Auto insurance works like this, you pay a monthly premium and the auto insurer agrees to provide financial protection up to an amount in certain events as detailed in a legally binding contract between the insured and the insurer. The contract typically covers both the automobile and the operator.
Although car insurance is the most popular vehicle coverage type, auto insurance actually refers to coverage for any road-based vehicle. That being said, there are enough commonalities to discuss how auto insurance works below. Keep reading to find out how different auto policy types work, what they cover, and what they cost.
How an Auto Insurance Contract Works
Auto insurance, be it car insurance or another type, offers financial protection in exchange for a premium. You make premium payments to the insurer periodically (usually once a month) and in return you can continue your auto insurance contract. If you miss a payment, you risk having a lapse in coverage or having your coverage rescinded.
How Auto Insurance Premiums Work
Among other things, the dollar amount of your premium depends on what much you want your policy to cover as well as how much financial risk you, as the customer, pose to the insurance company. If your insurer, in calculating a statistical estimation of your financial risk, decides that you could cost them a lot of money in the future, you will have a higher premium.
How Auto Insurance Claims Work
When something costly happens to you or your vehicle on the road – for example, you get into a car accident or your motorcycle is stolen – you will contact your insurer with all of the details of the incident to file a claim. The insurance company will assign a claims adjustor to your case.
In the case of a car accident your claims adjustor will investigate the incident by reviewing your report, reading the police report, getting in contact with you, inspecting your car, analyzing your policy, and examining any other relevant evidence. Once the adjustor has seen enough evidence to make a decision, your insurance company will resolve your case; this may include assigning a percentage of fault to you for the incident and making payments for the expenses.
In the best scenario, your case will be closed. You will pay an excess payment (also called a deductible) – a fixed dollar amount specified in your coverage contract that you pay towards a claim’s expenses – and your insurer pays for the rest of the costs.
Auto Insurance Litigation and Denied Claims
In a less favorable situation, your insurance company may make a decision that you feel does not fulfill the protections promised you in your policy. If you are unhappy with your insurer’s settlement offer, you can dispute the claim by speaking with your claim adjustor or your claim adjustor’s supervisor, initiating mediation or arbitration, or even hiring an attorney and taking the company to court.
What Does Auto Insurance Cover?
There are many different types of vehicle insurance policies; figuring out what can be covered by each auto insurance type can be confusing. However, all the auto coverage types share a lot of basics when it comes to coverage.
In general, the costs that can be covered by auto insurance fall into four categories – liability coverage (for injuries to others and damage to their property), coverage for damages to insured vehicles, coverage for medical expenses, and uninsured motorists’ damages (for when someone with insufficient coverage damages you or your property). However, there are many other specific costs of owning and operating a vehicle which can be covered depending on the policy you purchase.
Here’s a full list of expenses that can be covered by auto insurance policies:
- Medical payments for the insured party
- Cost of repairing physical damage to the insured vehicle
- Bodily Injury (BI) to a third party from a vehicle accident
- Property Damage (PD) to a third party from a vehicle collision
- Court costs for driving-related law suits
- Damages deemed the responsibility of the insured driver in court
- Fire damage to the insured vehicle
- Auto theft or attempted auto theft
- Vandalism by a third party
- Injuries to persons riding in the insured vehicle at the time of an accident regardless of fault in the incident (No Fault Auto Insurance)
- Damage to an insured vehicle created by an accident with an uninsured or underinsured driver
- Medical expenses of an insured driver caused by an accident with an uninsured or underinsured driver.
- The cost of renting a vehicle if yours is damaged
- The cost of towing your vehicle if it’s damaged on the road
- The cost of repairing your vehicle if it’s damaged in a collision
- Roadside assistance
- The cost of repairs on natural wear and tear on your vehicle after its warranty expires
- Damage done to a rental vehicle
- Payment of the cash value of a vehicle totaled (or damaged beyond repair) in a collision
- Damages to insured vehicles by weather
- Damages to insured vehicles by impacts with animals
- “Acts of God” – damages to insured vehicles by events outside of human control (tornados, hurricanes, floods, hail storms, spontaneous collapse of the space-time continuum, etc.)
- Damage by hit-and-run collisions
- Negative equity accrued when you purchase a vehicle (the GAP between the cash value of a car immediately after your purchase it and the amount of money you would owe on it if you were to total it).
- Certain items or pieces of property that are supplemental features of the vehicle but not a part of the vehicle itself (such as GPS systems).
Types of Auto Insurance Policies
There are many different types of auto insurance policies, and often people get so overwhelmed by the different types coverage that they either get a policy that they don’t need or forget to get the coverage that they do.
Only get the types of auto insurance that you need! Learn more about the types of auto insurance policies so that you can decide what kinds of auto coverage are right for you.
