The Consumer's Independent Guide to
AUTO INSURANCE
Back in 1898 when the first U.S. automobile insurance policy
was purchased, there were barely 100 cars on the streets, nationwide.
Horses and carriages ruled the roads, and the main concern then
for both insurers and auto drivers was any injury those noisy
new machines might do to horses.
Today a motor vehicle accident occurs every second. Auto accidents
cause an injury every 14 seconds, and every 13 minutes a car
accident results in a fatality. More than 31 million accidents
occur per year, at an annual cost of almost $100 billion. Theft
and vandalism are other major perils facing drivers, In fact,
every 20 seconds another vehicle is stolen.
With more than 150 million drivers and 160 million registered
vehicles on the road today, auto insurance is the most widely
purchased of all property-liability insurance. Drivers buy auto
insurance for economic protection against theft, vandalism, and
other risks, but few are familiar with the ins and outs of their
particular policy.
This guide was designed by the Independent Insurance Agents
of America to make it easier for you to know your insurance needs
and the many options available to you. Though this guide does
not represent the provisions of any particular policy, it should
serve as a starting point on your road to finding the best policy
for your needs.
Index
Why do I need auto insurance?
Your car has two unique qualities. First, it is probably one
of the most expensive things you own. Insurance protects your
investment and guarantees you a way of coping with the expense
of accidents, vandalism or theft, as well as securing your financial
responsibility to the bank or other institution lending the money
to buy your vehicle.
Second, when you drive, you are operating a powerful machine,
weighing one ton or more and capable of moving at over 100 miles
per hour. You are responsible for the safety of your passengers,
your fellow drivers, other people's property, pedestrians and
yourself. Insurance helps you live up to that responsibility
by ensuring your ability to cover the costs of potential damages
or injuries.
You are also required to be financially responsible by state
laws, which are best satisfied through your insurance coverage.
In fact, in most states insurance is a prerequisite to registering
your car. So if you want to drive your own vehicle, you must
be insured.
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What are the different types
of policies and what do they cover?
Auto insurance is divided into several different types of
coverage:
- General liability covers damage you may cause
to other people's property and injuries to the people themselves.
- Collision covers damage to your own vehicle
in an accident.
- Comprehensive (i.e., fire, theft and other
non-collision damage) covers fire damage to your vehicle, break-ins,
vandalism or theft, as well as natural disasters (earthquake,
hail, hurricane, flood, etc.--unless the vehicle is overturned,
then it is considered a collision).
- Medical payments insurance, usually in the
range of $5,000 to $10,000, covers medical expenses for injuries.
This "good-faith" coverage guarantees immediate medical
payments for you, your passengers and other parties, regardless
of who is at fault. It also covers you and members of your household
in any accident involving an automobile, whether you are on foot,
on a bicycle, in a friend's car, etc.
- Uninsured motorist (UM) and underinsured
motorist (UIM) coverage protects you if you are injured in
an accident with others who themselves carry insufficient or
no liability insurance.
- Extra coverages include expenses for towing,
labor, temporary replacement vehicles, etc. These are generally
defined as add-ons or endorsements to your policy.
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Why and how are policies priced
for different drivers?
Drivers are grouped according to the level of risk each one
poses--i.e., the amount of loss incurred by insurers within various
categories of policy holders. For various reasons, drivers are
categorized by:
- Sex--Men have more accidents on the road than
women.
- Age--Drivers under 25 (and, for some insurers,
under 30) are considered at higher risk of having an accident.
- Marital Status--Married drivers tend to have
fewer accidents than single drivers.
- Personal Driving Record--Years of driving
experience, accidents, speeding tickets and drunk-driving offenses
are all factors in determining how much of a risk you pose as
a motorist.
- How You Use Your Vehicle--If you commute by
car during rush hours, you're at greater risk of having an accident
than if you only drive for errands and recreation on the weekends.
Drivers who use their own vehicles for business also are considered
to be at greater risk.
- Type of Vehicle--The value, size, weight,
age of your vehicle--even the cost of replacement parts--are
essential to determining the price of your insurance. Larger,
heavier vehicles are considered at lower risk than smaller, lighter
ones. Plus, more expensive cars are costlier to have repaired
than economy models.
The cost of your insurance policy is based on the average
cost of covering actual losses, spread out over your particular
"rating group" as a whole. Of course, you may never
have an accident or have your car stolen, and therefore will
never need to be compensated. But others in your category may
not be so lucky. Your premium will help to pay for their losses,
just as their premiums would help to pay for yours. In other
words, you are investing a little today in case you need a lot
tomorrow; your investment is pooled with others, and the pool
pays for your loss.
