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The Consumer's Guide to
AUTO INSURANCE |
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Back in 1898 when the first U.S. automobile insurance policy was purchased,
there were barely 100 cars on the streets, nationwide. Horses and carriages
ruled the roads, and the main concern then for both insurers and auto drivers
was any injury those noisy new machines might do to horses.
Today a motor vehicle accident occurs every second. Auto accidents cause an
injury every 14 seconds, and every 13 minutes a car accident results in a
fatality. More than 31 million accidents occur per year, at an annual cost of
almost $100 billion. Theft and vandalism are other major perils facing drivers,
In fact, every 20 seconds another vehicle is stolen.
With more than 150 million drivers and 160 million registered vehicles on the
road today, auto insurance is the most widely purchased of all
property-liability insurance. Drivers buy auto insurance for economic protection
against theft, vandalism, and other risks, but few are familiar with the ins and
outs of their particular policy.
This guide was designed by the Independent Insurance Agents of America to
make it easier for you to know your insurance needs and the many options
available to you. Though this guide does not represent the provisions of any
particular policy, it should serve as a starting point on your road to finding
the best policy for your needs.
Index of Questions
Why do I need auto
insurance?
What are the
different types of policies and what do they cover?
Why and how
are policies priced for different drivers?
How does where I
live affect my premium?
Why are rates
different for different cars, even if the cars cost the same?
What is
"no-fault" insurance?
Do all states
require some kind of liability insurance?
What happens if
I have an accident with an uninsured driver?
Why would my
insurer cancel my policy?
What do I do if my
insurer cancels or refuses to renew my policy?
How do I keep
my insurance company from canceling my policy?
What steps can I
take to reduce my rates?
How does adding
drivers to my policy affect my rates?
Who's watching
the insurance companies?
Do I always need to
buy insurance when I rent a car? Am I not covered by my own policy?
What happens when I
loan my car to someone? Is that person covered by my policy? Am I still
covered?
Am I covered for
natural disasters or "Acts of God?"
What should I make
sure my policy includes? Do I really need to read all the fine print?
How can I
challenge my insurers if they refuse to cover a claim?
What actually
happens when I report an accident?
Do I need
special insurance for a classic car?
Under what circumstance do I not need certain types of auto insurance?
Your car has two unique qualities. First, it is probably one of the most
expensive things you own. Insurance protects your investment and guarantees you
a way of coping with the expense of accidents, vandalism or theft, as well as
securing your financial responsibility to the bank or other institution lending
the money to buy your vehicle.
Second, when you drive, you are operating a powerful machine, weighing one
ton or more and capable of moving at over 100 miles per hour. You are
responsible for the safety of your passengers, your fellow drivers, other
people's property, pedestrians and yourself. Insurance helps you live up to that
responsibility by ensuring your ability to cover the costs of potential damages
or injuries.
You are also required to be financially responsible by state laws, which are
best satisfied through your insurance coverage. In fact, in most states
insurance is a prerequisite to registering your car. So if you want to drive
your own vehicle, you must be insured.
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Auto insurance is divided into several different types of coverage:
General liability covers damage you may cause to other people's
property and injuries to the people themselves.
Collision covers damage to your own vehicle in an accident.
Comprehensive (i.e., fire, theft and other non-collision damage)
covers fire damage to your vehicle, break-ins, vandalism or theft, as well
as natural disasters (earthquake, hail, hurricane, flood, etc.--unless the
vehicle is overturned, then it is considered a collision).
Medical payments insurance, usually in the range of $5,000 to
$10,000, covers medical expenses for injuries. This "good-faith" coverage
guarantees immediate medical payments for you, your passengers and other
parties, regardless of who is at fault. It also covers you and members of
your household in any accident involving an automobile, whether you are on
foot, on a bicycle, in a friend's car, etc.
Uninsured motorist (UM) and underinsured motorist (UIM)
coverage protects you if you are injured in an accident with others who
themselves carry insufficient or no liability insurance.
Extra coverages include expenses for towing, labor, temporary
replacement vehicles, etc. These are generally defined as add-ons or
endorsements to your policy.
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Drivers are grouped according to the level of risk each one poses--i.e., the
amount of loss incurred by insurers within various categories of policy holders.
For various reasons, drivers are categorized by:
Sex--Men have more accidents on the road than women.
Age--Drivers under 25 (and, for some insurers, under 30) are
considered at higher risk of having an accident.
Marital Status--Married drivers tend to have fewer accidents than
single drivers.
Personal Driving Record--Years of driving experience, accidents,
speeding tickets and drunk-driving offenses are all factors in determining
how much of a risk you pose as a motorist.
How You Use Your Vehicle--If you commute by car during rush hours,
you're at greater risk of having an accident than if you only drive for
errands and recreation on the weekends. Drivers who use their own vehicles
for business also are considered to be at greater risk.
