Chapter 1

The PC Professional

Chapter 6

Auto Insurance

Americans often feel financially pressed from all sides; it is necessary to get to work and other obligations, but the cost of doing so can be as much or more as other necessities like utilities and food. Over the past ten years the cost of gasoline has risen greatly. Gas prices may rise and fall over any given year but in the end, it usually ends up more costly than previous years.

The cost of auto insurance has also gone up in most areas due to such factors as road congestion (with the resulting rise in auto damage), auto theft, the cost of repairs, medical services, lawyer’s fees, and fraudulent auto claims.

The cost of any insurance includes more than just the premiums paid. The amount of out-of-pocket deductibles and copayments must be added to the amount of premium paid to know the true cost of the insurance policy. In some cases, drivers are eligible for premium discounts. This might include multi-car coverage, passive restraint systems, driver training, mature driver’s credit, good student discounts, anti-theft devices, antilock brakes, auto-home discounts, and good driver discounts.

As is generally the case for any type of insurance, larger deductibles provide lower premium rates. If the insured can afford greater out-of-pocket expenses when a loss occurs, it makes sense to increase the deductible amounts. If no claim arises, the insured has saved money; if a claim does arise, he or she must be able to afford to pay part of the loss themselves to cover the deductible amount.

Those driving older cars will want to consider dropping collision or comprehensive coverage, especially if there is a high policy deductible in place. An automobile owner driving a ten-year-old vehicle with a book value of $1,500 would not benefit from a $1,000 deductible, for example. Of course, liability insurance must still be carried.

The Auto Policy

When an individual buys an automobile insurance policy, the insured and the issuing insurer enter into a legal contract. It is the auto policy that details the circumstances under which the insurance company is responsible for paying claims, and the financial limitations of their responsibility. Furthermore, it lists the insured’s rights and responsibilities as a policyholder.

The Policy Declarations Page

The policy’s declarations page is the part of the auto policy that is customized for that particular insured individual. It states the individual’s name and proves coverage exists; it should be kept in a safe location.

Some specific items will be included on the Declaration page:

· The name and address of the insured;

· The policy number;

· The period of time for which the policy is valid;

· The effective date of the policy (when coverage begins);

· The amount of the policy deductible chosen by the insured;

· The vehicles covered under the policy;

· The name and address of the insurer and also the sales representative;

· The type of coverage purchased;

· The maximum amounts, called limits, the insurer will pay on a claim;

· How much premium each part of the insurance coverage costs and the total premium amount;

· The name and address of the bank or finance company if a car loan still exists; and

· The model year, make, model, body style, serial number, and age of the insured vehicle or vehicles.

The first page of the standard personal auto policy states the “agreement.” While the layout of this may have slight variances bases on state requirements, most will be similar regardless of the state of issue. In general, it will state that the policyholder must pay the premium, and the insurer will then pay a covered claim up to the policy limits. It is important to note that the words “covered” and “up to” play a large part in how claims are paid. There will be definitions explaining the meaning of specific words that appear in the policy.

The remaining parts of the personal auto policy discuss coverages and insurance company agreements (Parts A through F).

Part A: Liability Coverage

Liability coverage refers to bodily injury or property damage resulting from operation of the insured automobile. Of course, the driver would also need to be found legally liable for the loss. Most states require a basic amount of coverage, but those mandated amounts are often inadequate, and drivers need to consider amounts that would cover actual losses (unless the driver is willing to pay amounts above their coverage out-of-pocket). If the driver is legally liable for the claim and is sued, the courts may award the injured party far more than the limits of the insurance policy. The driver is legally liable for whatever the loss is deemed to be; it is never based on the amount of coverage carried.

Part B: Medical Payments Coverage

Medical payments coverage is coverage for medical bills if the driver is injured in an auto accident, regardless of which driver is deemed to be at fault. Coverage is extended to the insured even if he or she is injured by another vehicle while walking or as a passenger in another car.

In no-fault states, injuries may be covered by personal injury protection (PIP) rather than medical payments coverage.

Part C: Uninsured Motorist Coverage

Some drivers do not carry automobile insurance even though state laws require it. Uninsured motorist coverage comes into play when a negligent, uninsured driver causes injuries to another in an auto accident. The injured party would be covered up to their policy limits by their own uninsured motorist coverage provision. It is (again) important to recognize that the policy will pay only up to the stated limits, regardless of what the costs actually are.

Part D: Coverages for Damage to the Automobile

Part D is optional coverage that may or may not be purchased. It is designed to pay the policyholder for the damages sustained by their insured vehicle.

There are two types of Part D coverage:

1. Collision, which pays for car repairs if the vehicle is damaged by impact with another vehicle or object, regardless of which driver is actually at fault.

2. Comprehensive, which may also be called “other than collision.” This coverage pays for a loss caused by such things as fire, theft, vandalism, windstorm, water, or animals.

Automobile insurance does not cover routine maintenance, usually referred to as “wear and tear” or road damage to such things as tires. Additionally, it may not pay for add-on items, such as electronic equipment, but these items can be covered by a homeowner’s policy in many cases.

