If you’ve ever felt like choosing the right car insurance coverage is as complex as learning a new language, you’re not alone.
Our prior two articles in this Car Insurance 101 series covered the basics of car insurance and explained how car insurance works using some practical examples. They touched on the specific coverages of a policy, but did not go into a lot of detail.
This article gets into the meat of your car insurance policy to help you understand exactly how each coverage works and what is and is not covered.
We’ll explore protection for your vehicle (comprehensive, collision, and uninsured/underinsured motorist coverage), protection for your assets (liability coverage), protection for vehicle occupants (medical payments and PIP), and also touch on many of the optional coverages like gap insurance, rental reimbursement, and new car replacement.
So without further ado, let’s hit the gas and get rolling!
Liability coverage
Liability coverage is a component of a car insurance policy that serves as the bedrock for protecting drivers against financial losses stemming from accidents for which they are deemed responsible.
This coverage is crucial as it addresses costs associated with bodily injuries and property damage inflicted on third parties.
It does not cover the insured’s own injuries or vehicle damage (this is covered by comprehensive and collision coverage and medical payments coverage). Rather, its primary function is to safeguard the policyholder from the potentially large expenses of legal claims.
The importance of liability coverage cannot be overstated.
In the event of an accident where the insured is at fault, liability coverage steps in to cover medical expenses, lost wages, and pain and suffering for the injured party, as well as repair or replacement costs for damaged property.
Moreover, it provides legal defense if the policyholder is sued over the incident. Given that the costs associated with accidents can escalate rapidly into tens or even hundreds of thousands of dollars, the absence of liability coverage could result in severe financial strain or bankruptcy for the uninsured driver.
Most states mandate a minimum amount of liability coverage, underscoring its significance as a public interest measure. It not only protects individual drivers but also serves as a financial safety net ensuring that victims of road accidents can receive compensation, thereby promoting responsibility and accountability among motorists.
There are two types of liability coverage on your car insurance policy: bodily injury liability and property damage liability.
Bodily injury liability
Bodily injury liability is a component of a car insurance policy that comes into effect when the insured is responsible for a motor vehicle accident that injures another person.
This coverage pays for the costs associated with the injuries sustained by others in the accident, including immediate medical expenses, ongoing healthcare costs, and compensation for pain and suffering.
Additionally, it may cover other financial losses the injured parties suffer as a result of the accident, like lost earnings.
Bodily injury liability is crucial for the policyholder because it provides financial protection by covering the costs up to the limits specified in the policy, thereby preventing the policyholder from paying these potentially substantial expenses out-of-pocket.
An example of a covered bodily injury liability claim
Sarah is driving home when she accidentally runs a red light and collides with Tom’s car. Tom suffers a broken leg and requires medical treatment.
Sarah is found at fault for the accident. Her bodily injury liability coverage is activated, and her insurance pays for Tom’s medical bills, including his ambulance ride, hospital stay, surgery costs, and rehabilitation. Additionally, it compensates for Tom’s lost wages during his recovery.
Sarah’s policy covers these expenses up to the limits of her coverage, ensuring that Tom’s injuries, which resulted from the accident Sarah caused, are financially addressed.
Property damage Liability
Property damage liability on a car insurance policy is coverage that pays for damage the insured driver causes to another person’s property during a car accident.
This property can include other vehicles, buildings, utility poles, fences, and any other type of physical property.
This part of the policy kicks in to cover repair or replacement costs, ensuring the property owner is compensated for the loss or damage.
The coverage has a maximum limit, which is the most the insurance company will pay toward a covered claim. Policyholders are responsible for any damage exceeding this limit.
Property damage liability helps to ensure that victims of an accident don’t bear the financial burden of someone else’s mistake, and it protects the at-fault driver from the potentially devastating financial consequences of a liability lawsuit.
An example of a covered property damage liability claim
John, while backing out of a parking space, misjudges the distance and accidentally hits a parked motorcycle, causing significant damage.
The motorcycle needs extensive repairs. John reports the incident to his insurance company, which determines he is at fault.