Below, we’ll summarize and describe the different types of auto insurance coverages you can get.
Before reading our comprehensive explanation of all of the different types of insurance, we recommend you watch this short overview of some of the most important types of auto insurance.
This is, by far, the most common type of auto insurance; 49 of the states and the District of Columbia require their drivers to have minimum coverage for BI and PD liability insurance, but the minimum acceptable coverage amounts in each category vary from state to state.
Auto Medical Payments (AMP) Coverage:
Auto medical payments (AMP) coverage is insurance against any of your medical expenses that come from auto-accident injuries to you, your household relatives, or your passengers. This also covers you if you get hit by a vehicle as a pedestrian.
Personal Injury Protection (PIP):
In the no-fault states, drivers can purchase Personal Injury Protection (PIP) – also called No Fault Auto Insurance – which covers the expenses of auto accident injuries regardless of who was at fault for the collision.
PIP is only available in no-fault states. In most no-fault states, PIP is required coverage. To get more information on PIP and to see if your state is a no-fault state, please visit our page on Personal Injury Protection, No-Fault insurance, and No-Fault States.
“Full” coverage is a combination of collision and comprehensive coverages (both covered bellow). Liability coverage is also often implied in a full coverage policy.
It also covers the costs of vehicles damaged beyond repair, or “write offs”, with payments to you from the insurance company for the cash value of the totaled vehicle. This type of coverage is almost always optional.
Some common examples of covered incidents are fires, auto-theft, attempted auto-theft, weather damage, and impacts with animals (such as deer). This is usually where expenses and damages from “Acts of God” – events entirely out of human control – are covered. This type of policy is usually almost always optional.
Uninsured/Underinsured Motorist (UM/UIM) Coverage:
If you have expenses that come from a collision in which the driver at fault was a third party who either doesn’t have insurance or doesn’t have a policy that can pay enough to cover the full extent of the damages done, Uninsured/Underinsured Motorist Coverage (UM/UIM) would take over and pay for the damage. This type of insurance also covers your costs in the event of hit-and-run collisions.
Some states require UM or UIM coverage. Be sure to find out if UM/UIM insurance is required in your state.
Other Types of Auto Insurance:
- Loss of Use Coverage — insurance to partially or completely offset the costs of a rental car if your insured vehicle needs repairs
- Loan / Lease (GAP) Coverage — supplemental insurance to protect you from the liability of totaling a vehicle financed on credit
- Vehicle Towing Coverage (Roadside Assistance) — a policy to cover the costs of services you may need when mechanical problems with your vehicle leave you stranded on the road
- Auto Repair Insurance — coverage for the costs of repairing damage to your vehicle by natural wear and tear
- Rental Insurance (CDW or LDW) — insurance to cover the costs of damages done to a rental vehicle
- Nonstandard Private Passenger Auto Insurance — a specialized insurance policy for drivers in special situations (like a driver with an exceptionally bad driving record or a specialized high-risk / high-value vehicle)
For full explanations and specifics about all the types of vehicle insurance listed above and more, visit our page on the Types of Auto Insurance.
Costs of Auto insurance
There are few different kinds of costs of auto insurance. First, the most universal type of auto coverage cost is a premium – a dollar amount you pay periodically to the insurance company in return for coverage. Any vehicle insurance policy you purchase will have a premium.
Second, the other common auto insurance cost is a deductible (or deductible). This is a fixed contribution that you pay towards a covered expense each an expense is billed to your automotive insurance policy. Not all types of auto coverage policies have deductibles or excess payments, but many do – for example, collision coverage, comprehensive coverage, roadside assistance policies, and auto repair coverage are subject to deductibles.
Let’s take a look at a quick example of how these two costs work. Let’s say that you have taken out a collision coverage policy on your motor vehicle. Every month, regardless of whether you need the insurance in that time period, you would pay your premium to the insurance company. Let’s say, for the sake of example, that your collision coverage premium is $348.63 (the 2012 average premium on Collision insurance in California). Let’s also say that your policy specifies a deductible of $300.
If you were to get into a crash sometime while you’re covered by this policy and your vehicle needed $5,000 worth of repairs, you would take your vehicle to a shop or garage, pay them your deductible of $300 towards the $5,000, and let the insurance company pay the remaining $4,700.
There are many different factors that affect how much you’re charged for a premium. The price of the premium for your policy is based on how much financial risk your policy poses to the company. This is based on a comprehensive, statistically-derived estimation process called Auto Insurance Risk Selection.
The calculations involved take into account characteristics of the covered vehicles, the type and extent of the policy’s coverage, any dollar maximum limits and deductibles in the policy, the profiles of all insured drivers, the intended uses of the insured vehicles, and more.
For a detailed explanation on the processes and factors that go into how the insurance companies calculate the price of your premium, please visit our page on Auto Insurance Risk Selection.