For example, if you are a 23-year-old man and you park your
new sports car on a downtown street in a large city, you will
likely pay more for insurance than a 37-year-old woman who parks
her four-wheel-drive in the suburbs, simply because--based on
average losses--you have a greater chance of having an accident
or being the victim of auto theft.
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How does where I live affect
my premium?
Where you live (or, more precisely, where you keep your car)
has a bearing on your chances of having an accident or becoming
a victim of theft or vandalism. That's why a vehicle owner in
Brooklyn, New York, pays a higher rate than the owner of an identical
vehicle in Casper, Wyoming.
Other factors affecting regional insurance rates include time
and efficiency of police response and law enforcement, local
road and traffic conditions and the quality of local medical
services. Insurers even factor in the litigation rates in a given
area--that is, how many lawsuits are filed, go to trial, are
settled out of court and for how much.
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Why are rates different for
different cars, even if the cars cost the same?
Vehicles are also grouped into categories according to their
likelihood of being damaged, vandalized or stolen. Insurers generally
consider the size and type of vehicle, as well as the value and
the cost of repairs (which can vary greatly, even on vehicles
that cost roughly the same). Thus, a new station wagon is expected
to hold up better in an accident than a sports car or a subcompact.
Putting insurance aside, safety is key when buying an automobile.
Your life depends on it! Some cars are considered safer than
others because of their performance record in safety tests and
real accidents.
That's why you should research insurance coverage before you
buy your car. It helps you to understand the actual cost and
indicates those vehicles with good safety records. Your insurer
will ultimately reward you for putting safety first.
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What is "no-fault"
insurance?
No-fault insurance is a system adopted in some states that
essentially bypasses the conventional legal procedure which finds
fault in an accident. (This is the procedure by which you hire
a lawyer, file suit and possibly go to court to prove the accident
was the other guy's fault.) No-fault simply does away with the
concept of one party or the other being at fault--no lawyers,
no court, no judge, no jury, no lengthy lawsuits against the
other party. This is considered beneficial to taxpayers, because
it eliminates costly legal proceedings that the state must manage,
and to insurance policyholders, because it helps keep rates down.
If you are insured in a no-fault state and have an accident,
you don't go after the other driver. You contact your own insurer
and file a claim. Your own insurance policy guarantees you immediate
compensation for damages, medical expenses, lost wages, etc.
The type and range of no-fault coverage varies from state
to state. What defines the limitations of no-fault policies can
differ in two critical areas:
- Threshold--The type of damage/injury or the
cost of repair/recovery that triggers the need for legal action.
- Mandated--Benefit Level--The package of benefits
(medical, wage loss, replacement services and other expenses)
your state requires you to carry.
The details of no-fault insurance can be complicated. Contact
your agent or state's insurance department for further information.
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Do all states require some kind
of liability insurance?
No. Some states, while not mandating auto insurance, have
"financial responsibility laws" that require all drivers
to be able to pay for any damage or injury they may cause. However,
carrying liability insurance is still the best way for you to
meet your state's financial responsibility requirements.
UM and UIM policies are offered by law in all states, including
no-fault states. In fact, some states require all motorists to
carry this coverage in order to gain protection from inadequate
insurance coverage of other drivers.
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What happens if I have an accident
with an uninsured driver?
First, call the police to the scene to be sure all pertinent
information is properly recorded. Your nerves will be shaken
right after an accident, and it helps to have a calm and knowledgeable
person walking you through the necessary details.
Then, contact your agent immediately and ask about filing
a claim. If you followed all the recommended guidelines when
you bought your policy, you should be covered within the limitations
of that policy. Remember, your insurance policy is designed to
protect you.
If the cost of your damages or injuries exceed the amount your
policy will pay out, it may be time to take legal action against
the other party. Even if you have no-fault insurance, sometimes
the only way to be compensated is to place blame and responsibility
where it belongs.
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Why would my insurer cancel
my policy?
Technically, in most states your insurer can cancel your policy
only if:
- you fail to pay your premium;
- you lose your driver's license;
- you are guilty of material misrepresentation during
the application process--i.e., you fail to notify your insurer
of a recorded violation, such as a drunk-driving offense; or
- you fail to report a substantial change of risk,
such as buying a high-powered sports car to replace a family
sedan.
However, your insurer can choose not to renew your policy
for a variety of reasons.
Do you have a bad driving record? Have you received a lot
of speeding tickets? Have you ever been caught driving drunk?
Not only are these scenarios considered unsafe and illegal, they
are justifiable cause for your insurer to label you a bad risk
and refuse to renew your policy. (Some underwriters may feel
compelled to cancel policies after only one accident.)
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What do I do if my insurer cancels
or refuses to renew my policy?
