Some Elementary Concepts in Auto Insurance

Illustrative car crash
Illustrative car crash

Legally, every car owner in United States must be covered under some type of auto insurance as stated by the Department of Motor Vehicles or DMV. This protects the owner of the car against damage to himself or his car, as well as protects other people from damages he may inadvertently cause.

Auto Insurance Coverage includes several definitions. These definitions determine the responsibilities and obligations of the policy holder, as a car owner, in case of damage to his car, the theft of his car, or an involvement in a car accident.


Property Coverage: this defines the coverage for which the insurance company is responsible for when the policy owner’s car is damaged (through accidents or vandalism) or when it is stolen. Clearly, a very important option.

Liability Coverage: this defines the coverage the insurance company provides for the policy holder when he is involved an accident and causes bodily or property damage to someone else. By having this option, the policy holder is protected, as defined by his policy, from the financial costs.

Medical Coverage: this term applies to the amount of money paid for the hospitalization and treatment of injuries incurred during an accident, as well as the costs of rehabilitation, and wages lost by the injured person during this time of incapacitation.

The following are standard policies

There is a great variety of auto insurance policies which exist for the purpose of indemnifying the car owner in case of loss, injury or damage. These also can be classified into several types.

Third Party: this is the simplest and cheapest policy, and the bare minimum, a car owner must possess if he owns a car. It financially protects an insured individual when he causes damage to someone or their property.

Fire and Theft: this type of policy offers more protection to the policy holder, and will cover the cost of a car that is burnt or is stolen. Note that it does not cover any damages incurred if involved in a car accident.

Collision: this type of policy covers the cost of repairs of the insured car even if the policy holder is responsible for the accident that caused the damage.

Personal Injury Protection (PIP) or Medical Payments (MedPay): this policy protects the driver and any passengers that were in his car during a car accident, by reimbursing them for medical bills and lost wages. Note that the question who caused the accident is irrelevant for this policy.

Comprehensive: this type of insurance offers the most protection to the policy holder, and covers everything from accidents, to auto theft, to fire damage, to act of god (vandalism, hurricane, flood). It can even cover the cost, at least partially, of medical expenses suffered during an accident and of items stolen from a car. Unsurprisingly, this is also the most expensive car insurance.

The following are specialized policies

The following are specialized policies that only some people may be interested in.

Classic car insurance: covers a car that is older than 25 years. In principle it is equivalent to a standard comprehensive car insurance, however, it may have a limitation on the number of miles the owner can drive per year.

Rental Reimbursement: this type of policy simply insures a policy holder in case his car is unavailable – he is given a replacement rental car for this period.

No matter which policy you may have, it is essential that you are intimately familiar with its details as this could have significant financial repercussions when the time comes. For instance, some auto insurance plans only reimburse 80% of the value of a stolen car – the reason being, to avoid fraud (car owners from staging theft of their own cars).

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