His property damage liability coverage is then utilized to cover the repair costs of the motorcycle. The insurance pays the motorcycle owner for the repair expenses, within the limits of John’s policy.
This coverage spares John the out-of-pocket repair costs for the damages his vehicle caused to someone else’s property.
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.
Collision coverage
Collision coverage on a car insurance policy is a form of protection that pays for the repair or replacement of the policyholder’s vehicle after an accident involving another vehicle or an object, such as a tree or a guardrail.
Unlike liability insurance, which covers damage to others’ property or injuries, collision coverage is designed to safeguard the insured’s own vehicle, irrespective of who is at fault.
This coverage is especially important when the policyholder is responsible for the accident or in the case of a hit-and-run where the other driver cannot be identified.
Collision coverage typically comes with a deductible, which is the amount the policyholder pays out-of-pocket before the insurance kicks in.
While it’s not legally required like liability insurance, lenders often require collision coverage for financed or leased vehicles.
An example of a covered collision coverage claim
Emily is driving home when she hits a patch of ice and her car skids into a lamppost. The front end of her car is significantly damaged.
Emily files a claim with her insurance company. After paying her $500 deductible, her collision coverage pays for the repairs to her vehicle.
Comprehensive coverage
Comprehensive coverage, often referred to as “other than collision” coverage, is a part of an auto insurance policy that helps pay to repair or replace a covered vehicle if it’s damaged by something other than a collision with another vehicle or object.
This includes scenarios such as theft, vandalism, fire, natural disasters (like a hurricane or a tornado), falling objects, damage done by animals, or civil disturbances.
Unlike collision coverage, which deals with accidents on the road, comprehensive coverage addresses mishaps that occur outside of driving situations.
It’s particularly useful in areas prone to severe weather, high theft rates, or animal crossings (deer or other large creatures).
Comprehensive coverage usually requires the policyholder to pay a deductible before the insurance company covers the remaining costs. While not required by law, lenders typically mandate comprehensive coverage for leased or financed vehicles to protect their financial interest in the car.
An example of a covered comprehensive coverage claim
Jessica’s car is parked outside her house during a severe hailstorm. When she returns to her vehicle, she finds the hood dented and the windshield cracked from the hail.
She files a claim with her insurance company, and an adjuster confirms the damages were a result of the hailstorm, which is a covered peril under her comprehensive coverage.
After Jessica pays her $500 deductible, her insurance covers the costs of repairing the dents and replacing the windshield.
Uninsured/Underinsured motorist coverage
Uninsured and Underinsured Motorist (UM/UIM) coverage is a provision in car insurance policies that provides protection when the policyholder is involved in an accident with a driver who either lacks any insurance (uninsured) or has insufficient insurance (underinsured) to cover the damages they have caused.
This coverage can pay for the policyholder’s medical expenses, lost wages, and pain and suffering resulting from such an accident. Additionally, it can cover property damage in some states or under certain plans.
UM coverage kicks in when the at-fault driver has no insurance, while UIM coverage comes into play when the at-fault driver’s insurance limits are too low to cover all of the damages.
This coverage is critical for ensuring that policyholders are not left financially vulnerable after an accident caused by another driver who is not adequately insured. In many states, UM/UIM coverage is either required or offered as an option that drivers are allowed to decline in writing.
An example of a covered UM/UIM claim
Denise is stopped at a red light when her car is rear-ended by another driver, who then speeds away in a hit-and-run.
Denise sustains a whiplash injury, requiring medical treatment. She files a police report, but the other driver is not identified.
Denise makes a claim under her uninsured motorist coverage. Her UM policy covers her medical expenses and lost wages since the at-fault driver is unknown and thus presumed uninsured.
If the driver had been identified but carried insufficient insurance, Denise’s underinsured motorist coverage would have covered the difference up to her policy’s limits.
Medical Payments/Personal Injury Protection (PIP) coverage
Medical Payments (MedPay) and Personal Injury Protection (PIP) are two types of coverages on a car insurance policy that pay for medical expenses and other associated costs resulting from a car accident, regardless of who is at fault.
