Modern automobile insurance coverage has been around for more than 100 years and first became mandatory in Connecticut in 1925. However, most states did not require car owners to insure their vehicles until the mid-1950’s. Currently 48 states and the District of Columbia require proof of valid insurance to register and operate an automobile.

According to the business intelligence services company SNL Financial, U.S. insurers paid out more than $65 million in liability claims in 2012 and $41 million in property damage claims for private passenger auto claims alone. AAA estimates that U.S. accidents involving cars are responsible for roughly $164 billion in damages a year. Without the resources of insurance company lawyers and adjusters, uninsured individuals would no doubt have incurred much higher costs. While most Americans understand that car insurance is important, most people are shaky on how their insurance actually works. This guide is here to teach you the fundamentals.

What is Auto Insurance?

The phrase auto insurance is a general term that refers to various types of insurance protection for cars. The Insurance Information Institute explains that an auto insurance policy can include up to six different types of coverage:

  • Liability
  • Collision
  • Comprehensive
  • Uninsured Motorist
  • Underinsured Motorist
  • Personal Injury Protection

The simplest explanation of auto insurance is that it agrees to pay all or part of the costs associated with an accident, theft or other cause of damage to your car. In exchange for this coverage, you need to pay an insurance premium to your provider.

Average Expenditures for Auto Insurance, United States, 2001-2010
Year Average expenditure Percent change Year Average expenditure Percent change
Source: National Association of Insurance Commissioners (NAIC)
2001 $726 5.2% 2006 $818 -1.7%
2002 786 8.3 2007 798 -2.4
2003 830 5.6 2008 791 -0.9
2004 843 1.6 2009 787 -0.5
2005 832 -1.3 2010 791 0.6

The Primary Types of Auto Insurance – What’s Covered

The six different types of auto insurance all cover different problems. In order to become a savvy auto insurance consumer you need to understand exactly how each type of coverage works.

Automobile Liability Insurance Coverage

Liability insurance pays for damage and injuries that result from accidents where you are deemed at fault. This means you were responsible in some way for causing the accident. In most accidents, both drivers are considered to be partially at fault because of a rule known as “comparative negligence.” There are a few situations when you won’t be considered at fault, such as if you were hit directly from behind, but otherwise you will be considered at least partly responsible.

As most states have comparable negligence laws, even if you are an incredibly cautious driver, a portion of the blame will be yours. According to the Centers for Disease Control and Prevention, the cost of injuries (medical and loss of productivity) from car accidents was $99 billion in 2010. Without liability coverage, you could be in charge of paying these bills yourself. There is an accident where an injury occurs every 14 seconds; in the time it took you to read this paragraph, at least one person was injured in a car accident.

What’s Covered?

  1. Bodily injury includes medical costs, pain and suffering, lost income from wages and other special damages.
  2. Property damage covers damage to other vehicles and their contents, as well as structures and other types of physical property. This also includes costs associated with the inability to use damaged property.

Auto Collision Insurance

This coverage pays for damage to your vehicle caused by other cars. Collision insurance is always optional and may only be required by a lender on more expensive vehicles. Collision insurance is generally more expensive than liability insurance and often includes a deductible (an amount you pay out of pocket before insurance kicks in). According to the research firm Mitchell International Inc., the average deductible for collision insurance is $110.25.

What’s Covered?

The benefit of collision insurance is that it pays for damage to your vehicle even when the accident was your fault. Collision coverage will only pay for the damage not covered by another driver’s policy when the accident is their fault. Simply put you can only get paid once.

Comprehensive Coverage

The best way to describe comprehensive coverage is as “everything else” insurance. This covers damage to your car from anything other than a car accident. It is an optional coverage that protects your investment. In 2010 buyer trends indicated that 76% of drivers purchasing liability coverage purchased comprehensive. In fact, many lenders require you have comprehensive for any vehicle that has a lien against it in order to pay off the note in the event the car is stolen. According to the research firm Mitchell International Inc., the average deductible for comprehensive coverage is $126.40.

What’s Covered?

  • Theft and vandalism
  • Windows and windshield
  • Animal damage
  • Falling objects (like trees)
  • Storms and natural disasters

Uninsured and Underinsured Motorist Coverage

Uninsured motorist protects you in the event of an accident where the driver of the other vehicle does not have insurance. In this case your uninsured motorist coverage steps in and covers your damages. This is an important gap in coverage because the Insurance Research Council found that roughly one out of every seven drivers doesn’t have car insurance. Here’s a map identified the percentage of drivers without insurance in each state:

