Auto Insurance Options

Automobile insurance is a contract between a policyholder and an insurance company to cover losses arising out of the use and operation of the automobile. Many states require drivers to have automobile insurance. Even if not required, automobile insurance is necessary since the cost of some losses is likely to exceed the net worth of individuals. There are many different types of policies, and policyholders may elect among a number of options when buying automobile insurance.

Automobile insurance considers four primary risks:

• physical damage to your automobile or another person's automobile
• liability for physical injuries to other persons
• the cost of your medical care if you are injured in an accident
• attorney's fees if you are sued

Automobile insurance may cover each of these risks; the amount of coverage per claim depends on the dollar amount of the policy. Not having automobile insurance exposes you to tremendous financial risks because of the high costs of property, medical care, and lawsuits.

No-Fault and Fault Systems

Each state has one of two kinds of automobile insurance systems:

• no-fault automobile insurance systems
• fault automobile insurance systems

No-fault. In states with no fault automobile insurance systems it doesn't matter who caused the accident. Each insurance company pays for the property damage and medical expenses of its policyholders according to the terms of the policy. If the property damage or medical injury is serious and expensive, the no-fault system may not apply and fault will have to be determined to identify the insurance company that is liable for the loss.

Fault. In states with fault automobile insurance systems, it does matter who caused the accident. Fault is either admitted or proved. Determining fault may involve a lawsuit. The insurance company of the at-fault driver pays the losses of the other driver. The insurance company of the at-fault driver also pays the losses of the at-fault driver according to the terms of the policy.

There are three major types of automobile insurance: collision, liability, and medical expense.

• Collision covers property damage to your car caused by an accident. It does not cover the other person's car.
• Liability insurance covers property damage and personal injury to the other driver.
• Medical insurance covers the cost of your personal injury. Your health insurance company also may cover the cost of your medical care resulting from an automobile accident.

Uninsured and Underinsured Motorists

Let's say you're in an accident and the other driver doesn't have insurance or is underinsured; that is, the insurance doesn't cover the amount of your losses. What happens?

If you are in a no-fault state, it doesn't matter so long as your insurance policy is adequate to pay for all losses. However, if your losses exceed the value of your policy, then you have a problem.

In an at-fault state, it creates a problem for the innocent driver. There are two ways to solve this problem:

• You can buy uninsured motorist coverage from your insurance company to guard against this risk. In this case, your insurance company covers your losses to the extent of the dollar amount of the policy.
• You can sue the uninsured or underinsured driver. This method assumes that the negligent driver has assets to cover the cost of the accident. It also involves the expense of hiring a lawyer and possibly going to trial.

Insurance Claims Message Board for more help