Part E: Duties after an Accident or Loss

Insured individuals have responsibilities under their policy; this section details what those responsibilities are in case of an accident or loss. Insureds must notify their insurance company of their loss promptly, for example.

Part F: General Provisions

General provisions explain the nine conditions that apply to the insurance policy. These include:

1. Bankruptcy: the insurance contract applies even if the insured declares bankruptcy, as long as the premiums have been paid in a timely manner.

2. Changes: any change to the coverage must be made by an endorsement issued by the insurer.

3. Fraud: while wrong information may sometimes happen without malice or intention, if wrong information is entered on the application coverage may be denied when a claim is filed. This is especially true if the incorrect information was intentionally listed. Wrong information may have been entered to misrepresent important facts.

4. Legal action against the insurance company: the insured cannot sue the insurance company unless he or she meets their obligations under the policy.

5. Right to recover payment: if the insurance company pays for a loss that someone else or some other entity caused, it has the right to recover their payment from that person or entity.

6. Policy period and territory: the policy period, which is typically from six months to one year, is shown on the declarations page. Territory is usually limited to the United States, its territories or possessions, and Canada. As always, the insured must refer to their own particular policy for exact details.

7. Termination: the conditions under which the policy can be discontinued are listed here. Obviously, nonpayment of premium would be one such condition. Another reason would be the revocation of the insured’s driver’s license by the licensing state or other authority.

8. Transfer of interest in the policy: Unless the issuing insurance company has given their permission, the insured may not transfer or assign the policy to any other person or entity.

9. Two or more auto policies: if the insurance company has issued more than one auto policy that applies to the same accident, the limits are dictated by the policy that has the highest limit. It is not possible to combine the limits of both policies into one higher limit (one policy may not be stacked up on top of another). This is often modified by state laws so it is important to know what your state allows or dictates.

Other Coverage Types

There are other types of coverage.

Personal Injury Protection (PIP)

Personal injury protection, usually called PIP, is mandated in no-fault states, where fault is not required to be proven. This coverage may be purchased as required by the state’s no-fault laws or as an additional endorsement to present coverage in other states. If the insured has an accident, this coverage pays the medical expenses, up to the policy limits, regardless of which driver was at fault.

Underinsured Motorists

Underinsured motorists’ coverage is similar to uninsured motorist’s coverage. It applies when the driver at fault is inadequately insured and does not immediately have financial means to cover the insured’s loss. Underinsured motorists’ coverage will pay the remaining loss up to the policy’s limits.

Rental Reimbursement

This coverage helps pay for a rental car if the insured auto is damaged in an accident.

Towing and Labor

Towing and labor pays for emergency road service and towing if the insured car is disabled. Many consumers buy coverage for this separate from their primary policy.

Extended Non-ownership Liability Endorsement

Extended non-ownership liability endorsements extend personal auto coverage to a car that is driven by the insured regularly, such as a company car.

Sound Receiving and Transmitting Equipment Coverage

This coverage is available for permanently installed cellular telephones, citizens’ band radios, mobile radios, and scanners. Radar detectors are excluded from this and coverage for radar detectors is generally not available.

Recordings, DVDs, or Other Devices

This covers recordings, DVDs, and other similar items while they are in the insured’s covered automobile. It does not cover equipment borrowed from other people.

Insurance Contracts

Legal contracts can be intimidating. Breaking down a policy into its separate parts is often the first step to understanding the policy. Even so, an automobile policy is not nearly as complicated as many believe. The problem is simple: few people actually read the policies they buy. This is true not only of auto policies, but of insurance policies in general. Most consumers rely upon their agents to explain the policy they have purchased. The agent must hope that his or her explanation was clearly understood and then remembered.

Reading the Policy

Format of any policy can vary by state. Many states mandate the policy layout, meaning how and in what order provisions are listed. An auto policy is typically broken down into three standard parts:

1. The declarations page,

2. The insuring agreement, and

3. The conditions of the policy.

The declarations page is where the policyowner's name will be stated along with the autos covered, the time period of coverage (January first through April first, for example) and the premium amount. Also listed is the description of the coverage provided (from the six components previously reviewed) and the dollar limits.

The insuring agreement is the main part of the policy. Policy terms, definitions, and the benefits provided in exchange for premium will be stated. Covered individuals will also be stated. This can be important information if the policyowner is in the habit of loaning out his or her car. Sometimes this may tie in to the listed definitions or policy terms. For example, a "relative" may be defined as any person who is related to those listed on the declarations page as named insureds and living in the same household.

Exclusions will also be listed. Exclusions are provisions in the policy denying coverage for specified perils, persons, properties, or locations.

The third part in an auto policy is the conditions of the policy describing the policyowner's responsibilities when a claim occurs. It may state how much time is allowed to report the claim and the types of proof of loss that will be required by the insurance company.

