Auto insurance is one of the most used types of personal insurance. Most states require that you purchase some kind of insurance coverage to drive legally in the state. Auto insurance can be divided into two basic coverage areas: liability and property damage.
Two factors determine what you pay for auto insurance. The first factor is underwriting, where insurance companies assess the risk associated with an applicant. The second factor is rating; the rating assigns a price based on what the insurer believes it will cost to assume the financial responsibility for the applicant’s potential claim.
Most auto insurance policies contain three major parts: liability insurance for bodily injury, liability insurance for property damage and uninsured/under-insured motorists coverage.
Bodily injury liability insurance protects you against the claims of other people who are injured in an accident for which you were at fault. Their claims for bodily injury may include medical expenses, lost wages, and pain and suffering.
Property damage liability insurance pays for any damage you cause to the property of others. This includes not only damages to other vehicles, but also other property such as walls, fences and equipment. Uninsured motorists coverage protects the policy holder directly. This coverage pays if you are injured by a hit-and-run driver or a driver who does not have auto insurance.
Property damage coverage may include both collision coverage and comprehensive coverage.
Collision coverage pays for physical damage to your car as the result of your auto colliding with an object, such as a tree or another car. This coverage is optional and not required by law. However, collision insurance may be required by your lending institution or lessor. In the case of an accident involving an older car, the cost of repairing the car can quickly exceed the worth of the car. In this case, insurers will “total” the car and pay you what the car was worth rather than fixing it.
Comprehensive coverage pays for damage to your auto from almost all other causes, including fire, severe weather, vandalism, floods and theft. Comprehensive coverage also will cover broken glass, such as windshield damage. You are not required by law to carry comprehensive coverage.
Rental Car Insurance
Car rental companies offer several different insurance options that your existing policy might already cover. They typically offer the following products at the counter:
Collision Damage Waiver (CDW)
Collision Damage Waiver is also referred to as a Loss Damage Waiver (LDW). If you have comprehensive and collision coverage on your own car, you will likely not need this additional protection. (Comprehensive insurance covers vehicular damages caused by accidents such as fire, theft, wind, hail or a run-in with a deer, vandalism, or theft. Collision insurance covers the cost of repairs or the actual cash value of the vehicle, if damaged in a crash or rollover.) This protection can cost an extra $10-$20 a day.
Liability Insurance covers medical expenses and damages to another person’s property as a result of a car accident caused by the insured’s negligence. If you are adequately insured on your own car, you may consider forgoing this additional liability protection. This supplemental insurance can cost $7-$14 a day.
Personal Accident Insurance
Personal Accident Insurance offers coverage to the renter and passengers for medical bills resulting from a car crash. If you have adequate health insurance and disability income insurance, or are covered by personal injury protection under your own car insurance, you will likely not need this additional insurance. It usually costs about $1-$5 a day.
Personal Effects Coverage
Personal Effects Coverage provides for the theft of personal items inside the rental car. If you have a homeowners or renters insurance policy, it generally covers this already. If you frequently travel with expensive jewelry or sports equipment, it may be more cost-effective to purchase a floater under your home or renters insurance policies so the items are fully protected when you travel. Generally, this coverage costs $2-$5 a day.
FAQ & Questions
Questions? We’ve got you covered.
How is my insurance rate determined?
Two factors determine what you pay for auto insurance. The first factor is underwriting and the second factor is rating. Insurance companies underwrite to assess the risk associated with an applicant, group the applicant with other similar risks and decide if the company will accept the application. Based on the results of the underwriting process, the rating assigns a price based on what the insurer believes it will cost to assume the financial responsibility for the applicant’s potential claim.
Each company adopts its own rating system, although there are general guidelines that all companies follow. The single greatest influence on the rating process is claim frequency. This does not mean how many times you specifically have made an insurance claim, although that will have an additional effect. Claim frequency measures how often an insured event occurs within a group relative to the number of policies contained in that group. Persons sharing characteristics with high claims groups will be charged more for insurance coverage.
What is usage-based insurance?
As driving habits shift, a new consideration is usage-based insurance (UBI). UBI examines driving habits (miles driven, speed, time of day and other factors) to determine insurance costs. Less than half of Americans are aware of UBI as an option and about six percent are using the product. When offered UBI, 50 percent of consumers make the switch.
UBI is an innovation by auto insurers designed to better align driving behaviors with premium rates for auto insurance. Mileage and behavior-based measures are tracked using odometer readings or in-vehicle telecommunication devices (telematics). The basic idea of telematics auto insurance is that a driver's behavior is monitored directly while the vehicle is in use. These telematics devices measure a number of elements of interest to underwriters: miles driven; time of day; where the vehicle is driven (GPS); rapid acceleration; hard braking; hard cornering; and air bag deployment. The level of data collected generally reflects the technology employed and the policyholders' willingness to share personal data. The insurance company then assesses the data and charges insurance premiums accordingly.
Do I need to share my drivers license number if I get in a wreck?
No. In the hands of criminals, your driver’s license number can be as valuable as cash. Many retailers accept driver’s license information to verify identity over the phone. In fact, your license number is the most common way to confirm your identity after Social Security number and date of birth.