Percent of Motorists Uninsured by State in 2009*

  • A
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • J
  • K
  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • U
  • V
  • W
  • X
  • Y
  • Z
  • a
  • b
  • c
  • d
  • e
  • f
  • g
  • h
  • i
  • j
  • k
  • l
  • m
  • n
  • o
  • p
  • q
  • r
  • s
  • t
  • u
  • v
  • w
  • x
  • y
  • 16-30 percent
  • 14-15 percent
  • 10-13 percent
  • 0-9 percent

*Estimated using UM to BI claim frequency ratios
Note that this data only addresses the contiguous United States.
UM refers to Uninsured/Underinsured Motorists and BI refers to Bodily Injury coverage
SOURCE: Uninsured Motorists, 2011 Edition, The Insurance Research Council

Underinsured motorist coverage protects you from shortfalls in the coverage of the other driver in the case of an accident. Let’s say, for example, your brand new Mercedes S class was totaled in an accident with a driver who only has state minimum liability coverage of $25,000. While no-one was hurt, the value of your car is four times more than the other driver’s insurance. In this example, your underinsured coverage would make up the difference (up to your coverage limit) on the cost of repair or replacement. Sometimes insurance companies sell both uninsured and underinsured coverage under the same policy, while others sell them as two separate types of coverage.

What’s Covered?

  • Both uninsured and underinsured coverage function as supplemental liability insurance for another driver who causes an accident with your vehicle.
  • Just like liability coverage, uninsured or underinsured coverage has separate coverage amounts for property damage and injury.
  • Most insurers limit the amount of uninsured/underinsured motorist coverage to the same limits as your policy’s liability coverage.
  • Limits can run from $20,000 to $1 million or more.

Personal Injury Protection

PIP or Personal Injury Protection goes above and beyond paying for medical and hospital expenses. Some states refer to this type of coverage as no-fault because it pays its benefits regardless of which driver was responsible for the accident.

What’s Covered?

Coverage may vary from state to state but will contain some or all of the following coverage benefits:

  • Lost wages
  • Service replacement for someone injured in an accident, meaning they’ll receive assistance with things like household chores or child care
  • Rehabilitation costs
  • Funeral costs

Unlike other auto coverage, PIP/no-fault payments are not dependent on who was to blame; they also begin making payments much faster. Currently a dozen states (and Washington D.C.) have mandatory no-fault personal injury protection requirements:

  • Washington D.C.
  • Hawaii
  • Kentucky
  • Michigan
  • New Jersey
  • North Dakota
  • Utah
  • Florida
  • Kansas
  • Massachusetts
  • Minnesota
  • New York
  • New York
  • Pennsylvania

Other states, like Arkansas, require that PIP be offered as an option to all policyholders. Check with your state’s insurance department to determine how they handle personal injury protection insurance.

Who’s Required to Have Auto Insurance, and How Much?

48 States have mandatory insurance requirements for motor vehicle registration. If you don’t have at least a minimum level of coverage in these states, you are breaking the law. This can lead to large fines, a loss of your driver’s license, and possibly jail time. These penalties apply even if you never get in an accident. For example, if your car is registered in Washington and you get caught driving without insurance, it’s a traffic violation that leads to an immediate fine of at least $450.

The only two states that don’t require all drivers to have car insurance are New Hampshire and Virginia. New Hampshire “strongly recommends and urges” owners to carry at least standard liability and property damage insurance. The Granite State may not have mandatory insurance requirements for everyone but it is required if any of the following apply:

  • DWI conviction in the last 3 years for first offenses, longer for subsequent convictions
  • Habitual offenders
  • Individuals found at fault for an uninsured accident
  • Individuals returning from a suspended license

Conviction of one or more of the following:

  • Leaving the scene of an accident
  • Conduct after an accident
  • Underage DWI
  • Subsequent (2nd) reckless driving offense

The other state that does not have a mandatory requirement is Virginia, which allows car owners to forego even basic coverage if they pay an “uninsured motor vehicle fee” of $500 per year in addition to the regular cost of registration. Virginia’s fee does not release owners of liability for damages.

In the event of an accident, the driver and or vehicle owner will be personally responsible for the cost of all damages and injuries. People who had insurance at the time of registration who are cancelled or cease having coverage for any reason are required to pay the pro-rated portion of the uninsured motor vehicle fee immediately or face a substantial penalty.

Top Ten Most Expensive and Least Expensive States
for Automobile Insurance, 2010*
Rank Most expensive states Average expenditure Rank Least expensive states Average expenditure
*Based on average automobile insurance expenditures.
Source: National Association of Insurance Commissioners (NAIC)
1 New Jersey $1,157.30 1 South Dakota $525.16
2 D.C. 1,133.87 2 North Dakota 528.81
3 Louisiana 1,121.46 3 Iowa 546.59
4 New York 1,078.88 4 Idaho 547.78
5 Florida 1,036.76 5 Maine 582.29
6 Delaware 1,030.98 6 Nebraska 592.69
7 Rhode Island 984.95 7 North Carolina 599.90
8 Connecticut 965.22 8 Wisconsin 613.37
9 Maryland 947.70 9 Ohio 619.46
10 Michigan 934.60 10 Wyoming 621.08

How Much Insurance is Enough Insurance?

