Understanding Your Auto Insurance Policy: Part I

Most of us go through the process of purchasing car insurance thinking we have a firm grasp of what we’re buying, but the truth is when we finally receive a copy of the policy in the mail very few of us actually read it and because of the cryptic way coverages are outlined, people only get a basic understanding of what’s actually covered. This lack of understanding can lead to confusion and exasperation after an accident. The following is the first in a series of articles intended to help clarify what type of coverages are provided in a policy and what protections they provide. This article will deal with liability insurance coverage, a coverage which protects you in case you are responsible for an accident.

The Policy and Declarations Page

After purchasing a policy, your insurance company will usually send you two documents. One is a copy of the policy itself, a booklet length document that most people forget receiving and never read because it’s full of dry legal language outlining the specific rules and provisions about what is actually covered. The other is a declarations page, this is usually a one-page summary of what specific coverages you have purchased, the limit amounts of those coverages and what vehicles and drivers are covered by the policy. The declarations page will let you know exactly what kind of coverage you have purchased.

Liability Coverage

This type of coverage is usually required by the state in order to register your vehicle and covers accidents in which you are responsible, paying for the damages and injuries you cause to another person or vehicle. This insurance provides zero coverage for any damages you suffer from the accident regardless of who is responsible. The coverage comes into play only if your insurance company determines you are responsible for any part of the accident. If that turns out to be the case then your insurance will determine what they will pay the other party. An insurance adjuster will determine responsibility for the accident and the value of any damage or injury claims due to the accident. The coverage is usually separated into bodily injury and property damage coverage.

Bodily Injury Liability Coverage

The bodily injury portion is split into two limit amounts and is usually sold in the following tiers; $15,000/$30,000 (This is usually the minimum amount offered by most companies) $25,000/$50,000, $50,000/$100,000 up to $250,000. These amounts are usually designated in policies in simpler numbers; 15/30, 25/50, 50/100 and so on. The higher the limits the more expensive your monthly payments will be.

The first amount listed is the maximum your policy will pay any individual for an accident in which you are found to be at fault. The second amount is the total maximum amount your insurance will pay for that loss. This distinction can be confusing, as an example if you hit a vehicle with 3 or more passengers and you carry a 15/30 policy no one person can receive more than $15,000 as a settlement and your insurance will only pay a maximum of $30,000 for the entire loss regardless of the number of passengers and the extent of their injuries.

Knowing what limits you carry is important because your insurance is required to pay out only to the extent of your limits. If the damages exceed those limits then you may be personally responsible for the remaining amount if the other party decides to pursue the matter in court. If you owe $50,000 but only carry $15,000 in coverage your assets, including property and bank accounts, may be in jeopardy of a court judgement. This is why it is important to have the right amount of coverage to protect your assets. The more assets you have that may be at risk of exposure from an accident,such as equity in a home, the higher your coverage limits should be.

Property Damage Liability Coverage

This insurance is sold in one lump sum in increments of $10,000, $15,000, $25,000, $50,000 and $100,000. It’s usually bundled with the bodily injury portion so the lower amounts correspond to the lower bodily injury limits. For example a 15/30 bodily injury policy will usually come with $10,000 in property damage coverage, the higher the bodily injury limits the higher the property damages limits. This coverage will pay up to the limits for any damage you cause to another vehicle or any other property such as a building or business. If the damages exceed the limits of your policy then the victim can pursue you for the difference in court. If the victim decides to use their own insurance then their insurance company can collect against you personally for that loss if your limits are not enough to pay for the damages. Again it is important to make a personal assessment of your assets and determine the amount of coverage you need to protect you against a court judgment or other collection efforts.

Hopefully this article helps explain liability insurance and start the processing of determining if you are appropriately covered. If you have any questions regarding your policy and coverage or have been involved in an any accident please feel free to contact my office at (626) 487-9521 for a free consultation.