Thirty-eight percent of consumers believed they should share their driver’s license number with the other driver — one in six would even allow the other driver to photograph the license as a convenient way to exchange information.
Are there any specific time limits for an insurance company to pay for collision or comprehensive claims?
Some states have specific time limits for the settlement of claims. In general, insurance companies should pay all claims in a prompt and reasonable amount of time. However, what constitutes "prompt and reasonable" may vary from claim to claim. Claims that require special or extended investigation may take longer to resolve. Inclement weather conditions often cause an increase in the number of claims filed and that can slow the process down as well.
Can I keep my vehicle if I have a collision, limited collision or comprehensive claim and my insurance company declares it a total loss?
Your insurance company has the option to take title to your vehicle when it issues payment on your claim. The insurer is entitled to any salvage value your auto may have. You can, of course, negotiate with your company to purchase your vehicle for the agreed salvaged value.
Can the insurance company pay me less than Blue Book for my totaled vehicle?
Yes. The Blue Book is only a guide. The company is required to pay you what your vehicle was actually worth (as a used car) the moment before the crash. The adjuster will find out how much used cars like yours (same make, model, and year) are going for in your area. It's a good idea for you to independently research the value of your car too.
Who pays for the rental car while my car is in the body shop?
When the claim is against the other driver's company, the other driver’s company should pay your rental car cost for a reasonable length of repair time.
If the car is totaled, many companies pay for your rental as a courtesy, but they are not required to do so — your right to a rental ends once a settlement has been offered.
When it's a claim against your own policy , your company will pay if you paid a premium to include rental reimbursement coverage in your policy. Most policies have a dollar limit for rental payments; your rental car rights are spelled out in your policy.
I got $500 to replace my car stereo. Can I use the money for something else?
If you are collecting from another driver's company, you're entitled to the cash. Do what you want with it.
Your own company may not pay the full replacement cost until you actually buy the new stereo. And if the stereo did not come with the car, you may need to show the company receipts to prove you had it in the first place.
The company wants to charge more than the agent quoted. Why?
The company makes the final decision about your rating classification after it reviews your background information.
It is not legal for the agent intentionally to quote you an unrealistically low price to get your business. The practice described above is called low-balling and it can be very hard to prove that's what happened.
Misquotes usually turn out to be the result of a mistake by the agent or incorrect information on your application. You can protect yourself by completing the application accurately and keeping a copy.
I've been sued by the other driver. Will my policy cover that?
Yes. Your liability insurance covers lawsuits. Your company has a duty to provide a lawyer to represent you in lawsuits accusing you of negligence in driving your car. If you receive a summons or notice of a lawsuit, notify your company right away. Although the company pays for the lawyer, the lawyer's ethical duty is to represent your best interests. There is no policy limit on how much the company must pay the lawyer to represent you.
If the case is settled or there is a judgment against you, the company will pay up to the policy limit . But if the court judgment or settlement is more than your policy limits, you will have to pay the difference. The company may refuse to defend you if you are accused of intentionally injuring someone or intentionally damaging property.
Why did the insurance company put the bank's name on the check for fixing my car?
Because your car is collateral for your loan, the bank (or whoever is financing the car) has an interest in making sure the money is used to repair the car and not for something else.
I've had 2 accidents that were not my fault. Can the company raise my premium?
Probably. Premium increases are always more likely when an accident is your fault. But it's a good chance the company has the right to raise your premiums if you have a second, not-at-fault accident within a policy period.
Sometimes I let a friend drive my car. Is she covered by my policy?
Some policies state specifically that no other person is covered when driving your car. However, almost all liability policies cover a licensed driver who drives your car with your permission. In general, your liability insurance also covers you if you drive a friend's car and the friend is not insured.
An uninsured driver totalled my car! Who pays?
Your collision coverage or your uninsured motorist property damage coverage, if you bought it. Either way, you'll have to pay a deductible.
I don't own a car, but need a rental vehicle. Do I need insurance?
If you don’t own a car, you might want to consider purchasing a non-owner auto insurance policy, because it provides benefits in addition to coverage for a rental car.
If your credit card does not provide benefits, it might be wise to purchase the liability insurance and collision damage waiver at the car rental counter.
My auto insurance doesn't cover a rental car. What should I do?
If your current policy doesn’t offer coverage for a rental car, see if an insurance rider can be added for a small fee.
Many credit cards include some level of collision and theft protection. In most cases, these benefits are secondary to your personal auto insurance or the car rental company’s insurance, meaning the credit card company will only pay claims after other insurance coverage has been exhausted. The NAIC recommends you call your credit card company and ask about benefits.
Tips & Tools
Be prepared before you buy.
Understanding Your Auto Insurance Policy
Your policy is divided into sections. It details types of coverage, rights and obligations under the policy and exclusions or limitations. Types of coverage may include liability, medical payments, uninsured/underinsured motorist, and coverage for damage to your auto.
An insurance policy is a legal contract. Your policy begins with a declarations page. This identifies the policy number and provides important information including the policy term, coverage limits, and information about the insured. It also contains a description of the vehicles covered under the policy.
