Wrecks & Fires
Chapter 5
Liability Coverage
Bodily Injury Coverage
Auto liability coverage is for bodily injury. Many policyholders misjudge the amount of liability needed. It is common for too little to be carried. Liability for bodily injury is absolutely necessary. It covers losses incurred by pedestrians, passengers and other drivers due to the negligence of the policy owner 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, he or she would have to liquidate their own assets to pay the costs of a judgment.
Single-Limit Policies
There are single-limit polices, which 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.
Split-Limit Policies
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.
Investigation Costs and Settling the Claim
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).
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Those with substantial assets should purchase an umbrella policy. |
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 policy owner’s own personal costs if they are injured. The policy owner 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 underinsured 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 underinsured 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 policy owner.
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 policy owner 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 policy owner’s car, without regard to who caused the accident. It also covers the policy owner’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 less benefits than the policy owner 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.
Personal-Injury Protection (PIP)
In no-fault states, personal-injury protection is required by law.
The policy owner 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. In New York, for example, medical bills under $50,000 must be paid only through their no-fault auto policy (without using other medical policies). There are also definite limits set on what doctors and therapists may charge.
Collision Insurance
Collision insurance pays for the repair 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.
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When a car is totaled out by the insurance company following an accident, they will pay the insured its cash 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 policy owner’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 policy owner lives. If the accident is not the fault of the policy owner, 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.
Uninsured and Underinsured Motorists
Uninsured motorist coverage is required by law in many states. This type of insurance pays the cost of the policy owner’s own injuries if they are hit by:
1. An uninsured driver who is at fault,
2. An at-fault driver whose small insurance policy won't cover all the damages, or
3. A hit and run accident.
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 underinsured 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 policy owner 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 policy owner is injured badly enough to sue. The policy owner 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.
Towing and Service/Rental Car Reimbursement
Most professionals feel towing and service/rental car reimbursement benefits are a matter of personal preference. The premium cost is generally affordable although sometimes coverage may be duplicated if the policy owner belongs to an auto club. Certainly, duplication of benefits should be avoided whenever possible.
Wage Loss and Substitute Services
This type of coverage is required in no-fault states and often included in other polices as well. Wage loss and substitute services benefits will pay at least part of one's lost income because of an injury. It will also cover the services that are associated with the accident, such as child care.
Setting 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 does, 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 most 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. This would include bartenders and cocktail waitresses. Some say this is because they make less believable witnesses if the insurance company decides to fight the claim in court.
Occupation may also play a part in one's insurance rates if he or she is employed in an occupation that the insurance company dislikes financially. By this we mean an occupation that is known for not paying bills. Certainly, it is unjust to be charged higher rates based on the actions of others, but the consumer often is not aware that this even played a part in the premium rates charged.
5. Driving Record: few would argue that this should not play a part in calculating insurance rates. 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. Type of Car: some types of cars cost more to insure. There can be several reasons for this, including the likelihood of it being stolen. 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 sex 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.
No Fault Insurance
Some states are no-fault insurance states. These states usually require that personal injury protection (often simply referred to as PIP) be purchased by car owners. 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 easily 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 that there be $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. Most 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.
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Some industry specialists feel the problem with no fault laws is poor creation. Good no fault laws often cut out fees for the very people who create them - lawyers. |
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 actually do not keep the costs down, but this section will assume that the laws were well written and, therefore, are not actually encouraging such 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 driver at fault 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 will still pay. 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 a no-fault state, a driver may go to court and try for a pain-and-suffering award. In such a situation, fault must be proven.
In either type of state, the insurer will investigate the accident, handle the settlement negotiations, give legal counsel and pay any judgments against the driver up to the limits within the policy.
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 who was 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 usually time consuming. In California, for example, it takes an average of five years 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 are 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.
End of Chapter 5