This portion of the contract will also generally list the conditions under which a policy may be canceled. The policyholder may cancel their coverage at any time, but the insurer must follow set procedures. Non-payment of premium is an obvious reason for which the insurance company may cancel the policy. They may generally also cancel the policy if the policyholder deliberately concealed or misrepresented any facts when applying for the coverage. If this were the case, the company could refuse to pay any losses that occurred.

Liability insurance is the most important and most expensive portion of an auto policy in most cases. If the policyowner or any other driver covered under their policy is found to be responsible for an accident that injures or kills another person they may be held liable for his or her medical bills (hospital and doctors), rehabilitative care and therapy, long-term nursing care and perhaps even the injured person's lost wages. Often there may be additional cash rewards given for pain and suffering. Consumer publications often recommend at least $100,000 of bodily injury protection per person and $300,000 per accident, but with today’s costs and high legal awards those figures could be very inadequate. The cost of such protection will depend upon the insurance company and the amount of risk the insured represents.

Many people purchase additional coverage called umbrella policies. If a person has over $300,000 in assets professionals often recommend additional liability coverage. As the name suggests, an umbrella policy is a policy that is carried above all other liability insurance. It comes into play only when other coverages are exhausted. Most standard policies go up to a $300,000 limit. It is possible, however, to purchase policies with limits as high as $400,000 or even $500,000. Generally, an umbrella policy can be bought from the same company that insures the policyowners home and automobiles.

Consumers look to their agent for suggestions when buying insurance. Recommending the proper coverage is often more a matter of "fact finding" than anything else. As questions are asked and answered the client will often recognize their own needs as the facts are written down in front of them. The "fact finding" should always be written down and then filed with the client's files at the agency office for future reference.

Family Automobile Policies (FAP)

The Family Automobile Policy (FAP) has several parts to it:

1. Part I consists of Coverage A, bodily injury liability and Coverage B, property damage liability. Under these coverages, the insurer agrees to pay to third parties money to cover any damages for which the insured is legally obligated due to bodily injury or property damage arising out of ownership, maintenance or use of an automobile.

2. Part II is Coverage C. The insurer agrees to pay all reasonable and necessary medical expenses for the insured, their relatives, and other persons resulting from an accident involving an owned car or a non-owned car while being operated by the named insured, a resident of the household, or any other licensed driver who was operating the vehicle with the permission of the insured.

3. Part III, which is Coverages D through I, provides protection against loss resulting from physical damage to an owned or non-owned automobile.

4. Part IV is Coverage K, which may be found in some policies. Under Part IV the insurer agrees to pay a stated accidental death benefit in case of the death of the named insured resulting from bodily injury sustained while occupying or by being struck by a motor vehicle, providing that death occurs within 90 days of the accident.

Each part of the Family Automobile Policy (FAP) contains its own recovery limitations, definitions and exclusions. Coverage under a FAP will vary from contract to contract and among insurers not using standard bureau forms. There are also generally limited policies available in the marketplace at a lower cost. As a result, the FAP owned by one person may differ from that owned by another.

Some states have no-fault laws. In such states, each driver's own insurance policy reimburses their medical claims and loss of wages, even if the other person was technically at fault. Even when a driver lives in a no-fault state, professionals still recommend larger liability policies be carried, because anyone could still be sued for pain and suffering if they were at fault.

Rates vary greatly from company to company. Of course, rates are also based on one's personal driving history (the number of tickets received and so forth). Although there may be "standard" policies, there is no such thing as a standard price. Price shopping is much more likely these days, especially with the availability of the internet. Customers that once merely bought the first policy that met their needs now go online to see what prices are available.

Many insurance experts recommend consumers consider purchasing their policies from independent agents since they usually offer multiple companies. Of course, this is no guarantee that the agent will suggest the lowest priced policy. As agents, we are often aware that price is not the only factor to be considered. Insurance agents often prefer to work with companies that make claim reimbursements easiest.

Car insurance is probably one of the most basic types of insurance. If the policyholder causes an accident, he or she wants their policy to cover the cost of the other person's injuries, damage to his or her car or property, legal costs and any pain-and-suffering damages that might be awarded. The policyholder also wants their losses covered. This would include injuries or losses suffered by passengers. In addition, he or she may want theft, towing, auto rental (for a car while theirs is being repaired) and loss of earnings as a result of injuries.

Liability Insurance

Auto liability coverage is for bodily injury. Many policyholders misjudge the amount of liability needed; too little is often carried. Liability for bodily injury is absolutely necessary. It covers losses incurred by pedestrians, passengers and other drivers due to the negligence of the policyowner or those covered under his or her policy.

Liability is probably one of the most important aspects in an auto policy. The potential for liability claims are especially great these days. Liability covers the injuries or deaths of other people and damage to their property when the policyholder is deemed responsible for the loss. It protects the policyholder's own assets as well, because if he or she did not have liability protection, their assets would need to be liquidated to pay the costs of a judgment.

There are single-limit polices that spell out the maximum amount the insurance company will pay for each accident. How the money is paid out is not set so the company will pay any combination of personal injury and property damage, not to exceed policy limitations. Single-limit policies are the most flexible form of liability coverage.