Even "good" drivers can find themselves in the position
of being dropped by their current carrier. Reasons range form
a "drinking while driving" violation or other serious
violations (that make you a high risk) to situations outside
your control, such as when insurers in your state are suffering
severe business losses. Overall rises in claims or losses can
cause insurers to become highly selective in determining whom
they can afford to insure.
That is why it is important to note that if you are licensed
to drive, by law, you are eligible for insurance. However, your
options for new coverage may be limited. Each state has created
and regulates a market of last resort for those who cannot otherwise
obtain coverage. These groups have various names, depending on
the state you live in, such as assigned risk plans or the residual
market. Your agent will know more about the particulars in your
state.
Regardless of the reason you were dropped, you need to act immediately
to get another policy. Under no circumstance should you drive
your vehicle without insurance. Call your agent to help you find
new coverage. If you do find yourself in the residual market,
the price may be higher but it may be your only alternative in
maintaining your freedom to drive.
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How do I keep my insurance company
from canceling my policy?
The most obvious way to maintain your low-risk status is to
keep a clean driving record. If you've been in an accident, consider
taking a defensive driving course. Even those of us who have
been driving for years rarely know the simple tricks to preventing
accidents through defensive driving.
Also, look into purchasing special safety and security features
for your car, such as anti-lock brakes and an alarm system. Your
insurance agent can give you further tips on how to convince
your insurer you're a safe driver.
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What steps can I take to reduce
my rates?
Insurers often discount their rates in order to encourage
good driving practices and the use of safety and security precautions.
Depending on the insurance company, you can often lower your
rates from 5 to 35 percent.
Sometimes the investment you make in your vehicle is worth the
discount, and sometimes it's simply worth some peace of mind.
For example, the purchase of anti-lock brakes merits a discount
from nearly every insurer, but the discount probably will not
pay for the brakes (which cost several hundred dollars) during
the normal life of your vehicle. Anti-lock brakes are touted,
nonetheless, as a life-saving feature Û a serious consideration
when safety is a top priority.
Insurers generally offer discounts for:
- Safety Features--Anti-lock brakes, air bags
and passive restraint systems (i.e., automatic seat belts).
- Defensive Driving--Clean violation record,
driver's-ed courses for teenagers and defensive driving or accident
prevention courses for adults (insurance discounts for the latter
are required in some states).
- Security Systems--Alarms, electronic locks
and disabling devices.
- Changing Driving Habits--Commuting by public
transit, using a company vehicle for work-related travel and
car-pooling.
- Formal Agreements Not to Drink and Drive--The
availability of a discount for signing such an agreement varies
among insurers and states.
- Buying Home Owners and Auto Policies from the
Same Company--If you own a home and an automobile and you
are insured by two different companies, check into the cost of
carrying both policies by one insurer. Your agent can give you
guidance as to which insurers offer discounts.
You can also lower your insurance rates by requesting higher
deductibles Û the amount of money you pay before you make
a claim. Increasing your deductibles on collision and comprehensive
coverage from $100 to $250, or even $500, will bring your rates
down. Moreover, you may not need collision and comprehensive
coverage if you drive an older car. Ask your agent which discounts
are available to you.
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How does adding drivers to my
policy affect my rates?
The more people you allow to drive your vehicle on a regular
basis, the greater the chances of your vehicle being in an accident.
Teenagers are especially expensive to insure because they are
the least experienced drivers.
A driver's-ed course can help ease the burden of insurance costs
since it teaches your teenager defensive driving techniques.
If your child's high school does not offer driver's-ed, try to
find one offered by another school or a private firm in the area.
After all, the cost of driver's-ed could be cheaper than the
extra cost of your insurance. (Many insurers offer "good
student" discounts as well.)
An adult's driving experience can also affect your rates significantly.
Don't assume that every adult you know has been driving since
age 16 or is a competent driver with a clean record. Again, taking
a defensive driving course is a good way for adults to prove
they are responsible drivers, thus lowering their risk and their
insurance rates. (This is a great solution for new couples who
are jointly insured but unmatched in their driving skills or
experience.)
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Who's watching the insurance
companies?
With few exceptions, your insurance company does not set its
own rates (unless you live in Illinois). It request the right
to charge appropriate rates from your state's insurance department,
which responds with legal approval and authorization, provided
the requested rates are fair.
Every state has some sort of department, administration or
agency that regulates and monitors every insurer operating within
the state's borders. In addition to approving rates, your state's
insurance department is involved in all insurance matters on
behalf of private citizens and businesses. It also issues operating
licenses to insurance companies and agents, based on their ability
to meet the state's requirements for conduct and knowledge about
insurance issues.
