Since Joe is at fault, he is responsible for the other driver’s medical bills and the cost to repair the bumper. This is where Joe’s liability coverage kicks in.
Liability insurance is comprised of two different coverages, bodily injury liability and property damage liability:
- Bodily Injury Liability – This part of Joe’s coverage will pay for the other driver’s medical expenses, which could include costs for the ambulance ride, hospital stay, and any follow-up doctor visits required for the whiplash.
- Property Damage Liability – This portion covers the expenses to repair the damage to the other driver’s car.
Joe’s liability coverage has certain limits, which is the maximum amount his insurance company will pay for a single accident.
Let’s assume Joe has limits of $50,000 for bodily injury per person and $20,000 for property damage. The other driver’s medical bills come to $2,000, and the car repairs cost $1,500.
Since these amounts are within Joe’s policy limits, his insurance will cover these costs. Joe doesn’t need to pay out of pocket, except for any deductible, which is not typically applied to liability claims.
However, if the costs exceeded Joe’s coverage limits, he would be personally responsible for the excess amount. That’s why choosing appropriate coverage limits is crucial when purchasing a liability insurance policy.
Joe’s insurance also helps cover legal fees if the other driver decides to sue.
As we discussed in the first example, any damage to Joe’s own car will be covered by his collision coverage.
For a more detailed look into how liability insurance works and why you need it, see our Car Insurance 101 article titled Crash Course in Liability Insurance: Hit the Road with Confidence.
The neighbor kids vandalize Joe’s car
Joe’s car sits outside at night because Joe uses his garage for his band’s recording studio. His neighbors have two teenage boys who are well-known in the neighborhood for causing mischief.
Joe came out in the morning to go to work and noticed around two dozen eggs had been thrown at his car. The clear coat on his blue sedan had been etched by the acid in the eggs (yeah, that’s really a thing).
Without having any proof of who threw the eggs, Joe had no choice but to file a claim with his insurance company to have the paint repaired.
Just like when the tree branch fell on his car, the paint damage from the egg incident is covered under the comprehensive coverage on his policy.
However, he does still have to pay that pesky $500 deductible and the company will pay the remainder. Joe is still plotting his revenge on the neighbor boys.
Joe’s car gets hit by an uninsured driver
Joe was driving down to his favorite pancake house when suddenly a vehicle swerved into his lane and sideswiped his car. The impact crumpled the side of Joe’s vehicle and shattered the windows.
Shaken but not seriously injured, Joe pulled over to the side of the road. The other driver also stopped, and they both got out to inspect the damage and exchange information.
Upon discussing the incident, the other driver confessed that he did not have car insurance, which is illegal but unfortunately not uncommon.
Joe knew that he might be in a difficult situation because of the other driver’s lack of coverage. He called the police to report the accident and the fact that the other driver was uninsured.
Fortunately, Joe remembered that when he purchased his car insurance policy, he opted for uninsured motorist coverage. After the police arrived and he obtained a copy of the police report, Joe contacted his insurance company to file a claim. He explained the situation and provided all the necessary documentation.
Joe’s insurance company advised him that his uninsured motorist coverage would kick in to cover the damages to his car and any medical expenses he incurred due to the accident, up to the limits of his policy.
Now, if the other driver had liability insurance, but the damage to Joe’s car exceeded the limit on the other driver’s policy, then underinsured motorist coverage would kick in and pay for the excess cost to repair Joe’s car.
Joe gets injured in an accident
Joe was on his way to the grocery store when a distracted driver ran a red light and collided with Joe’s car at an intersection. The impact was significant, and both drivers sustained injuries.
Joe, feeling disoriented and in pain, was taken to the emergency room by ambulance. At the hospital, Joe was treated for a broken wrist and whiplash.
While Joe had no fault in the accident, he was concerned about the medical bills that would undoubtedly start to pile up. He remembered that his car insurance policy included Medical Payments (MedPay) coverage, which is designed to pay for medical expenses for injuries sustained in a car accident, regardless of who is at fault.
After receiving treatment, Joe contacted his insurance company to report the accident and file a claim for his injuries. He provided them with all the necessary documentation, including the medical reports and bills from his visit to the emergency room.
The insurance company explained to Joe that his MedPay coverage would help with the medical expenses incurred from the accident, such as the ambulance ride, emergency services, and treatment for his injuries.
Because MedPay is designed to pay quickly, Joe was able to submit his medical bills directly to his insurance company, and they took care of the expenses promptly.
In the days following the accident, Joe also received outpatient care for his wrist and physical therapy for his whiplash. He submitted these additional expenses to his insurer, and they were also covered under his MedPay coverage.
Joe’s foresight in opting for medical payments coverage on his policy provided him with the necessary financial protection to cover his medical costs, thus allowing him to focus on his recovery without the added stress of overwhelming medical bills.
Joe’s car is back in the shop and he needs a rental car
Joe had just dropped off his children at school and was on his way to work when a vehicle unexpectedly backed out of a driveway, causing a collision with Joe’s car.
The damage was severe enough that Joe’s car needed to go to the shop for repairs. Fortunately, Joe was not hurt, but his car was undrivable and would require several days in the auto repair shop.
