Reader Question: What Auto Insurance Coverage Am I Required to Carry by Law and Is Collision Coverage Required Too?
You’re not required by law to carry collision coverage. However, if you finance a car, lenders typically require you to carry collision and comprehensive coverage since they technically “own” the vehicle and don’t want to suffer a loss if the car is totaled or damaged. Collision covers any damage to your car resulting from an accident that isn’t someone else’s fault, like when you collide with another object or vehicle. Comprehensive covers damage from fire, flood, weather, theft, and glass breakage — essentially any damage incurred due to something out of your control, like that from animals or vandalism.
Although collision coverage isn’t required by law, and although a few states do have some particular coverage options you’re required to carry, you are always required to carry liability coverage. Liability is composed of Property Damage (PD) liability and Bodily Injury (BI) liability. PD liability pays for damages to another person’s property if you cause an at-fault accident, and BI liability pays for another person’s medical expenses if you cause an at-fault accident injuring someone. It does not pay for your medical or property damage expenses.
So why should you be concerned with liability insurance? It may seem like it doesn’t benefit you, but if you cause an accident, you’ll be happy you’re required to carry it. Here are a couple reasons why and how it works:
- If you cause an accident and the other party has serious injuries, death, disfigurement, or medical expenses, your insurer will pay for legal counsel and the claimant’s medical expenses up to your BI limit. If you cause an accident that damages or destroys another party’s personal property, like a car, building, or something on their property, like a fence, your insurer will pay for legal counsel and the claimant for the costs to repair or replace the damaged property up to your PD limit. Without BI and PD coverage, you’ll have to pay out of pocket for these expenses.
- If you only carry the minimum liability limits required by law, you’re still responsible for expenses exceeding those limits. Typically, state limit requirements are grossly insufficient, for both such, like Florida, where only $10K per person/ $20K per accident is required for BI liability. A couple days in the hospital can exceed $10K — add in pain and suffering, loss of wages, and other incidental expenses, and $20K likely won’t be enough. The same is true for PD liability limits. For example, California only requires $5K in PD liability, so if you hit and total a new $45K Lexus, you’re on the hook for $40K.
- If you can’t pay out of pocket for expenses exceeding your liability limits, (which can include medical, property damage, legal, and other incidental expenses, loss of wages, and pain and suffering), your wages can be garnished and your assets seized. Depending on the accident’s resulting expenses, it could take years to pay off — and financially ruin you.
- The more liability coverage you carry, the more it will benefit your pockets too. By carrying only the minimum amount required by your state, you’ll probably be rated as a high-risk driver — even with a perfect driving record. High-risk drivers pay more for insurance, but when policyholders carry higher liability limits, insurers view them as responsible drivers and reward them with lower premiums.
- Failure to carry liability insurance when you’re required to results in insurers rating you without having prior insurance, also classifying you as a high-risk driver. Once you carry coverage consistently for six months or more — without any lapses — you’ll likely qualify for better premiums since you’ll be viewed as a responsible driver in the eyes of insurers.
It’s wise to buy the most protection you can afford, whether it’s optional or not. It’s better to pay $20 more per month than to be on the hook for $40K for someone’s Lexus and $10K for their medical expenses.
If you’re a new vehicle owner, have no idea what insurance you need or already have, these are the most important, basic auto insurance principles to know. Understanding the implications of not carrying what you’re legally required to, or carrying the bare minimum, will mean you already know what many don’t.