Type of Vehicle--The value, size, weight, age of your vehicle--even
the cost of replacement parts--are essential to determining the price of
your insurance. Larger, heavier vehicles are considered at lower risk than
smaller, lighter ones. Plus, more expensive cars are costlier to have
repaired than economy models.
The cost of your insurance policy is based on the average cost of covering
actual losses, spread out over your particular "rating group" as a whole. Of
course, you may never have an accident or have your car stolen, and therefore
will never need to be compensated. But others in your category may not be so
lucky. Your premium will help to pay for their losses, just as their premiums
would help to pay for yours. In other words, you are investing a little today in
case you need a lot tomorrow; your investment is pooled with others, and the
pool pays for your loss.
For example, if you are a 23-year-old man and you park your new sports car on
a downtown street in a large city, you will likely pay more for insurance than a
37-year-old woman who parks her four-wheel-drive in the suburbs, simply
because--based on average losses--you have a greater chance of having an
accident or being the victim of auto theft.
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Where you live (or, more precisely, where you keep your car) has a bearing on
your chances of having an accident or becoming a victim of theft or vandalism.
That's why a vehicle owner in Brooklyn, New York, pays a higher rate than the
owner of an identical vehicle in Casper, Wyoming.
Other factors affecting regional insurance rates include time and efficiency
of police response and law enforcement, local road and traffic conditions and
the quality of local medical services. Insurers even factor in the litigation
rates in a given area--that is, how many lawsuits are filed, go to trial, are
settled out of court and for how much.
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Vehicles are also grouped into categories according to their likelihood of
being damaged, vandalized or stolen. Insurers generally consider the size and
type of vehicle, as well as the value and the cost of repairs (which can vary
greatly, even on vehicles that cost roughly the same). Thus, a new station wagon
is expected to hold up better in an accident than a sports car or a subcompact.
Putting insurance aside, safety is key when buying an automobile. Your life
depends on it! Some cars are considered safer than others because of their
performance record in safety tests and real accidents.
That's why you should research insurance coverage before you buy your car. It
helps you to understand the actual cost and indicates those vehicles with good
safety records. Your insurer will ultimately reward you for putting safety
first.
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No-fault insurance is a system adopted in some states that essentially
bypasses the conventional legal procedure which finds fault in an accident.
(This is the procedure by which you hire a lawyer, file suit and possibly go to
court to prove the accident was the other guy's fault.) No-fault simply does
away with the concept of one party or the other being at fault--no lawyers, no
court, no judge, no jury, no lengthy lawsuits against the other party. This is
considered beneficial to taxpayers, because it eliminates costly legal
proceedings that the state must manage, and to insurance policyholders, because
it helps keep rates down.
If you are insured in a no-fault state and have an accident, you don't go
after the other driver. You contact your own insurer and file a claim. Your own
insurance policy guarantees you immediate compensation for damages, medical
expenses, lost wages, etc.
The type and range of no-fault coverage varies from state to state. What
defines the limitations of no-fault policies can differ in two critical areas:
Threshold--The type of damage/injury or the cost of repair/recovery
that triggers the need for legal action.
Mandated--Benefit Level--The package of benefits (medical, wage loss,
replacement services and other expenses) your state requires you to carry.
The details of no-fault insurance can be complicated. Contact your agent or
state's insurance department for further information.
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No. Some states, while not mandating auto insurance, have "financial
responsibility laws" that require all drivers to be able to pay for any damage
or injury they may cause. However, carrying liability insurance is still the
best way for you to meet your state's financial responsibility requirements.
UM and UIM policies are offered by law in all states, including no-fault states.
In fact, some states require all motorists to carry this coverage in order to
gain protection from inadequate insurance coverage of other drivers.
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First, call the police to the scene to be sure all pertinent information is
properly recorded. Your nerves will be shaken right after an accident, and it
helps to have a calm and knowledgeable person walking you through the necessary
details.
Then, contact your agent immediately and ask about filing a claim. If you
followed all the recommended guidelines when you bought your policy, you should
be covered within the limitations of that policy. Remember, your insurance
policy is designed to protect you.
If the cost of your damages or injuries exceed the amount your policy will pay
out, it may be time to take legal action against the other party. Even if you
have no-fault insurance, sometimes the only way to be compensated is to place
blame and responsibility where it belongs.
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Technically, in most states your insurer can cancel your policy only if:
you fail to pay your premium;
you lose your driver's license;
you are guilty of material misrepresentation during the application
process--i.e., you fail to notify your insurer of a recorded violation, such
as a drunk-driving offense; or
you fail to report a substantial change of risk, such as buying a
high-powered sports car to replace a family sedan.