Remembering the coverage details of his car insurance policy, Joe called his insurance agent. He reported the accident and expressed his concern about needing transportation to get to work and run daily errands while his car was being repaired.
The agent confirmed that Joe’s policy included rental reimbursement coverage, which would cover the cost of a rental car while his own car was out of commission due to a covered claim.
Lucky for Joe, he opted for this optional coverage so the cost of a rental car didn’t come out of his pocket.
Joe’s car breaks down driving home from the repair shop
Joe was driving home from the repair shop after finally getting his car fixed when he noticed his car was beginning to handle strangely. He pulled over to the side of the highway and realized he had a flat tire.
It was dark and he was on a less-traveled road without much lighting. Although Joe knew the basics of changing a tire, the unsafe conditions and lack of proper tools made it difficult for him to do it himself.
Remembering that his car insurance policy included roadside assistance coverage, Joe retrieved his insurance card from the glove compartment where he found the hotline number.
He called the number and explained his situation to the operator, who assured him that help was on the way. The policy’s roadside assistance covered a variety of services, including towing, jump-starts, lockout service, and flat tires, which was exactly what Joe needed.
Within 45 minutes, a service vehicle arrived, equipped with all the necessary tools. The service professional quickly assessed Joe’s situation and proceeded to change the flat tire using the spare tire from Joe’s trunk.
After the spare tire was securely in place, Joe signed a service receipt indicating that the call was for a flat tire change. There was no payment required at the scene because the service was fully covered under his insurance policy’s roadside assistance feature.
Again, thanks to another optional coverage on his policy, Joe wasn’t left stranded or facing the potential dangers of being alone on a dark, quiet road.
Situations where Joe’s car insurance will NOT pay
Lucky for Joe, the accidents and incidents he has been involved in were all covered by his car insurance policy.
However, there are a lot of times when things happen that are NOT covered by car insurance. Here are some of those situations:
- Intentional Damage – If Joe intentionally damages his own car, perhaps out of frustration or for fraudulent purposes, his insurance policy will not cover the damage. Insurance is designed to protect against unforeseen accidents, not deliberate actions.
- Normal Wear and Tear – Joe’s car insurance is not meant to cover the costs associated with the normal aging and wear of his vehicle. So, if his car’s engine fails due to old age or his tires wear out, these are maintenance issues and will not be covered by insurance.
- Driving Under the Influence – If Joe has an accident while driving under the influence of alcohol or drugs, his insurance company will likely refuse to pay for damages or any legal defense costs arising from the incident.
- Unapproved Drivers – If someone not listed on Joe’s policy, such as a friend who doesn’t have his permission, takes the car and has an accident, the insurance may not cover the damages. Similarly, if Joe lends his car to someone who is explicitly excluded from his policy and that person has an accident, the costs will not be covered.
- Business Use – If Joe uses his personal vehicle for business purposes, such as making deliveries or transporting clients, and gets into an accident, his personal car insurance might not cover the damages. He would need a commercial auto insurance policy for such activities.
- Racing and Reckless Behavior – If Joe participates in an illegal street race and crashes his car, the insurance company will not pay for the damages resulting from this illegal activity.
- Policy Exclusions – Each policy has specific exclusions detailed in the contract. If Joe’s accident is due to a risk or situation that is explicitly excluded in his policy, the insurance will not cover the incident.
- Expired Policy – If Joe forgot to renew his insurance and it lapses, any accident occurring during that period of being uninsured will not be covered.
- Uninsured Perils – If Joe’s car is damaged by something his policy doesn’t cover, such as a flood or earthquake, and he does not have comprehensive coverage or a specific rider for that peril, he will not be compensated.
- Lack of Coverage – If Joe only has liability insurance and his car is damaged in a way that liability doesn’t cover, such as in a single-car accident or due to theft, his policy will not pay for his own vehicle’s damages.
The wrap up
Having car insurance is important because it means you don’t have to face the full cost of car damage alone. It helps to cover expensive repairs and medical bills that could otherwise ruin your finances.
It also keeps you on the right side of the law since most places require at least liability coverage. Plus, it can help cover the cost if you hit someone who doesn’t have insurance, or if your car gets damaged not from a crash, but from something out of your control, like weather or vandalism.
Remember, car insurance doesn’t cover everything. Regular maintenance, like oil changes, aren’t covered. It also won’t cover personal items stolen from your car, or damage from driving under the influence or doing illegal activities.
In short, car insurance is your financial guard in the wild world of driving. For Joe, it meant turning what could have been a financial disaster into a manageable hiccup.
It’s all about preparing for the worst while hoping for the best, and finding the right balance between what you pay regularly and what you can afford to pay out of pocket if an accident happens.
By understanding how it works and choosing the right coverage, you take control of your driving life and protect your peace of mind on the road.
About the Author
During his career as an independent insurance agent, Ryan Grabenstein was appointed with Progressive, Allstate, Nationwide, Travelers, and many smaller regional and mutual companies. He has a Bachelor's degree in Finance from the University of Nebraska at Lincoln and Certified Insurance Counselor (CIC) personal and commercial lines training.