Your insurance company works closely with your state's insurance
department to make sure you are getting the best and fairest
possible service within the state's guidelines. Contact your
state's insurance department (listed at the end of this guide)
if you wish to know more about how it serves your interests.
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Do I always need to buy insurance
when I rent a car? Am I not covered by my own policy?
If you have fully insured your own vehicle, including collision
and comprehensive coverage, and rent a vehicle for pleasure only
(while on vacation, for example), you do not need to buy extra
insurance from the rental company. In fact, in most states your
basic rental fee by law will include liability coverage for damage
or injury to others. But different rules apply when you rent
a car for business purposes, so check with your agent for details.
If you do not have your own insurance, be aware that many
car rental liability policies cover you only at the state's required
minimum. Also, you should buy the collision and comprehensive
coverage offered by the rental company for your own protection.
Plus, do not buy a collision damage waiver (CDW) from the rental
company assuming it is insurance. A CDW simply releases you from
financial responsibility if you damage the vehicle you are renting,
provided you comply with the terms of the rental contract. But
those terms can vary considerably, and CDWs are not state-regulated,
which means they are technically not insurance.
It's always a good idea to review your policy before renting
a vehicle and, if necessary, contact your agent for clarification.
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What happens when I loan my
car to someone? Is that person covered by my policy? Am I still
covered?
Not necessarily. Some policies are "Named Driver"
policies. Consult your agent before loaning your vehicle to someone
else.
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Am I covered for natural disasters
or "Acts of God?"
Comprehensive insurance, which covers you for fire and theft,
generally covers you against damage by flood, earthquake, hail
and other natural perils, except when your car is overturned
(which is technically considered a collision). If you have special
concerns about the safety of your vehicle in the face of Mother
Nature's wrath, contact your agent for information on catastrophic
coverage.
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What should I make sure my policy
includes? Do I really need to read all the fine print?
While you don't need a law degree or an agent's license to
understand your policy, you should read it thoroughly. After
all, it is a binding legal contract. If there is anything you
don't understand, ask your agent to explain it to you. You have
the right to know what's in your policy.
If you wish clarification beyond your agent's explanation,
or if you want to be certain that the policy is completely valid,
contact your state's insurance department.
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How can I challenge my insurers
if they refuse to cover a claim?
Usually, insurers that refuse to cover a claim have a strong
legal reason for doing so-- even if you disagree. First, contact
your agent if you feel you are being treated unfairly because
your agent is your strongest advocate in insurance matters. But
if it is a legal problem, you may have to hire a lawyer.
Talk to your agent if you have a problem with your insurer,
and talk to your state insurance department if you want more
specific information on state regulations and legal precedents.
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What actually happens when I
report an accident?
After an accident, you should call your agent as quickly as
possible, to help you complete a claim form, determine what exactly
happened and evaluate any damages or injuries. Your agent then
will contact your insurer's claims adjuster--usually within an
hour of your report --whose job is to work with you to fix the
problem. While compensating you for auto repairs or medical expenses
is easy and immediate, determining liability is more complicated.
The adjuster will begin the settlement process, the length of
which will depend on the cooperation of the other party.
The amount of compensation for your loss can vary according
to the adjuster's analysis of the damage. You do not have to
accept the first amount of money you are offered, if it is lower
than the cost of your repair or recovery. While you may have
to do some homework to prove your reported loss is valid, it's
worth it to be certain your insurer lives up to the provisions
of your policy.
Remember, negotiating with an adjuster is just business--insurers
simply want to settle claims fairly in light of possible fraud.
While it is your insurer's responsibility to root out false claims,
you pay the price in the end. In fact, you spend nearly a dime
on every dollar of your premium to cover the false claims of
others. So, try to keep an open mind when working with your adjuster
to settle on a price that's fair to both you and your insurer.
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Do I need special insurance
for a classic car?
You should always talk to your agent about coverage of rare
and valuable property. Since a classic car usually cannot be
replaced, you'll probably want ample compensation if it is lost.
A classic car, because it is rare or unique, may indeed require
a special insurance policy.
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Under what circumstance do I
not need certain types of auto insurance?
While most drivers today are generally insured for collision
and theft, this coverage may not be necessary for every vehicle.
Liability insurance, as mentioned earlier, is essential and
in many states required. But if you drive a clunker--an older
car that isn't worth much money--you may be able to do without
collision insurance. If you have an accident, repair costs could
easily be higher than the value of your vehicle, thus "totaling"
it. This means your insurer will pay you the total book value
of your vehicle, and that could be far less than the cost of
your vehicle's repair. So, collision insurance may not cover
your loss adequately.
Since it depends on special circumstances, ask your agent
for guidance.
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