However, your insurer can choose not to renew your policy for a variety of
reasons.
Do you have a bad driving record? Have you received a lot of speeding
tickets? Have you ever been caught driving drunk? Not only are these scenarios
considered unsafe and illegal, they are justifiable cause for your insurer to
label you a bad risk and refuse to renew your policy. (Some underwriters may
feel compelled to cancel policies after only one accident.)
Where do you live? Has the neighborhood changed in the last few years? Have the
accident or crime rates risen noticeably? As regions are reassessed
periodically, their status could change and you could suddenly find yourself
living in a high-risk area, where your insurer's rates may not be adequate to
cover losses.
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Even "good" drivers can find themselves in the position of being dropped by
their current carrier. Reasons range form a "drinking while driving" violation
or other serious violations (that make you a high risk) to situations outside
your control, such as when insurers in your state are suffering severe business
losses. Overall rises in claims or losses can cause insurers to become highly
selective in determining whom they can afford to insure.
That is why it is important to note that if you are licensed to drive, by law,
you are eligible for insurance. However, your options for new coverage may be
limited. Each state has created and regulates a market of last resort for those
who cannot otherwise obtain coverage. These groups have various names, depending
on the state you live in, such as assigned risk plans or the residual market.
Your agent will know more about the particulars in your state.
Regardless of the reason you were dropped, you need to act immediately to get
another policy. Under no circumstance should you drive your vehicle without
insurance. Call your agent to help you find new coverage. If you do find
yourself in the residual market, the price may be higher but it may be your only
alternative in maintaining your freedom to drive.
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The most obvious way to maintain your low-risk status is to keep a clean
driving record. If you've been in an accident, consider taking a defensive
driving course. Even those of us who have been driving for years rarely know the
simple tricks to preventing accidents through defensive driving.
Also, look into purchasing special safety and security features for your car,
such as anti-lock brakes and an alarm system. Your insurance agent can give you
further tips on how to convince your insurer you're a safe driver.
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Insurers often discount their rates in order to encourage good driving
practices and the use of safety and security precautions. Depending on the
insurance company, you can often lower your rates from 5 to 35 percent.
Sometimes the investment you make in your vehicle is worth the discount, and
sometimes it's simply worth some peace of mind. For example, the purchase of
anti-lock brakes merits a discount from nearly every insurer, but the discount
probably will not pay for the brakes (which cost several hundred dollars) during
the normal life of your vehicle. Anti-lock brakes are touted, nonetheless, as a
life-saving feature ó a serious consideration when safety is a top priority.
Insurers generally offer discounts for:
Safety Features--Anti-lock brakes, air bags and passive restraint
systems (i.e., automatic seat belts).
Defensive Driving--Clean violation record, driver's-ed courses for
teenagers and defensive driving or accident prevention courses for adults
(insurance discounts for the latter are required in some states).
Security Systems--Alarms, electronic locks and disabling devices.
Changing Driving Habits--Commuting by public transit, using a company
vehicle for work-related travel and car-pooling.
Formal Agreements Not to Drink and Drive--The availability of a
discount for signing such an agreement varies among insurers and states.
Buying Home Owners and Auto Policies from the Same Company--If you
own a home and an automobile and you are insured by two different companies,
check into the cost of carrying both policies by one insurer. Your agent can
give you guidance as to which insurers offer discounts.
You can also lower your insurance rates by requesting higher deductibles ó
the amount of money you pay before you make a claim. Increasing your deductibles
on collision and comprehensive coverage from $100 to $250, or even $500, will
bring your rates down. Moreover, you may not need collision and comprehensive
coverage if you drive an older car. Ask your agent which discounts are available
to you.
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The more people you allow to drive your vehicle on a regular basis, the
greater the chances of your vehicle being in an accident. Teenagers are
especially expensive to insure because they are the least experienced drivers.
A driver's-ed course can help ease the burden of insurance costs since it
teaches your teenager defensive driving techniques. If your child's high school
does not offer driver's-ed, try to find one offered by another school or a
private firm in the area. After all, the cost of driver's-ed could be cheaper
than the extra cost of your insurance. (Many insurers offer "good student"
discounts as well.)
An adult's driving experience can also affect your rates significantly. Don't
assume that every adult you know has been driving since age 16 or is a competent
driver with a clean record. Again, taking a defensive driving course is a good
way for adults to prove they are responsible drivers, thus lowering their risk
and their insurance rates. (This is a great solution for new couples who are
jointly insured but unmatched in their driving skills or experience.)
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With few exceptions, your insurance company does not set its own rates
(unless you live in Illinois). It request the right to charge appropriate rates
from your state's insurance department, which responds with legal approval and
authorization, provided the requested rates are fair.