There are also split-limit policies, which sets specific ceilings on each segment of coverage. In other words, only up to a set amount will be paid for personal injury, property damage, or pain-and-suffering. This is usually stated in the policy as 100-300-50, for example. It would mean the insurance company would pay up to $100,000 for the injuries of one person (including medical bills, loss of earnings, death and pain-and-suffering awards); up to $300,000 for the injuries of two or more people; and up to $50,000 for property damage. Damage occurring to one's own vehicle or property would not be included. If judgments were awarded that were higher than the insurance contract covered, those balances would have to come out of the policyholder's own pocket.

Liability insurance also covers the cost of investigating the accident and settling the claim. If the case goes to court, the company will provide an attorney, paying his fees. The policy often pays any reasonable expenses the policyholder might incur in getting to court, including loss of wages. It is important that the policy also cover anyone who drives the policyholder's car with their permission. Policies will not generally cover any car that was rented out or entered into a race (regardless of whether it is a legal or illegal race).

Some states set minimum amounts of liability insurance that must be carried; others do not. Anyone with substantial assets should carry an umbrella policy of up to $1 million or more for liability judgments. These days, $1 million is not excessive in view of past court awards.

No matter how much liability insurance is personally carried, it covers only the "other guy." It is not intended to cover the policyowner's own personal costs if they are injured. The policyowner would need to collect from the other driver's insurance company (and hope that he or she was adequately insured). Of course, if the other driver is under-insured the policyholder can attempt to collect damages from them personally. If, however, they have no collectable assets, they may have little ability to collect damages. Since such a situation is clearly not just or fair, this is often an argument for the establishment of no-fault laws (where a driver can, in effect, insure themselves).

There are several ways by which to judge the amount of liability needed:

1. Protecting one's own assets means buying enough insurance to cover the highest judgments that might be assessed. The richer a person is, the more liability is needed. A policyholder who owns substantial property or assets is much more likely to be sued than is a person who has nothing.

2. Protecting oneself is often a wise buy. By this, we mean carrying insurance to cover one's own losses due to an uninsured motorist or an under-insured motorist. Generally, it is only possible to buy as much coverage for oneself as is purchased to cover the other person. If a $20,000 cap is on the policy for the other driver, there will also be a $20,000 cap on the policyowner.

3. Protecting the injured is not only a legal requirement in some states, but certainly a social and moral obligation as well. When a driver causes injury to another person, they have an obligation to pay for it. That requires an adequate amount of insurance even if the policyowner does not have assets to protect. Higher liability limits may not even be much more expensive. Certainly, it is worth inquiring about.

It could be argued that all insurance is property insurance to some degree. The buyers wish to protect themselves against loss of property already accumulated or loss of property to be earned (as is the case for life insurance). Even so, the concept of property insurance is restricted to losses resulting from causes other than life, disability or death.

Property Damage

For property damage, liability coverage covers, as the name indicates, damage done to someone's property. While that is most often a car or other vehicle, it may be any type of property such as fences, a gasoline pump at a filling station or even a building. The amount carried is usually figured on the cost of replacing a car, however. Since cars do vary greatly in price, the amount covered may vary greatly from policy to policy.

Medical Payments

Medical auto insurance covers reasonable medical and funeral expenses for the insured and anyone riding with the insured, even if the accident is not his or her fault. Usually, the limits are fairly low, because the policy is relying on judgments to cover larger injuries. This segment would also typically cover anyone driving the policyholder's car with their permission. The car does not have to be in motion for this type of coverage to be used. For example, if your Great Aunt Martha is getting into your car and stumbles, hurting her ankle, your medical insurance would pay her doctor bills (up to the limits of the policy). Some policies double the coverage available if seat belts were worn at the time of the injury.

Some medical policies will not pay if the policyholder's regular health insurance will cover the cost of medical treatment. They will, however, fill in the gaps left by any deductibles or coinsurances that apply.

Medical payments pick up the tab for hospital and doctor bills of anyone injured in the policyowners car, without regard to who caused the accident. It also covers the policyowner's family if they are hurt as pedestrians or while riding in another vehicle. This would generally even include such things as a bus or taxi. Usually, this type of coverage would also cover a person who was injured while getting into or out of a stationary vehicle.

Sometimes medical coverage offers fewer benefits than the policyowner may realize. If regular major medical health insurance benefits exist medical bills are already covered. If the auto insurance will pay only those bills not covered by the regular major medical policy, the actual payments may be limited to deductibles and co-payments. In no-fault states, medical payments are typically a part of the basic auto-insurance policy.

If the injured person is on Medicare due to age or disability, Medicare will require the auto insurance to cover the bills. Generally, the bills are still sent to Medicare first, but reimbursement is expected from the auto insurance.

States Require Liability Insurance

It is a simple fact of life: all drivers cannot be trusted to do the right thing. Many states mandate minimum amounts of liability insurance in order to guarantee compensation if the driver is at fault for an accident. Even so, it is best to carry personal insurance and not count on the other guy to do so.