If you received a loan to purchase your car and there is still an outstanding balance, the lender will be listed as "loss payee" on the declarations page.
Your policy contains a general insuring agreement consisting of a broad statement listing the perils and risks covered under the contract. The insuring agreement also identifies exclusions, which are specific events and circumstances the policy will not cover. It will contain definitions to help make the coverage clear and prevent any misunderstandings.
Specific Factors that Affect Your Rate
- Driving record – drivers with previous violations or accidents are considered to be higher risk
- Geographic territory – urban areas have more claims than rural areas
- Gender and age – males have more accidents; certain age groups have more claims
- Marital status – married people show lower rates of claims
- Prior insurance coverage – if you have been cancelled for non-payment of premiums
- Vehicle use – higher annual mileage results in higher exposure to risk
- Make and model of your vehicle – luxury and sports cars average a higher number of claims
Ask Your Agent About Discounts
Discounts are awarded because the insurance company sees you as a “better risk.” Here are some discounts you should look for: multiple vehicles, driver education courses, good student, safety devices, anti-theft devices, low mileage, good driver/renewal, auto/home package and dividends. Not all states offer all discounts, so check with your agent to see if you qualify.
Tort System vs. No-Fault System
Each state must implement either a tort system or a no-fault system. The system your state has implemented will determine what kind of insurance is available to you. The three basic coverages sold under the tort system are bodily injury liability insurance, property damage liability insurance and uninsured motorists coverage. In a no-fault state, coverages will vary, but under a no-fault system your insurance company pays you directly for your losses as a result of injuries sustained in an accident, regardless of who is at fault. Check with your state insurance department for questions concerning tort or no-fault state systems.
Check Into Optional Coverage
The most commonly recognized coverages, in addition to the basic liability package, are collision and comprehensive coverages. Collision coverage pays for physical damage to your car as a result of your auto colliding with an object such as a tree or another car. This is relatively expensive coverage and is not required by law. Comprehensive coverage pays for damage to your auto from almost all other causes, including fire, severe weather, vandalism, floods and theft. This coverage will also cover broken glass and windshield damage. Comprehensive coverage is less expensive than collision, but is also optional. Other optional coverages include medical payments coverage, rental reimbursement coverage and towing and labor coverage.
Where to Go for More Information
Information is available to consumers from a number of unbiased sources. These sources include public libraries, state insurance departments, online resources, consumer groups and consumer publications. Every state insurance department has personnel available to answer questions regarding auto insurance coverage and many departments publish premium comparisons to make shopping around easier.
Shop Around Before You Buy
When shopping for auto insurance, premium quotations are a useful tool for comparison of different companies’ products. When asking for price quotations, it is crucial that you provide the same information to each agent or company. The agent will usually request the following information: description of your vehicle, its use, your driver’s license number, the number of drivers in your household, the coverages and limits you want.
Where to Shop
Search for companies and agents in your area. In addition, ask your neighbors, relatives and friends for recommendations on insurance companies and agents. In particular, ask them what kind of claim service they have received from the companies they recommend. Remember to shop around to get the best price and service.
For Your Protection
Once you have selected the insurance coverages you need and an insurance agent or company, there are steps you can take to make certain you get your money’s worth. Before signing an application for any insurance coverage, call you state insurance department and verify that the company and the agent are licensed to do business in your state. It is illegal for unlicensed insurers to sell insurance, and if you buy from an unlicensed insurer, you have no guarantee that the coverage you pay for will ever be honored.
Read Your Policy Carefully
You should be aware that an auto insurance policy is a legal contract. It is written so your rights and responsibilities, as well as those of the insurance company, are clearly stated. When you purchase auto insurance, you will receive a policy. You should read that policy and make certain you understand its contents. If you have questions about your insurance policy, contact your insurance agent for clarification. If you still have questions, turn to your state insurance department.
Distraction is Expensive
Distracted driving compounds danger to life and limb with escalating financial costs. For years, annual reviews for auto insurance premiums brought consumers good news. Year after year, their premiums went down. In 2004, the average annual expense was $843, by 2009 that had fallen to $787.
But rates from a 2015 report were more than 12-percent higher than in 2007, when the iPhone was launched and the smartphone boom began. By the end of 2009 more than 170 million smartphones were sold world-wide, nearly 10-times the number sold in 2007. Even as an economic recession reduced the number of miles driven, U.S. insurance rates began to rise. In 2010 auto insurance rates rose for the first time in six years and they've continued climbing every year since.
Insurance rates are based on a number of factors. However the experts all point to distracted drivers as the cause of more frequent, more expensive accidents, resulting in higher insurance premiums.
Need help navigating auto insurance?
Auto Insurance Buyer’s Guide
NAIC’s Auto Insurance Buyer’s Guide provides you information to make better informed decisions around purchasing auto insurance. Download the Auto Insurance Buyer’s Guide to get a better understanding of auto insurance products.
Keep The Road Code
Distracted driving compounds danger to life and limb with escalating financial costs. Pledge to Keep The Road Code.