I’ve been working claims in the car insurance industry for an entire year now, and it has taught me one thing: people do not understand what coverage is on their car insurance policy.
This is a huge problem. Here’s the deal: car insurance is a lot more than an annoyance you are required to have by law. There is a reason for it, and I’m here to help you understand why it’s required and why you need it. If you don’t understand the coverage you purchase and pay for, you may be in for a huge disappointment if you get into an accident or something happens to your car. Your insurance policy contains coverages that protect you, your vehicle, and anyone that may be with you when an accident occurs.
Even if you think you’re covered, you may not be and not even realize it. There is no bigger pain that I’ve felt than when I have to tell someone that we can’t help them with the damage to their vehicle because they do not carry the correct coverage. Inevitably, they ask me this question:
But I thought I had full coverage?
Here’s the real truth bomb for you: the term “full coverage” means absolutely nothing.
When I first started training as a claims adjuster, they asked our class: “what does full coverage mean to you?” Everyone had a different answer. That is precisely the issue. You can say you have full coverage but this will mean something different to everyone. It could mean you have the minimum liability requirements per your state and are therefore fully covered should you cause an accident, or it could mean you have every coverage available.
Understanding your car insurance policy requires a deeper dive into the language, and that’s exactly what I’m here to do with you! I recommend grabbing a copy of your policy if you have one, so you can follow along and see exactly what you have, and what you might be missing.
We’ll start with the liability coverages. These are what cover the other party’s damages and injuries if you were to cause an accident. They’re what’s required by the state. They’re called liability coverages because your insurance company is liable to pay the damages to the other party.
>> Liability (aka Third Party) Coverage: For Others
Property Damage Coverage
Say for example that you spilled coffee on your lap and hit the back of another vehicle while they were stopped, cracking their rear bumper. In this scenario, you would be at fault for the accident. Under your Property Damage Coverage, your insurance company (not you) pays for the damage to the other vehicle.
Bodily Injury Coverage
In the scenario above, say the driver of the car you hit bumped their head on their steering wheel and went to the doctor for minor injuries. Your Bodily Injury Coverage would pay for any of their medical bills related to the accident.
Property Damage and Bodily Injury coverages protect you against the other party bringing legal action against you. Keep in mind that these coverages have a limit. Each state has a minimum amount of coverage required – for example, Texas requires you to carry $25,000 in Property Damage coverage, but California only requires $5,000. I strongly recommend carrying over the amount of coverage required. If the damage caused exceeds the policy limits, you will be responsible for paying anything over the limit.
But what about you? What covers you, your car, and your passengers in an accident?
>> First Party Coverage: For You
Back to the rear-end scenario. Say your front bumper is now damaged as a result of the impact, and there’s some crinkling in your hood. Your engine is also making a weird sound and something might be broken. Your Collision coverage will pay for any repairs to your vehicle as a result of something impacting your car. Collision does carry a deductible that you choose when you start the policy and can change at any time.
Your deductible is the amount that you pay for repairs, and your insurance pays anything over your deductible. For example, if the damage costs $2500 to fix and your deductible is $500, you would pay $500 to the repair shop once your vehicle is done. Your insurance will pay the remaining $2000. The deductible applies even if you are not at fault.
Let’s take a break from the rear-end scene. Say there’s a bad storm in your area and your car is covered in hail. That falls under Comprehensive coverage. A lot of things actually fall under this coverage – fire, theft, vandalism, falling objects, flooding, hail, being picked up by a tornado, et cetera. Like collision, this coverage is also subject to a deductible.
If you make payments on your car, it is often a condition of your loan that you carry both collision and comprehensive coverages.
If you’re using Collision or Comprehensive and need a rental vehicle while your car is in the shop, your insurance will pay for it if you have this on your policy. It is often not included automatically, but it is critical. Usually it doesn’t cost more than a few dollars a month (like less than $5), but it can be a huge help if you’re without your car for a while.
Personal Injury Protection and/or Medical Payments
If you’re injured in an accident, your policy may include Personal Injury Protection or Medical Payments coverages. These can assist you with medical bills and out of pocket expenses related to an accident for you and any passengers in your vehicle. The important thing to remember is that these can be used regardless of who is at fault for the accident. Not all states offer these, and some states only offer one or the other, so make sure to check your policy.
>> Miscellaneous Coverages: Additional or Extra
Emergency Roadside/Roadside Assistance
Some insurances will offer optional roadside assistance, such as if you get a flat and need to change a tire, if your car breaks down and needs towed, or you run out of gas. It usually isn’t very expensive and can give you peace of mind.
Mechanical Breakdown Insurance
Not every company offers this, and there are often very specific requirements. Usually the car must be purchased brand new and the very first insurance on that vehicle is the only one that will offer this. It is very similar to a warranty and covers mechanical issues that shouldn’t happen in a brand new car, and doesn’t cost as much as a warranty.
Considering a new car? Here’s some more information about mechanical breakdown insurance.
I highly recommend gap insurance for all vehicles that have a loan (where you make monthly payments to a bank, or lien holder). If your car is a total loss in an accident, your insurance will only cover the value of the vehicle less your deductible. Say, for example, that your car is in an accident and is a total loss, and is worth $8,000. However, you purchased it for more and still owe $10,000 in your loan. If your deductible is $500, your insurance company will pay out $7,500 towards your loan. This means that suddenly, you are responsible for paying your lien holder $2,500. This is a very scary situation.
Gap insurance covers the “gap” between what your vehicle is worth and what is left on the loan. In this example, your gap insurance would pay the $2,500 difference between the value of your car and what’s still owed.
Uninsured and/or Underinsured Motorist Coverage
If you are in an accident and the other driver is at fault, their insurance should pay for any damage or injuries they caused. But what if they don’t have insurance? If you have Uninsured Motorist coverage, your insurance company will handle your damage at usually a lower deductible. If they do not have enough coverage to pay for it all, your Underinsured Motorist coverage can take care of the difference. These coverages are not available in all states, so be sure to check your policy.
One last note if you drive for Uber/Lyft, food/item delivery services, or other business use:
Your personal auto policy likely includes a clause that specifically disclaims coverage if you use your car for these purposes. Your policy can be cancelled and it can leave you legally liable for an accident. You definitely want to look into getting a policy specifically built for vehicles used for business!
Got more questions about strange or confusing terms in your auto policy? Check out NerdWallet’s Glossary of Key Terms in Car Insurance.