The insurance policy is a contract between the insured and the insurance company. The insured pays a premium, which is the price or cost of the policy. The insurance company agrees to pay for the insured's losses resulting from events covered by the issued policy. Policies typically have what is called a "policy limit." That means there is a limit to the amount of money the insurance policy will pay on a covered loss.

If a driver causes an accident or is somehow shown to be at fault, it will not matter how large or small the insurance policy is. Damages will be awarded according to many factors, but not insurance coverage. If he or she has a judgment levied against them for $100,000, for example, and his or her liability policy has a $25,000 limit, he or she will still be required to pay the full amount awarded. It is financially dangerous to be underinsured but many Americans are still in that position for a variety of reasons. Adequate coverage protects the driver from financial consequences of an accident that is their fault.

Many types of insurance contracts contain deductibles. A deductible is a specified amount of money that the insured must pay on a claim before the insurance company will pay anything. The deductible is usually per claim or per accident, so it may apply as often as a claim or accident occurs. Any losses under the deductible amount simply come out of the insured's pocket. The higher the deductible, the lower the premium cost for the policy.

It is human nature to want an insurance policy to return the premiums paid in. As a result, a common complaint of consumers involves high deductibles. However, the sensible way to buy insurance is to construct the policy so that large losses are covered. Most people can handle the smaller ones themselves. Of course, the term "smaller claims" may mean different figures to different people. It is necessary to understand that one household may be able to handle a $500 loss themselves while another household may have difficulty coming up with $200.

PIP

A factor in rising premiums is the costs of litigation and settlements. There is more litigation now than ever before. Settlements in injury cases tend to be much higher these days as well.

The intention behind no-fault laws was to reduce costs associated with accidents and bring financial aid faster to the victims. In those states that have passed no-fault laws personal injury protection, called PIP, are utilized. In no-fault states, personal-injury protection is required by law.

Personal Injury Protection (PIP) is a broader form of medical payments and it may vary from state to state. PIP may cover, as well as medical payments, such things as lost wages and the cost of replacing services normally performed by the injured person (such as cooking). As stated, personal injury protection is sometimes called no-fault coverage because it is required in states that have no-fault laws; that doesn’t mean individuals in other states cannot buy it however.

The policyowner is covered for:

1. Their own medical bills up to a specified limit,

2. Part of lost wages,

3. Funeral expenses and,

4. In some states, replacement services (such as house cleaning when the wife is injured, for instance).

State laws vary so, of course, collectable amounts also vary. There may be no ceiling or there may be a relatively low ceiling for specific benefits. There are also definite limits set on what doctors and therapists may charge. Agents must keep up with their state’s laws.

No-Fault Insurance

Some states are no-fault insurance states. These states usually require that personal injury protection (PIP) be purchased by car owners. While individuals in no-fault states may refer to PIP as no-fault insurance, the true name is personal injury protection coverage. Under this system, victims of accidents are theoretically compensated more swiftly and justly. That is because payment is not based on "proving fault" (thus the name). Proving fault in an automobile accident can take two or more years. No-fault states provide immediate payment of medical bills and loss of income to the victims. For poorer citizens, no-fault states may work very well since they do not have to settle for whatever they can get in order to pay the bills that are due immediately. If the other driver is well off, he or she could feasibly delay payment in those states in which fault must be proven. Under no-fault insurance financial ability is not an element because each person's own insurance company pays promptly for any medical bills and loss of earnings that result from the accident. It must be noted, however, that the bills will only be paid up to the limits of the policy.

Not all no-fault states have set their laws up well, but in those that have, the lawyers may be cut out completely in small cases because limits are set on who can sue. Of course, this does not appeal to everyone, especially these days when many people prefer to sue for pain and suffering even in small cases. Some states require $2,500 worth of medical injuries before there can be a lawsuit. In those states, the number of auto cases has dropped dramatically, and insurance costs have been contained. However, some states have the dollar point as low as $500 which, by some estimates, has actually escalated small cases (bills are extended in order to reach the $500 mark) that would not have ordinarily reached that high in medical bills. In these states, there has been no evidence of cost containment. Some industry experts feel that good solid no-fault laws will be hard to come by in most states because the legislatures who must pass the laws are primarily made up of lawyers. Good no-fault laws often cut out the lawyers and their resulting fees.

No-fault is a system in which the driver's own insurance coverage pays for the losses regardless of who caused the accident. It is due to this fact that the protection purchased is called no-fault insurance. It is generally felt that such a system keeps down the cost of insurance premiums since it eliminates much of the legal costs associated with proving blame. As previously mentioned, badly written no-fault laws may not keep costs down, but this section will assume that the laws were well written and are not actually encouraging legal problems.

"Fault" states must establish blame, as the name implies. Whoever is at fault must pay for the damages or losses brought on by the accident. Of course, the driver at fault may not necessarily have insurance (even in states which require it). Even if the liable driver does have insurance, the amount carried may not be adequate in all cases. The insured driver may, of course, sue for a larger amount.