Every state has some sort of department, administration or agency that
regulates and monitors every insurer operating within the state's borders. In
addition to approving rates, your state's insurance department is involved in
all insurance matters on behalf of private citizens and businesses. It also
issues operating licenses to insurance companies and agents, based on their
ability to meet the state's requirements for conduct and knowledge about
insurance issues.
Your insurance company works closely with your state's insurance department
to make sure you are getting the best and fairest possible service within the
state's guidelines. Contact your state's insurance department (listed at the end
of this guide) if you wish to know more about how it serves your interests.
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If you have fully insured your own vehicle, including collision and
comprehensive coverage, and rent a vehicle for pleasure only (while on vacation,
for example), you do not need to buy extra insurance from the rental company. In
fact, in most states your basic rental fee by law will include liability
coverage for damage or injury to others. But different rules apply when you rent
a car for business purposes, so check with your agent for details.
If you do not have your own insurance, be aware that many car rental
liability policies cover you only at the state's required minimum. Also, you
should buy the collision and comprehensive coverage offered by the rental
company for your own protection. Plus, do not buy a collision damage waiver (CDW)
from the rental company assuming it is insurance. A CDW simply releases you from
financial responsibility if you damage the vehicle you are renting, provided you
comply with the terms of the rental contract. But those terms can vary
considerably, and CDWs are not state-regulated, which means they are technically
not insurance.
It's always a good idea to review your policy before renting a vehicle and,
if necessary, contact your agent for clarification.
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Yes. Liability and coverage for physical damage (i.e., comprehensive and
collision) always follow your car. So, if a friend borrows your car and has an
accident, you're still protected against the cost of damages or injuries. Plus,
if the driver of your car is insured, his/her policy will also be available to
cover the cost of damages and injuries.
The same rules apply when you borrow someone else's vehicle-- your own
insurance follows you no matter whose car you are driving. But the vehicle
owner's policy is the key coverage if you have an accident.
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Comprehensive insurance, which covers you for fire and theft, generally
covers you against damage by flood, earthquake, hail and other natural perils,
except when your car is overturned (which is technically considered a
collision). If you have special concerns about the safety of your vehicle in the
face of Mother Nature's wrath, contact your agent for information on
catastrophic coverage.
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While you don't need a law degree or an agent's license to understand your
policy, you should read it thoroughly. After all, it is a binding legal
contract. If there is anything you don't understand, ask your agent to explain
it to you. You have the right to know what's in your policy.
If you wish clarification beyond your agent's explanation, or if you want to
be certain that the policy is completely valid, contact your state's insurance
department.
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Usually, insurers that refuse to cover a claim have a strong legal reason for
doing so-- even if you disagree. First, contact your agent if you feel you are
being treated unfairly because your agent is your strongest advocate in
insurance matters. But if it is a legal problem, you may have to hire a lawyer.
Talk to your agent if you have a problem with your insurer, and talk to your
state insurance department if you want more specific information on state
regulations and legal precedents.
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After an accident, you should call your agent as quickly as possible, to help
you complete a claim form, determine what exactly happened and evaluate any
damages or injuries. Your agent then will contact your insurer's claims
adjuster--usually within an hour of your report --whose job is to work with you
to fix the problem. While compensating you for auto repairs or medical expenses
is easy and immediate, determining liability is more complicated. The adjuster
will begin the settlement process, the length of which will depend on the
cooperation of the other party.
The amount of compensation for your loss can vary according to the adjuster's
analysis of the damage. You do not have to accept the first amount of money you
are offered, if it is lower than the cost of your repair or recovery. While you
may have to do some homework to prove your reported loss is valid, it's worth it
to be certain your insurer lives up to the provisions of your policy.
Remember, negotiating with an adjuster is just business--insurers simply want
to settle claims fairly in light of possible fraud. While it is your insurer's
responsibility to root out false claims, you pay the price in the end. In fact,
you spend nearly a dime on every dollar of your premium to cover the false
claims of others. So, try to keep an open mind when working with your adjuster
to settle on a price that's fair to both you and your insurer.
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You should always talk to your agent about coverage of rare and valuable
property. Since a classic car usually cannot be replaced, you'll probably want
ample compensation if it is lost. A classic car, because it is rare or unique,
may indeed require a special insurance policy.
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While most drivers today are generally insured for collision and theft, this
coverage may not be necessary for every vehicle.
Liability insurance, as mentioned earlier, is essential and in many states
required. But if you drive a clunker--an older car that isn't worth much
money--you may be able to do without collision insurance. If you have an
accident, repair costs could easily be higher than the value of your vehicle,
thus "totaling" it. This means your insurer will pay you the total book value of
your vehicle, and that could be far less than the cost of your vehicle's repair.
So, collision insurance may not cover your loss adequately.
Since it depends on special circumstances, ask your agent for guidance.
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