At the very least you will need to carry your state minimum coverage. If you don’t have at least this much coverage, you are breaking the law. The basic required coverage in most states is automobile liability insurance coverage, which protects you from financial loss for accidents that are all or partly your fault.

Liability coverage is presented as two or three numbers; Pennsylvania for example is 15/30/5 – all of which represent thousands of dollars.

  • The first number is the maximum amount that the insurance company will pay out for injuries to one person in a car you hit ($15,000).
  • The second number is the maximum they will pay if multiple people in the other car are injured (the total is divided among all the injured) ($30,000).
  • The third number is the maximum they will pay for property damage ($5,000).

However, many people will find that minimum coverage is insufficient. Let’s say you cause a serious accident that destroys multiple cars and you only have the Pennsylvania minimum amount of coverage for property damage, $5,000 total. This wouldn’t even begin to cover damages. Not only would you have to replace your own car out-of-pocket, the other driver could also sue you for damages, which would then come out of your other assets.

The more you have in coverage, the less likely it is you’ll ever pay for damages out-of-pocket. On the other hand, more coverage costs more money. This is the sort of tradeoff you need to learn to manage in order to really get the coverage that best suits you.

You should also consider what risks you want to insure and what risks you don’t. If you’re driving an old, broken down car, you may not need collision coverage. Since your car is worth so little, it may not be worth the money to insure it. On the other hand, liability is almost always worth having because it protects you from a lawsuit.

Shop Around and Save Money on Car Insurance

The California-based Foundation for Taxpayer and Consumer Rights advises you to determine how much insurance you want before you start shopping around for rates. This way it will be easier for you to compare companies and you’ll be less likely to buy coverage you don’t want or need.

The insurance departments in every state do a great job of regulating insurance companies to make sure they provide the right kinds of coverage and comply with state-specific laws. This overhead means you need not worry about paying your premium and the company disappearing into the night.

However, not all insurance companies provide the same level of service. Differences can especially occur in the time it takes a company to process claims – the difference between getting a check in a week versus a month can be enormous. While insurance departments only make sure insurers fulfill their obligations, consumer rating organizations like J.D. Power and Consumer Reports will tell you how they treat their customers.

Top Ten Writers of Private Passenger Auto Insurance
by Direct Premiums Written, 2012*
Rank Group/company Direct premiums written (1) Market share (2)
  1. Before reinsurance transactions, includes state funds
  2. Based on U.S. total, includes territories
  3. Data for Farmers Insurance Group of Companies and Zurich Financial Group (which owns Farmers’ management company) are reported separately by SNL Financial LC

Source: SNL Financial LC

1 State Farm Mutual Automobile Insurance $32,101,907 18.4%
2 Allstate Corp. 17,478,055 10.0
3 Berkshire Hathaway Inc. 16,748,872 9.6
4 Progressive Corp. 14,438,111 8.3
5 Farmers Insurance Group of Companies (3) 10,279,070 5.9
6 USAA Insurance Group 8,447,461 4.8
7 Liberty Mutual 8,263,737 4.7
8 Nationwide Mutual Group 7,136,179 4.1
9 Travelers Companies Inc. 3,393,014 1.9
10 American Family Mutual 3,300,454 1.9

How to Save Money on Car Insurance

Controlling the cost of auto insurance is a proactive process, which means you can’t count on your insurer to do it for you; you have to do it yourself. The best advice is to shop your auto insurance around on a regular basis. Jim Whittle, the Chief Claims Council of the American Insurance Association, recommends that drivers review their policies once a year to make sure coverage is appropriate and that drivers aren’t missing on any discounts.

Evaluate your coverage

Consider what you are insuring by answering some simple questions. Is your new car loan paid off? If so, do you really need to continue comprehensive coverage? This is an especially important question if you live in an area with a very low incidence of car theft. You’ll want to consider increasing deductibles.

Bundle

Ask your insurer about discounts for bundling your auto insurance with your homeowner’s or renter’s policy, life insurance and your other forms of coverage in order to receive a volume discount.

Safe driver discounts

Ask your insurer about safe driver discounts and if you qualify. Many insurance companies offer discounts for each year you go without an accident or violation. Ask about taking a safe driver or defensive driving course and how this will affect your rates.

