Auto Insurance: How to Know What You Are Buying

Personal risk management includes knowing your policies and what they cover. The following article will help you understand the various parts of your personal auto policy (PAP) and what to look for.

When you buy auto insurance, you enter into a legal contract with your insurer. The policy and any attachments (called “endorsements”) spell out the terms of the agreement and what the policy covers, along with any limitations or exclusions. An auto policy has the following parts:

Declarations Page

The first page of your policy, the declarations page outlines your agreement with the insurance company. It contains information personalized for you, so you will want to review it to ensure information is correct. This includes the name of the insurer and policyholder(s), policy number, policy period, description of insured vehicle(s) and their identification numbers, and the garaging address.

The declarations page also lists the financial details of your agreement, including the coverages you have selected, the limit of liability for each (the maximum the insurer will pay for this type of claim), and the premium for each type of coverage.

It also lists endorsements, or additional coverages you have bought, plus their premium.

If you have a loan on the car(s), it will list your bank as “loss payee,” meaning the policy will pay the bank in case of a total loss to the car.

It should also list any discounts or credits you might have. Finally, it lists the forms that make up the rest of the policy, along with any endorsements, or additional coverages that you buy.

Insurance Policy

The policy itself forms the second part of the insurance contract. This is almost always a standard form. Most policies include the following sections:

Insuring Agreement. In the insuring agreement, your insurer states that it agrees to pay any covered claims you incur during the policy period, up to stated policy limits, as long as you pay your premiums.
Definitions. Following the insuring agreement, the policy will define some of the terms used in the rest of the policy.

Part A – Liability Coverage. Every state requires owners to have a certain minimum of liability coverage, usually expressed as three numbers, such as 25/50/20. The first number refers to the per-person bodily injury limit, or the maximum a third party injured in an accident would receive from the policy, in thousands. The second number indicates the per-accident bodily injury maximum in thousands. This policy would pay a maximum of $50,000 in bodily injury claims per accident, regardless of how many people were injured. The final number indicates the property damage limit per accident, which in this case would be $20,000.

Part B – Medical Payments Coverage/Personal Injury Protection Coverage. In states with fault-based auto insurance systems, this coverage helps pay medical bills of the insured if injured while driving, while a passenger in another car or as a pedestrian. In no-fault states, you might have personal injury protection, which would cover your medical payments.

Part C – Uninsured Motorists Coverage (UIM). Not all drivers buy required liability coverage, so this section covers you if you are involved in an accident with an uninsured driver. If you lack this coverage, an accident with an uninsured driver could leave you with repair or medical bills, even if the accident was not your fault. Although it’s optional, we highly recommend you buy this coverage.

Part D – Collision and Comprehensive Coverage. These optional coverages pay for property damage to your own car. Collision coverage pays for damage by impact with another car or object, regardless of whether you are at fault. Comprehensive covers your car from loss or damage from other causes, such as theft, fire, vandalism, water or animals. Whether you opt to buy these coverages or not should depend on the value of your car and your risk tolerance.

Part E – Duties After an Accident or Loss. Included in every policy, this section outlines your responsibility to notify your insurer about every accident promptly, and other responsibilities.

Part F—General Provisions. This section describes the conditions that apply to your coverage. If you have questions on any of these, we are happy to discuss them with you.

Optional Coverages. In addition to the coverages outlined above, many insurers offer additional coverages, such as personal injury protection (additional medical coverage for you and insured family members), towing/labor coverage, coverage for electronics and more. Please contact us for more information.