INSURANCE 101
Insurance Coverage Definitions | Car Insurance Coverage
Auto insurance coverage is packaged into different coverage types. It is usually easiest to determine what you are required to purchase. Then, you decide what you have that needs to be protected. You are buying insurance to protect yourself (your family) if you suffer a loss to your person or property. You purchase insurance to protect yourself (your family) from losses suffered by others. Below is a breakdown of each car insurance coverage type to help you understand more about what each type of coverage protects. Next to each class is usually associated with that coverage type (i.e., BI and PD).
LIABILITY COVERAGE (LIABILITY)
BODILY INJURY LIABILITY (BI):
Covers other people's bodily injuries or death for which you are responsible. It also provides for a legal defense if another party in the accident files a lawsuit against you. Claims for bodily injury may be for such things as medical bills, loss of income, or pain and suffering. In the event of a severe accident, you want enough insurance to cover a judgment against you in a lawsuit without jeopardizing your assets. Bodily injury liability covers injury to people, not your vehicle. Therefore, it is a good idea (and usually a company requirement) to have the same coverage level for all of your cars. Bodily Injury Liability does NOT cover you or other people on your policy. Coverage is limited to the terms and conditions contained in the system. It is mandatory in most states.
How much protection does this coverage provide?
The dual coverage limits refer to the maximum amounts paid per person, per incident, respectively.
Essential things to keep in mind when selecting your Bodily Injury limits:
If you select limits that are too low, you could be putting yourself at risk financially.
For example, if you or a driver covered by your policy cause a severe injury where damages exceed your limits, you will be held responsible for the amount above your limits. To make that payment, you could be forced to liquidate property, savings, and other assets, or your future earnings could be attached. By purchasing liability limits to account for your current assets and future net worth, you can help protect yourself against this risk.
PROPERTY DAMAGE LIABILITY (PD):
Covers you if your car damages someone else's property. Usually, it is their car, but it could be a fence, a house, or any other property damaged in an accident. It also provides you with a legal defense if another party files a lawsuit against you. It is a good idea to purchase enough of this insurance to cover the amount of damage your car might do to another vehicle or object. Coverage is limited to the terms and conditions contained in the policy.
How much protection does this coverage provide?
The coverage limits refer to the maximum amounts that will be paid per accident.
Essential things to keep in mind when selecting your Property Damage limits:
If you select limits that are too low, you could be putting yourself at risk financially. For example, if you or a driver covered by your policy cause a severe accident where damages exceed your limits, you will be held responsible for the amount above your limits. To make that payment, you could be forced to liquidate property, savings, and other assets, or your future earnings could be attached. By purchasing liability limits to account for your current assets and future net worth, you can help protect yourself against this risk.
Related Coverage:
Limited Property Damage, which is available in Michigan. It protects if you are at fault in an accident that causes damage to another vehicle.
PHYSICAL DAMAGE COVERAGE (COMP AND COLL)
COMPREHENSIVE COVERAGE (OTHER THAN COLLISION, OTC, COMP):
Covers your vehicle and other vehicles (in limited scenarios) you may be driving for losses resulting from incidents other than collision. For example, comprehensive insurance covers your car's damage if it is stolen; or damaged by flood, fire, or animals. It pays to fix your vehicle less the deductible you choose. To keep your premiums low, select as high a deductible as you feel comfortable paying out of pocket. Coverage is limited to the terms and conditions contained in the policy. A state does not require this, but if you have a loan or a lease, then the lien holder will need it.
How much protection does this coverage provide?
The amount you see typically refers to the deductible or the portion of a claim you are responsible for paying.
A higher deductible can substantially lower the cost of insurance premiums. You should balance these savings against your ability to absorb a more considerable out-of-pocket expense.
For example, if you set your deductible at $1,000 and your car sustains damages totaling $1,500, you will pay $1,000, and your insurance company will pay $500.
Who might benefit from buying Comprehensive coverage?
If your car is financed or leased, the finance company will probably require that you carry this coverage.
If you have a newer vehicle or one in excellent condition, you may need this coverage to replace or repair the car in case of loss.
If you have an older car or one in poor condition, you may not want to pay for this coverage.
COLLISION COVERAGE (COLL):
Covers damage your car when your car hits or is hit by another vehicle or other objects. Pays to fix your vehicle less the deductible you choose. To keep your premiums low, select as large a deductible as you feel comfortable paying out of pocket. For older cars, consider dropping this coverage since coverage is usually limited to the cash value of your vehicle. The scope is limited to the terms and conditions contained in the policy. A state does not require this, but if you have a loan or a lease, then the lien holder will need it.
How much protection does this coverage provide?
The amount you see typically refers to the deductible or the portion of a claim you’re responsible for paying.
A higher deductible can substantially lower the cost of insurance premiums. You should balance these savings against your ability to absorb a more massive out-of-pocket expense.
For example, if you set your deductible at $1,000 and your car sustains damages totaling $1,500, you will pay $1,000, and your insurance company will pay $500.
Who might benefit from buying Collision coverage?
If your car is financed or leased, the finance company will probably require that you carry this coverage.
If you have a newer vehicle or one in excellent condition, you may need this coverage to replace or repair the car in case of loss.
If you have an older car or one in poor condition, you may not want to pay for this coverage.
UNINSURED AND UNDERINSURED MOTORIST COVERAGE (UM)
UNINSURED MOTORIST BODILY INJURY (UM):
Covers you, the insured members of your household, and your passengers for bodily/personal injuries, damages, or death caused by an at-fault uninsured or hit-and-run driver. If you are involved in an accident where the other driver is at fault but has no insurance, your policy will=2 0cover your medical expenses up to your policy limit.
Who is covered?
Policyholder
Other drivers covered by the policy
Passengers
How much protection does this coverage provide?