For tips on getting the best possible prices and deals on car and vehicle insurance, visit our page on Shopping for Car and Auto Insurance.
We also have a number of statistics and facts on average premiums in the United States at the More Data and Statistics about Auto Insurance section at the bottom of this page.
What If I Can’t Get Car Insurance?
If you have a recent history of moving violations, car accidents, or auto incidents, or if you have an unusually high number of high-risk characteristics, there’s a chance that you won’t be able to find an insurer on the private market. However, each of the states (and the District of Columbia) use special systems to provide options to those who are unable to obtain car insurance on the private market.
The Shared / Residual Market
If you are unable to obtain auto insurance on the private market, you may be able to purchase private passenger auto insurance through the residual market. If this is the case, you will be placed into an “Assigned Risk Pool”. These policyholders will then be assigned to various insurance providers operating in the state.
For more information, see our page on The Shared or Residual Auto Insurance Market.
The Non-Standard Auto Insurance Market
This is a niche market specifically for drivers who have worse-than-average driving records or who drive specialized cars (for example, high-power sports cars, extremely expensive classic or vintage automobiles, and custom-built cars). This market is made up of small companies who specialize in nonstandard auto coverage as well as the nonstandard divisions of major private car insurance providers.
For more information on this type of niche-market insurance, see our page on Non-Standard Auto Insurance.
Do I Have to Get Auto Insurance?
Every state in the U.S. (and the District of Columbia) requires its drivers to have some minimum form of compulsory auto insurance. How this requirement is enforced and what specifically it mandates varies from state to state. In other words, whether a specific types of auto insurance are compulsory and the minimum auto coverage requirements all depend on what state you live in.
Some auto insurance requirements are:
- Some Minimum Bodily Injury (BI) and Property Damage (PD) Liability insurance is a requirement. Each state has set different minimum requirements on what pay out limits make a liability insurance policy acceptable.
- Personal Injury Protection (PIP) in the No-Fault States
- Uninsured/Underinsured Motorist Insurance
To find out all of the details on required auto coverage, minimum liability limits, and vehicle insurance regulations in your state, be sure to visit our page Car Insurance: Requirements and Regulations by State.
Disputing Insurance Claim Settlements
Above, we discussed how insurance works and what happens in the insurance company when you file a claim. However, what do you do if your insurer comes back with a settlement offer that think is unfair?
If you’d like to dispute the settlement on your claims adjustor’s report, you have all of the following options:
- Speak with your claims adjustor and explain why you believe the settlement offer was inappropriate for the claim.
- Speak with your claims adjustor’s supervisor and provide detailed written documentation to lay out your case.
- Get one or more independent appraisals from independent third parties.
- Hire a lawyer and put together a legal case against your insurer.
- Mediation – a non-binding form of discussion between you and your insurer that’s moderated by an independent third party to help reach a mutually-agreeable compromise.
- Arbitration – a discussion between you and your insurer in which both parties must abide by the rulings and decisions made by an independent arbitrator.
- Court – sue your insurance company for a settlement that you see as more appropriate.
For more details, tips, tricks, and pieces of advice on all of the different steps in disputing an auto insurance claim, see our page on How to Dispute a Car Insurance Claim Settlement.
More Data and Statistics on Auto Insurance
Auto insurance is complicated, and there are many more aspects of auto coverage that we haven’t been able to get to on this page. At FactsOnInsurance, we really want to help! We hope this page was helpful and we recommend visiting some of the other pages in the Auto Insurance section of our site to learn more!
In the mean time, here are some additional facts, pieces of data, and cited statistics on car Insurance:
- According to the Insurance Research Council, in 2012, 12.6% of all drivers were uninsured.
- The IRC calculated that Oklahoma was the state with the highest percentage of uninsured drivers (at about 26%), and Main was the state with the lowest percentage of uninsured drivers (at about 4%).
- By the Insurance Information Institute’s estimation, (same source as the above two facts) the overall percentage of uninsured drivers in the United States has decreased by 3.4% since 1993 – specifically from 16.0% (in 1993) to 12.6% (in 2012).
- At the present (in 2015), Florida is the state with the lowest bodily injury liability limit ($20,000), and Alaska and Maine are tied as the states with the highest bodily injury liability limit ($100,000).
- There are four states tied with the lowest minimum property damage liability limits (at $5,000) and 16 states tied for the highest minimum property damage liability limits (at $25,000).
If you’d like to find more statistics and see the original data for most of the facts listed above, the definitive, most comprehensive resources is the Insurance Information Institute’s section on Facts and Statistics. This site is the source that compiled much of the data from which the above facts (and others on our site) were derived. They also have data from studies in the past which we didn’t include, but may be useful for those curious about historical trends in Auto Insurance data.