The Basics of Personal Auto Insurance
A story about personal auto insurance:
Mary is a medical researcher at a major university. She and a colleague are driving back from lunch one afternoon, when they are involved in a serious collision. Mary sideswipes a car that unexpectedly turned in front of her. She veers off and knocks over a lamppost.
The airbags deploy, and the seat belts lock up, but everyone is fine. Other than some bumps and bruises, no one is seriously hurt. After the EMTs and police arrive, Mary and her colleague go to the hospital as a precaution. They are both treated and released a couple hours later. The other driver is treated at the scene and released. The towing company tows both cars away. Both drivers contact their respective insurance companies.
While Mary is technically not at fault, they discover the other driver didn’t have great car insurance. So they are going to have some serious problems. Luckily, Mary has great insurance. It will cover the damage to the lamppost (property damage). It would also cover Mary and her colleague’s medical costs (bodily injury). Lastly, it would cover the damage to Mary’s car (collision). In addition, because she had the right amount insurance, Mary avoided paying thousands of dollars out of her own pocket to make up for any overages.
What Is Personal Auto Insurance?
Personal auto insurance is insurance you have on your personal car or truck. The law requires it, and everyone is supposed to have at least a couple of components of it in order to be compliant with their state laws.
Personal auto insurance comprises two areas: liability and physical damage, which together compose full coverage.
Coverage for Third Parties (Other vehicles, someone else’s property)
Liability insurance is coverage for third parties, and comprises two sections, bodily injury and property damage. Bodily injury has two minimums, and every state has a different required minimum. In New York, those limits are $25,000 and $50,000 — $25,000 is the amount paid out per person, and the $50,000 is the total amount paid per accident.
Some states have lower minimums, like $15K/$30K, and some even have $10K/$20K. However, those increase in increments — $25K/$50K, $50K/$100K, $100K/$300K, $250K/$500K. Anything above that, often around the $1 million range, and the limits turn into a single amount called the combined single limit (CSL). Then, it covers any combination of bodily injury and property damage costs up to that limit.
In reality, there are three limits. The bodily injury limit is $25K/$50K, and the property damage goes in correlation. In NY, the lowest property damage minimum you can have is $10,000. That amount increase in increments to $25K or $50K. Almost 95 percent of the population has one of those three amounts. We tell our clients that the more assets they have, the higher those limits should be.
You are free to choose whatever amount you want otherwise, with one exception. If you are leasing the vehicle, the bank owns it, and they typically require $100,000/$300,000/$500,000 limits. Otherwise, if you own the car yourself (even if you are financing it), then you can choose your limits.
Property damage – which has a $10,000 minimum – is the damage you cause to someone else’s property, including their vehicle. However, we usually recommend that you get more than that amount. What if you got into a small fender bender with a Jaguar? Even a small, low speed collision with a Jag will have repairs higher than $10,000, and you do not want to be on the hook for the rest. If the repairs were $20,000, your $10,000 property damage would only cover the first $10,000 in repairs. You would have to cover the rest yourself.
It’s also possible to increase the amount of your property damage coverage without increasing your liability costs. Be sure to ask your insurance agent about it.
Coverage for Your Vehicle and Property
As we’re talking about liability insurance, keep in mind that these two areas have nothing to do with your vehicle. This is only for the coverage of others’ vehicles and property, not yours (that’s physical damage). Liability insurance covers your car hitting another vehicle, a wall, a light post, a fence, or even a building.
Physical damage has two coverages: comprehensive and collision. Comprehensive coverage is for your vehicle, usually for things like theft or vandalism. Collision covers any accidents your vehicle is involved in. When you take these two areas and combine it with liability, that’s full coverage insurance.
Beyond that, you can choose to add rental and towing coverage. That is, getting your car towed and having a car to rent when your car is in the shop, after an accident. In our story above, this kind of insurance would have provided a new car for Lester to drive around while his was being repaired.
Finally, there are two other areas of coverage under physical damage: underinsured and uninsured. This comes into play if you’re involved in an accident, and the person who hits you doesn’t have enough insurance to cover your damages, or they don’t have any insurance at all. Then, your policy will pick up the limits. Those limits are the same as your base limits, so $25,000/$50,000. This is what saved Mary from paying out of her own pocket.
Who Needs Personal Auto Insurance?
Any individual who owns a car needs to have personal insurance. If someone else drives the car, say a teenage driver driving a parent’s car, the parent needs to have coverage that includes the teenager. The government mandates insurance, so everyone who owns a car has to have it.
A business owner who also owns their own car may wonder whether they should have the business “own” the car, or if they should personally own it. It’s hard to make an absolute statement, since there are so many variables. In this case, it is a good idea to discuss this with your insurance agent and your accountant, and look at all the different possible scenarios.
If you are not sure, or if you have other exceptions or situations that you need to consider, it’s important to talk to your insurance agent. They will advise you about what might be the best option for you. They’ll ensure that you not only to comply with all the appropriate laws but also get the best possible coverage available.
Driving Passengers in Your Personal Vehicle
While normal personal auto insurance will cover you and your passengers — usually family and friends — people who drive for Uber and Lyft do not have regular personal auto insurance. These people have purchased Commercial Auto Insurance, which ride-sharing companies require. It’s the same kind of insurance that taxicabs, private car services, and limousines are required to have. In New York, the Taxi & Limousine Commission regulates this kind of insurance.
The limits on personal insurance may vary from state to state. Uber, for example, requires its drivers to have a $100,000/$300,000 minimum on their commercial auto insurance. So, if you want to drive for one of the ride sharing services, you’ll need to speak to an insurance agent about the right kind of auto insurance for your business.
Are There Any Special Kinds of Insurance Add-Ons?
There are not very many add-ons for personal auto insurance. There are plenty for commercial auto, however. But there are a couple you should be aware of.
For example, if you start driving your personal vehicle for a delivery job, like a pizza restaurant, they should carry a policy called Hired & Non-owned, which covers you in case of an accident on the job. Hired is used when the driver has his or her own car, and are paid to deliver the pizzas. Unowned is when you drive the owner’s personal car.
Contractors also use this endorsement as well. A contractor may send one of their workers to the lumberyard or hardware store to pick up something they need, but the worker travels in her own car. That worker’s car is then covered under the Hired & Non-owned policy or endorsement.
Other situations may include a salesperson who covers a geographic territory, a regional manager who has to visit several stores in an area, or even a contractor who works for a construction company, but is required to use their own vehicle on the job.
This is an important endorsement for companies to have, so make sure your employer has it. If they don’t, ask your insurance agent what kind of coverage is available for you.
Are There Limitations to the Scope of Personal Auto Insurance?
No, not really. It’s very difficult to deny coverage, because it’s mandated that everyone has to have auto insurance. Some companies may drop a customer after they have to pay out following an accident, but denials from the outset are very rare, unless there is true misrepresentation or fraud.
The Big Takeaway
The big takeaway is that every car needs auto insurance, regardless of how you use the car.
It is also important to have as much coverage as you can afford, given all the different scenarios of what could go wrong. Whether it’s getting involved in a small fender bender or a major accident, you need enough auto insurance coverage to protect you and your passengers from serious financial loss.
Unlike commercial auto insurance, personal automobile insurance is straightforward, but that does not mean it’s easy. Rather than figuring everything out yourself on one of those “buy your insurance online” websites, it’s important that you speak to a professional insurance agent who has experience helping individuals and families manage their automobile insurance.