If the other driver involved in an accident is uninsured, this coverage pays up to the limit you purchase. The coverage limits refer to the maximum amount paid per person, per incident, respectively.
Who might benefit from buying uninsured motorist bodily injury coverage?
Individuals without health insurance may benefit from this coverage because if the limits chosen are inadequate, you will be responsible for paying the additional amount.
UNDERINSURED MOTORIST BODILY INJURY (UNDUM):
Covers you, the insured members of your household, and your passengers for injuries, damages, or death caused by a person's negligence with insufficient insurance. If you have an accident with a person whose coverage cannot meet your hurts, your policy will meet the difference-up to the limit of liability listed on your system.
Who is covered?
Policyholder
Other drivers covered by the policy
Passengers
How much protection does this coverage provide?
If the other driver involved in an accident is underinsured, this coverage typically pays any difference between the other driver’s insurance covers and what your bodily injury coverage will pay. The coverage limits refer to the maximum amount paid per person, per incident, respectively. If the limits you purchase are lower than an accident’s costs, you’ll be responsible for paying the amounts over your limits unless you’re covered by health insurance.
Who might benefit from buying uninsured motorist bodily injury coverage?
Individuals without health insurance may benefit from this coverage because if the limits chosen are inadequate, you will be responsible for paying the additional amount.
Both UM and UNDUM coverage can be combined or sold separately depending on the state and the insurance carrier.
UNINSURED PROPERTY DAMAGE (UMPD):
Covers your auto when property damage is sustained by an insured and the negligent operator does not possess insurance.
How much protection does this coverage provide?
If you don’t have Collision coverage, Uninsured Motorist Property Damage coverage pays up to a certain amount for repairs to the insured car (some states have limits at $3500, some are lower, and some are higher). If you have Collision coverage, Uninsured Motorist Property Damage coverage only pays your Collision deductible (in some states).
Does this coverage replace Collision coverage?
No. the Uninsured Motorist Property Damage alone is not enough to cover all potential car repair/replacement costs. It only applies if you are involved in an accident caused by a driver without insurance coverage.
UNDERINSURED MOTORIST PROPERTY DAMAGE (UNDP):
Covers, when property damage is sustained by an insured and the negligent operator possess insurance. Still, the limits of liability carried by the negligent driver are not sufficient to cover the damages.
How much protection does this coverage provide?
If you don’t have Collision coverage, Underinsured Motorist Property Damage coverage pays up to a certain amount for repairs to the insured car (some states have limits at $3500, some are lower, and some are higher). If you have Collision coverage, Underinsured Motorist Property Damage coverage only pays your Collision deductible (in some states).
Does this coverage replace Collision coverage?
No. Underinsured Motorist Property Damage alone is not enough to cover all potential car repair/replacement costs and only applies if you are involved in an accident caused by a driver without enough liability insurance coverage.
Both UMPD and UNDPD coverage can be combined or sold separately depending on the state and insurance carrier.
OTHER COVERAGE TYPES
MEDICAL PAYMENTS (MEDPM):
It covers medical expenses for you and your passengers injured in an accident. There may also be coverage if, as a pedestrian, a vehicle injures you. This coverage applies, regardless of who is at fault. Medical Payments may also cover policyholders and their family members when they are injured while riding in someone else's car or when a car hits them while on foot or bicycling. Coverage is limited to the terms and conditions contained in the policy.
Who might benefit from buying Medical Payments coverage?
If you and your regular passengers already have health insurance coverage similar to expenses, medical payments coverage may be unnecessary. Check your health insurance policy for details.
RENTAL CAR REIMBURSEMENT (RREIM):
Covers are renting a car if your car is not drivable or your vehicle is being repaired because of a covered accident.
TOWING AND LABOR (TL):
Also, referred to as Tow Club, Emergency Road Service, Emergency Roadside Service
Coverage is only available if you purchase Comprehensive and Collision Coverage. Some policies limit the scope to pay only when a claim has been issued against your physical damage coverage (an accident). Coverage limits are different for each carrier, but typically, this is what is covered.
Replacement Cost VS Actual Cash Value
The easy explanation between RCV and ACV is the difference between “new” and “used.” Replacement cost is the item's current price, new. “What will it cost when I replace it?” Actual cash is the item's used price, old. “How much money would I have gotten since I used it for five years?”
Replacement cost, by definition, is usually a more tremendous dollar amount or value than actual cash. Whether RCV or ACV applies, the applicable cost is based on replacing the lost or damaged building material or personal property item with an exact replacement or building material or unique property item equal to the original. If the building material or individual property item is no longer available, the replacement may be better than the original.
Replacement Cost Value (RCV) is the maximum amount your insurance company will pay you for damage to covered property without a depreciation deduction. The RCV payment is based on the current cost to replace your property with a new, identical, or comparable property. Example: Five years ago, you paid $100, plus sales tax, for an item. The item is no longer available, but a comparable item currently costs $125. With RCV coverage, the maximum amount your insurance company will pay you for the item is $125, plus sales tax.
Actual Cash Value (ACV) is the amount your insurance company will pay you for damage to covered property with a depreciation deduction. ACV is the replacement cost of a new item less depreciation. Example: Five years ago, you paid $100, plus sales tax, for an item. Since ACV is the current replacement cost less depreciation, you must consider “wear and tear,” if any. If the thing had a reasonable life expectancy of ten years, and you used it for five years, the item possibly could have depleted 50% of its value. The article, or a comparable equivalent if the item is no longer available, currently costs $125. With ACV coverage, the maximum amount your insurer will pay you for the item is $62.50, plus sales tax (current replacement cost, $125, plus sales tax, less 50% depreciation).
Depreciation is defined as the loss in value from all causes, including age and wear and tear.