In "no-fault" states, each driver's own insurance company covers their losses. Even if the accident was totally the driver's fault, their insurance still pays. No-fault coverage does generally have a ceiling on their payments. If the limit is set too low, the injured driver may find the losses are far greater than the coverage provided by their policy. Even in no-fault states, a driver may go to court and sue for pain-and-suffering awards. In such situations, fault must be proven.

In either type of state the insurer will investigate the accident, handle the settlement negotiations, give legal council and pay any judgments against the driver up to the policy limits.

In states that do not have no-fault laws, the person who caused the accident (and his or her insurance company) is liable for the losses resulting from the accident. Sometimes in order to collect from the person at fault (the person who caused the accident) it is necessary to sue and establish in court that the accident was their fault.

Lawsuits are time-consuming. It may take five years or more for a civil case to come to court. Obviously, medical care cannot be delayed for five years! Many families have suffered severe financial difficulty as a result of medical bills and loss of income.

Lawsuits are also expensive. As much as one third to one half (plus costs) may go to the attorney. The basic idea of no-fault laws is to get accident victims' bills paid promptly regardless of who caused the accident. Another benefit is lowered insurance premiums since the number of lawsuits are reduced dramatically which saves hundreds of dollars in legal fees. More of the premium dollars go towards losses instead of into litigation expenses.

Collision

Collision pays for the repairs of the policyholder's car if it is damaged in an accident or other mishap. This is true even if the accident is the policyholder's fault. If the car is ruined beyond reasonable repair limits, the insurance company will generally give the policyholder its cash value. This is sometimes called "totaling the car out." This figure is generally arrived at by taking the cost of the car and deducting for depreciation. The theory is that the policyholder will be able to replace it with a car of like value.

Collision coverage is usually required by the lender for new unpaid-for vehicles. The lender wants to be sure they will receive their money in the event that the car is totaled. The insurance money would be needed, in that case, to repay the loan.

Typically, collision insurance covers the fair market value of the vehicle, which is usually determined by the book value, minus the cost of making repairs, minus a charge for unusually high mileage. As a result, this type of coverage is often not a good buy for old or already damaged cars.

When a loan is taken out to purchase an automobile, the lending institution typically requires that collision insurance be carried. Most people want to insure new cars for collision, because it would be a major loss if the vehicle were destroyed. Many professionals do not recommend carrying collision insurance on old cars. The cost of the insurance often does not warrant it because the vehicle is worth so little.

Collision policies typically have a deductible in the contract. A deductible is the amount of the repair bill (paid before the insurance company steps in) that would be the policyholder's responsibility. The actual amount can vary widely. Of course, the larger the deductible, the smaller the premium cost.

Collision coverage covers repairs to the policyowner's vehicle no matter who caused the accident. The price of this type of coverage will depend upon such factors as the size of the deductible and where the policyowner lives. If the accident is not the fault of the policyowner, the insurer may arrange for the deductible to be paid by the other driver or the other driver's insurance company.

Comprehensive Coverage

Comprehensive insurance covers theft and damage from vandalism, fire, projectiles (that baseball that goes through the windshield), animals, flood, explosions and other perils. Sometimes it also includes towing costs and other incidental bills. It will not pay for the normal wear-and-tear that a car receives. Comprehensive coverage will not pay for mechanical breakdowns.

Comprehensive does not always have deductibles, but the premium cost will be less if there is. The insurance company will not pay more than a car's value. Therefore, once again, if the car is old and does not have much value, comprehensive coverage is probably not worthwhile to purchase.

Comprehensive coverage is considered to be essential for new cars and, sometimes, even for older ones. This type of coverage pays for damage to the vehicle from such things as fire, flood, vandalism, theft, rocks thrown on the freeway and so forth. This coverage does generally contain deductibles which might range from $50 to $500. Of course, the higher the deductible, the lower the insurance premiums.

Comprehensive insurance covers the vehicle's fair market value which normally declines with time. Comprehensive tends to be cheaper than collision insurance.

Many more consumers are now carrying coverage for uninsured motorists. This type of insurance pays for whatever damages occur for bodily injury, and sometimes property damage, when the policyholder would have been legally entitled to receive it from the other driver, had he or she carried insurance, or a hit-and-run driver (where the other driver is not identified).

Generally, this coverage also covers lost wages. In some states, the driver might even be reimbursed for damage to the vehicle.

Uninsured and under-insured motorist coverage covers more perils than does the other types of coverage. It might even be possible to collect for pain-and-suffering. If the policyowner does not have disability insurance, it may serve to fill this gap.

Many states allow an individual to buy as much insurance to protect themselves as they buy to protect the other guy. In no-fault states, uninsured motorist coverage kicks in when the policyowner is injured badly enough to sue. The policyowner can collect from this policy on top of their no-fault, personal-injury protection.

Some people prefer to carry sound, adequate life, health and disability insurance rather than uninsured motorist protection. In some situations, uninsured motorist coverage really isn't necessary. In Michigan, for example, no-fault benefits are most generous. In addition, it is hard to sue for pain-and-suffering there. In such a case, uninsured motorist benefits are not financially worthwhile.