Beware of Scams

The most costly form of insurance is bad insurance. Bad insurance is insurance that does not provide the protection you want or need and often lulls you into a false sense of security by tricking you into thinking you are properly covered. If you want to avoid being scammed into buying bad insurance following this list of dos and don’ts will help protect you:

Don’t
buy insurance from a door to door salesman, unsolicited callers or pop-up internet ads.
Do
check prospective insurers and brokers rating with the Better Business Bureau.
Don’t
give your current policy number out indiscriminately.
Do
check with your state insurance department to make sure the agent/company are licensed in your state.
Don’t
fall victim to the promise of “Free Services” that only conceal hidden costs.
Do
use your common sense. If a deal sounds too good to be true, it likely is!

What If I Have a Terrible Driving Record?

Insurance companies are in the business of making money, plain and simple. They try to limit their risk by avoiding riskier drivers since they are more likely to have an accident. If you have a poor driving record or are a brand-new driver with no history, it might be hard to find a company willing to cover you.

One solution is to try to find coverage through an assigned risk pool. All states have a system of assigned risk where high risk drivers are given to an insurance company at a prescribed rate. Insurers are required to accept a certain number of these assigned risk drivers in order to continue selling insurance in the state.

Buying insurance through the assigned risk pool is not a permanent condition. As violations fall off your record and accidents fade into the past without new incidents, you can move out of the pool and buy regular car insurance lower rates.

The Parts of an Auto Insurance Policy

When your auto policy arrives, it will come with your insurance ID card. You may have received a temporary ID by fax, email or directly from your agent, but the one that comes with your policy is the permanent one and should be immediately placed in your car so you don’t lose it.

Read through your policy when it arrives to make sure you have the coverage you want. While mistakes aren’t common, they do occur. It’s best not to discover that your limits or coverage is wrong when it comes time to make a claim. Car insurance policies have a set design and will include the following:

Declarations Page

This is usually the first page of your policy and includes who and what are insured. The declarations page has the make/model of your car and the VIN (vehicle identification number). It’s important to compare the VIN on the policy with the way the number appears on your registration or title. If they don’t match, you’ll be sure to have some trouble when making a claim.

The declarations page will also include your premium amount and the policy term, either six months or a year. It will also mention any deductibles. If any of this information appears incorrect, advise your agent or insurer as soon as possible and request a corrected policy be issued.

Insuring Agreement or Base Policy

This section spells out the provisions of your policy, the extent of your coverage and the insurer’s responsibilities. It also stipulates certain requirements, like when and how to pay your premium on time and how to report accidents to the insurance company in a timely fashion.

Policy Exclusions

This section spells out what isn’t covered; it’s especially important to read and understand these exclusions in their entirety. If you find exclusions you wish to have covered, you should speak with your agent or the company about having them added to the policy. Be aware that having exclusions removed will most likely result in a higher premium.

Policy Conditions

This section spells out your legal responsibilities and your insurance company’s legal responsibilities.

Policy Definitions

Also known as the fine print, this is where the terms of the policy are explained. Reading and understanding this section ensures you do not have any misunderstandings about your coverage and obligations.

What to Do in the Event of an Accident

Accidents happen. The Property Casualty Insurers of Association of America recently reported that drivers file a collision claim roughly once every 18 years. Given the likelihood that you will face multiple accidents during your time as a driver, there are a few basics to keep in mind in the immediate aftermath of any car accident:

  • First and foremost, when you get into an accident, don’t panic.
  • Make sure you and any passengers are physically okay.
  • Put on your hazard lights and, if possible, relocate the car to the side of the road to avoid any further collisions.
  • If you have a cell phone notify the police, even for a minor fender bender.
  • If someone in either vehicle is injured, immediately request medical assistance.

Once the vehicles have been moved and injuries have been addressed, it is time to exchange information with the other driver(s):

  • Collect as much information as possible, including name, address, phone number and driver’s license number.
  • You will also want to gather information about the other vehicle, particularly the license plate number, make and model.
  • There is no need to discuss who is at fault with the other driver; that’s the job of the insurers and/or the police.

Reporting the Accident

After an accident, be sure to contact your insurance provider as soon as possible. They will need your name and contact information and ideally your policy number. They also need to know the day, time and location of the accident, as well as a general description of the injuries and damage. A more detailed report will come in the following weeks. Don’t take your car in for repairs until after you’ve spoken with your insurance company because they may have rules you need to follow to handle the repairs, such as what garages you are permitted to go go to.

Filing a Claim

When you talk to your insurer’s claim department they will provide you with instructions regarding their procedures for filing a claim. Follow the instructions you are given, and if you are unclear or uncertain about what is being requested, always ask questions. Claims representatives are trained to walk you through the process and explain the whys and wherefores of the process.

The Driver’s Seat

Don’t wait until you get into a car accident to figure out your car insurance. By then, it may already be too late. If you master the basics presented in this guide, you’ll become a more informed auto insurance consumer and, in turn, a safer, smarter road warrior!