MedPay coverage is generally limited to medical expenses. After an accident, MedPay can be used to cover the costs of hospital visits, doctor’s appointments, surgeries, X-rays, and sometimes funeral expenses for you, your passengers, or any family members driving the insured vehicle at the time of the accident.
PIP, often referred to as “no-fault” coverage, is broader. In addition to medical expenses, it can cover other costs such as rehabilitation services, lost wages, funeral costs, and services you may not be able to perform due to injuries, like housecleaning or childcare.
PIP is mandatory in some states that operate under no-fault laws, meaning that drivers must use their own insurance to cover injuries and lost wages, regardless of who caused the accident.
The key difference between MedPay and PIP lies in the extent of coverage. While MedPay is strictly for medical expenses, PIP offers additional coverage for indirect costs, which can be crucial following an accident that leads to a loss of income or requires extensive recovery time.
An example of a covered MedPay/PIP claim
Lisa is involved in a side-impact collision at an intersection, and she suffers a broken arm and whiplash.
She files a PIP claim with her insurer. Her PIP coverage pays for her emergency room visit, surgery, and subsequent physical therapy. Additionally, since her injuries prevent her from working her job as a physical therapist and from performing daily tasks like cleaning her home, PIP also compensates for her lost income and the cost of hiring a cleaning service during her recovery period.
MedPay would have covered her medical bills but not the lost wages or cleaning service.
Additional coverages available by endorsement
Adding endorsements to a car insurance policy enhances protection and tailors coverage to individual needs.
Each company offers their own assortment of additional coverages, but here’s a comprehensive list of additional coverages that may be available from your company:
- Roadside Assistance – Covers services like towing, jump-starts, tire changes, lockout service, and emergency fuel delivery.
- Rental Reimbursement – Pays for a rental car while your vehicle is being repaired under a covered claim.
- Gap Insurance – Covers the difference between the actual cash value of a vehicle and the balance still owed on financing if the car is totaled or stolen.
- New Car Replacement – Provides the cost of a new car if your recently purchased vehicle is totaled.
- Accident Forgiveness – Prevents your insurance rates from increasing after your first at-fault accident.
- Custom Equipment – Covers aftermarket additions such as custom wheels, navigation systems, and enhanced audio.
- OEM Endorsement – Guarantees the use of original equipment manufacturer (OEM) parts for repairs.
- Rideshare Coverage – Extends personal car insurance to cover periods when driving for a rideshare company like Uber or Lyft.
- Pet Injury Coverage – Pays for veterinary expenses if your pet is injured in a car accident.
- Glass Coverage – Often a zero-deductible coverage for windshield and other glass repair or replacement.
- Diminishing Deductible – Reduces your deductible amount over time if you remain claim-free.
- Full Glass Coverage – Eliminates the deductible for glass repairs, often including windshield chips or cracks.
- Personal Umbrella Policy (PUP) – Provides additional liability coverage beyond the limits of your auto policy.
- Personal Property Coverage – Reimburses for personal items in your vehicle that are damaged or stolen.
- Loan/Lease Payoff – Similar to gap insurance, this covers the difference between the vehicle’s actual cash value and the remaining loan or lease balance if it’s totaled.
- Towing and Labor Cost Coverage – Covers a specified amount for towing and labor charges for your vehicle.
- Full Replacement Cost Coverage – Pays the full cost to replace your car with a similar new model without considering depreciation.
- Electronic Key and Lock Replacement – Covers the cost of replacing electronic car keys and locks if they are lost or stolen.
- Non-Owner Car Insurance – Provides liability coverage for individuals who drive but do not own a vehicle.
- Accidental Death and Dismemberment – Pays a benefit if an accident results in death or a specific serious injury.
- Extended Transportation Expense – Provides a higher daily limit for rental car costs than standard rental reimbursement.
- Vanishing Deductible – Reduces your deductible for each year of safe driving.
Remember, availability and specifics of these endorsements can vary by insurer and state. Always discuss with your insurance agent to tailor coverage to your particular needs and ensure compatibility with state laws and regulations.
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.