The Most Misuderstood Parts of an Auto Insurance Policy
Six key questions every driver should ask about their auto insurance
Auto insurance is something most drivers know they need, but few totally understand what their policy actually covers. From deductibles to liability limits to pages of fine print, it’s easy to overlook the details and focus on the monthly premium instead. But understanding all the parts of your contract will be important when it’s time to file a claim. Here are some questions you should ask your agent to ensure you understand your auto insurance policy.
What does a “full coverage” policy actually cover?
Full coverage means that your car has both collision and comprehensive coverage. Fire, theft or vandalism losses, plus collisions with another vehicle, a person or an object, would be covered under a full-coverage policy, according to AAA insurance agent Brian Warchol of Mount Laurel, New Jersey. But just because you have a full-coverage policy doesn’t mean all damage will be covered, as intentional acts, such as purposely crashing your car, are excluded.
Does the insurance follow the car or the driver?
You typically hear that insurance follows the car. However, there is some nuance to understand. “If I am driving someone else’s car with permission and I’m involved in an accident, the insurance of the person whose car I am driving would be the first to pay for any bodily injury to others as well as property damage or collision damage to the car itself,” Warchol says. “But, in some states, that insurance company can subrogate against my insurance company to recoup any money paid out. That is, they can seek payment from my insurance company for all the damages they paid out. Also, if I’m injured, then my company would pay for my medical expenses under my policy.”
What’s the difference between a deductible and a monthly premium?
You may think that once you’ve paid your monthly premiums, you will not have to pay anything else if a loss occurs. This is not the case. The deductible is the amount you will pay before the insurance company pays for the loss. While increasing your deductible can help lower your monthly premiums, remember that if your car is damaged in a crash or other loss and you are at fault, you will be responsible for paying the deductible. So, don’t make it more than you can afford.
What is actual cash value, and how does it impact your new car?
If your vehicle is totaled in a crash or stolen and not recovered, your insurance company will typically pay the car’s actual cash value, not the amount you originally paid or the amount you still owe on your loan. Actual cash value reflects the vehicle’s market value at the time of the loss, taking depreciation into account.
“The minute you drive off the lot, the car depreciates,” explains AAA insurance agent Jennifer Woloszyn of Hamilton, New Jersey. This means that if you have a total loss, you will have a gap between the amount you paid and what your insurance will pay out. If you are adding a new car to your auto insurance policy, check whether your insurance company offers gap protection or new-car replacement coverage. This can help you protect your investment in the event of a loss.
What do the liability limits mean?
When you look at your policy, you’ll often see liability limits listed as three numbers, such as 35/70 and 25. These numbers represent the maximum amount (in thousands of dollars) that your insurance company will pay if you’re responsible for an accident. Under a policy with these limits, which are the minimum allowable amounts in New Jersey, the insurance company would pay a maximum of $35,000 per person and $70,000 per accident for bodily injury, and a maximum of $25,000 per accident for property damage.
Woloszyn explains that it is important to make sure you have high enough limits to protect yourself, especially if you are a homeowner or have other large assets. State-required minimum limits may leave you financially exposed at the time of loss, so consider increasing your limits or adding an umbrella policy, which provides extra liability coverage on top of your auto policy and pays out when the primary policy limits are exceeded.
When should you consider paying out of pocket instead of filing a claim?
If you’re in a single-car crash with minimal damage, you might consider paying for the damage out of pocket instead of filing a claim with your insurance company. Woloszyn provides an example: If your “claim is $200 and your deductible is $100, sometimes it’s better just to pay out of pocket than to submit the claim so that you don’t incur a surcharge [an increased premium as a result of the accident] in the following years.”
The importance of reviewing your policy
Auto insurance policies can be complex, but taking the time to review your coverage can help you make more informed decisions so you can be confident every time you get behind the wheel.