Auto Insurance Rates

Not everyone pays the same for auto insurance. Insurance companies set their rates according to statistics that have been collected. Those that fall in groups with higher accident rates pay more for their insurance than those who fall in groups that experience lower incidence of accidents. Those groups are generally referred to as risk groups. Of course, personal irresponsibility will push individual rates higher, as well.

There are several factors when determining the cost of auto insurance:

1. Age: single individuals who are under the age of 25 often pay higher rates. Sometimes the rate can be lowered if the driver is on a policy with his or her parents.

2. Marital Status: once a person marries, especially if he or she is under 25, rates are often lower for auto insurance. Statistics show that marriage is a factor in safety. Some companies put widowed and divorced persons into higher-risk categories, which do, of course, mean higher insurance rates. Young women do tend to pay lower rates than do young men; single women pay less than single men. With many companies this can continue up to the age of 65. Overall, statistics show that women have fewer accidents than men.

3. Residence: since insurance companies are excellent scorekeepers, it will not surprise an agent to learn that statistics are even kept in relation to accidents and location. As a result of these statistics, men and women pay lower auto insurance rates when they live in less populated areas. Even within the same city, one zip code area will often pay less than another zip code area. Those who live in rural areas typically pay less than those who live in cities; people who live in smaller cities are charged lower rates overall than are those who live in larger cities.

4. Occupation: some occupations are considered to pose higher risks. Some experts charge that there is no rational statistical information regarding automobile accidents and occupation. Even so, there are still insurance companies who do rate drivers using occupation as one of the elements. Often, those who work in occupations that deal with alcohol are charged more, including bartenders and cocktail waitresses. While many states have addressed these issues, not all have. Occupation may also play a part in one's insurance rates if he or she is employed in an occupation that the insurance company determines carries additional financial risk.

5. Driving Record: few would argue that this should not play a part in calculating insurance rates since safe drivers should get better rates than unsafe drivers. How insurance companies use driving records can vary widely from company to company.

6. Use: the more a car is used, the higher rates often are. This is not surprising since higher use means higher exposure to other drivers and conditions.

7. Other Drivers: even if the policyholder is a safe driver, he or she may have a member of their family that is not. If he or she drives the policyholder's car, their rates may be higher as a result. Policyholders often see their rates go up when their teenage children begin to drive, for example.

8. Make and Model of the Car: some types of cars cost more to insure. There can be several reasons for this, including the likelihood of it being stolen, repair costs, and safety records. The cost to insure inexpensive, low-priced cars is often less.

9. Merit Rating: A few states, such as Hawaii, have banned rates based on personal characteristics, such as gender and age. These states have attempted to link automobile rates directly to personal performance and responsibility. Of course, if an accident occurs, rates can go up sharply. Because merit-rating does not penalize the responsible person who just happens to be in a high-risk group, it is considered a fairer way of charging premiums.

Measuring Loss Exposure

There are about 3,500 insurance companies selling property and casualty home and auto insurance in the United States. While the type of insurance company may vary, they all sell in two basic ways:

1. Directly to the general population through the mail, or

2. Indirectly using a middleman (insurance agent).

Locating and measuring loss exposures requires detailed information searches which must be done in an organized manner. Many sources are utilized. Financial records are one important source. The balance sheet of a business is always an excellent source of information as well. A systematic study of each asset will often help to locate loss exposures. Such things as asset location, replacement costs, utility values, and the perils and hazards to which they are exposed are all considered.

Also involved in any risk analysis is the process of setting premium rates. An insurance rate is the cost for one unit of insurance. The premium is basically the rate multiplied by the number of units purchased. It is similar in concept to unit pricing at the local grocery store. A box of food may be priced at $4.25 for the total package, but the unit price is what the cost is for a given measure whether that unit of measure happens to be an ounce or a pound or whatever. By comparing the "unit price," the consumer may determine the best buy. A box of rice costing $4.25 may actually be the best buy over a box costing $3.00 if the unit price is less per pound. In other words, $1.50 per pound is always less than $1.75 per pound no matter what size or shape the package may come in.

A unit of insurance is generally $1,000 of coverage. As with the package of rice, the cost of one's insurance is based upon the rate, not the size of the policy. Rates are given for every type of car and driver and for each geographical area of each state.

The rate for any given policyholder depends upon numerous rates. Surcharges and discounts may be considered penalties and rewards given by the insurance company to their policyholders. These penalties and rewards are based upon the kind of risk that the policyholder represents.

Typically, rates are set along three basic guidelines:

1. To make enough money to cover all their policyholders claims and pay the company's overhead expenses. If a company is publicly held, they must also pay a profit (hopefully) to their shareholders.

2. With auto, to charge higher rates to drivers who file more costly claims and lower rates to drivers whose claims occur less often and/or who have smaller claims.

3. To stay competitive with other insurers in the markets which they think will be the most profitable.

Another factor in rates will be based, to some degree, on which state they are set in. The insurer must follow the regulations of each individual state. The rate for a particular car and driver could change from state to state.

When determining a driver's rate, one of the first things which will be considered is the amount of risk the driver represents. Such things as age is considered as well as factors such as the type of car driven, the number of miles driven and so forth. Although an underwriter (who determines the rate) may have some prejudices, statistical experience is primarily used. Many years of record keeping supports their judgments in establishing rates. A 21-year-old with a sports car will pay a higher rate than will a 50-year-old person who drives an economy car. The underwriter will feel the risk imposed by the 21-year-old driver is much higher than the risk imposed by the 50-year-old driver.

Risks are usually stated in one of three ways:

1. Preferred (low risk),

2. Standard (average risk), and

3. Non-standard (high risk).

No section on risk analysis would be complete without an adequate definition of insurance. As previously stated, the often-used definition, the transfer of risk, is not totally accurate. A more fully expanded definition would be either the accumulation of a fund OR a transfer of risk, though not necessarily both. In addition, it must include a combination of a large number of separate, independent exposure units to make somewhat predictable the possible individual losses. The predictable loss is then shared proportionately by all units involved. This definition of insurance makes the point that both uncertainty is reduced and losses are shared. Both are important aspects of insurance.

Insurance policies allow an individual or a business to substitute a relatively small, defined premium cost for a possibly large, though uncertain, loss. The fortunate many that do not experience a loss will help to compensate the unfortunate few who do suffer a loss.

It is the "cookie jar" classic. Many people put cookies into the jar, but only a few will find themselves in need of removing cookies. A policyholder puts one cookie in but may find themselves (due to a major loss of cookies at home) needing to replace the dozen lost. Having put one cookie into the jar enables the person to take out the dozen needed to replace their loss. The extra 11 cookies taken out came from others who also placed one cookie into the jar.

Processing an Auto Claim

When a claim is received, the insurance company will first confirm that the policy was in effect at the time of loss. This is actually true for virtually all types of insurance policies. Secondly, the company would check to see if the issued policy covered the type of loss that occurred. Once these two things are confirmed, the company will assign the claim to a Claims Adjuster. This person may work exclusively for one company or may work as an independent representing multiple companies. The job of the adjuster is to verify the loss and then determine the amount that the policyholder is entitled to claim under the policy.

Sometimes an adjuster may declare a vehicle a total loss, in which case the insurance company will pay the policyholder its book value rather than the cost of repairs. A standard auto policy will not pay to repair a vehicle if the repairs would cost more than the cash value of the car. The value of a car may be determined by consulting standard reference guides such as the Blue Book published by the National Automobile Dealers Association and/or by consulting local used car dealers. The policyholder is entitled to the market price of their car. Sometimes it may be necessary to prove a higher value if the reference guides state a lower price. Records which might be useful in proving a higher value include mileage records, service history and affidavits from mechanics.

Some states have no-fault laws (refer to the section on no-fault laws). These states usually require that personal injury protection (PIP) be purchased by car owners.

No-fault is a system in which the driver's own coverage pays for the losses regardless of who caused the accident. It is due to this fact that the protection purchased is called "no-fault insurance."

Of course, not all states have no-fault laws. In states that do not have no-fault laws, the person who caused the accident is liable for the losses resulting from the accident. Many states require that liability insurance be carried to protect drivers from the negligent acts of others. Sometimes, in order to collect from the person who was at fault, it becomes necessary to sue and establish negligence in court.

There are basically three types of negligence laws (please refer to the section on Negligence Laws):

1. Pure comparative negligence which bases what a policyowner can collect on the percentage of each person's (driver's) fault.

2. Modified comparative negligence which allows the driver to collect from the other driver's insurance only if the other driver's liability in the accident was more than a specified percentage. Usually, that percentage is 50 percent.

3. Contributory negligence which allows a policyholder to collect damages only if they had no fault at all in the accident. If the driver had any fault at all, then he or she must collect from their own insurance company.

If a policyholder is sued for more than their policy limits, the insurance company will still defend their client. The company may, however, suggest that the policyholder retain another attorney as well to protect the additional interests involved.

When a claim occurs that does not involve bodily injury, the insurer will usually arrange to have an adjuster or appraiser examine the damaged vehicle. An appraiser estimates the cost to repair the car; an adjuster also estimates the repair cost, but usually also has the authority to settle the claim.

A large part of the insurance policy will deal with the procedures for loss adjustment. Although policies will vary, generally a policy will contain provisions relating to:

1. Notice of loss,

2. Protection of property,

3. Inventory,

4. Evidence,

5. Proof of loss,

6. Assistance and cooperation,

7. Appraisal,

8. Abandonment and salvage,

9. Settlement options,

10. Time limits for paying claims,

11. Time limits for bringing lawsuits, and

12. Miscellaneous clauses.

Because policies vary, not all policies will contain provisions on all twelve items. Which provisions are used often depend upon the type of policy. Life insurance policies, for example, generally have just two: proof of loss and settlement options.

For those who pay out numerous premiums and never make a claim, insurance must seem very costly. After all, an insurance policy is most valuable after a loss. Since no one has access to a crystal ball, we must all simply make the best choices we can with the facts available to us.

End of Chapter 6