Auto Insurance Explained: Coverage, Quotes, Claims Process, 10 Tips

In this article, you will learn all the basics of auto insurance including, type of claims, key terms to know, and other information your insurance company will not tell you. At the end, you will discover 10 simple tips you can use to request and compare auto insurance quotes from the top insurance companies in the country and save on your insurance premium. 

Auto insurance, commonly known as car insurance, is insurance for trucks, cars, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage or bodily injury resulting from traffic collisions and against liability that could also arise from incidents in a vehicle.

Auto insurance may additionally offer financial protection against theft and damage to the vehicle sustained from events other than traffic collisions, such as keying, weather or natural disasters, and damage sustained by colliding with stationary objects.

History of Auto Insurance 

Vehicle insurance has a humble beginning.

Widespread use of the motor car began after the First World War in urban areas. Cars were relatively fast and dangerous by that stage, yet there was still no compulsory form of car insurance anywhere in the world. This meant that injured victims would seldom get any compensation in an accident, and drivers often faced considerable costs for damage to their car and property.

A compulsory car insurance scheme was first introduced in the United Kingdom with the Road Traffic Act 1930. This ensured that all vehicle owners and drivers had to be insured for their liability for injury or death to third parties whilst their vehicle was being used on a public road. Germany enacted similar legislation in 1939 called the “Act on the Implementation of Compulsory Insurance for Motor Vehicle Owners.

In the United States, the first auto insurance policy was sold in 1898 by Traveler’s Insurance Co. to Dr. Truman Martin of Buffalo, N.Y., according to the U.S. Census Bureau. That first policy gave Dr. Martin $5,000 in liability coverage and cost him $12.25. At that time, there were about 4,000 cars in the entire U.S.

In 1925, Massachusetts passed the first legislation requiring automobile insurance for drivers as a prerequisite to registering a vehicle. For over 30 years, Massachusetts was the only state in America with a compulsory auto insurance law requiring insurance before registration.

Is Auto Insurance Mandatory?

Yes. The regulations for vehicle insurance differ with each of the 50 US states and other territories, with each U.S. state having its own mandatory minimum coverage requirements (see separate main article). Each of the 50 U.S. states and the District of Columbia requires drivers to have insurance coverage for both bodily injury and property damage, except New Hampshire and Virginia, but the minimum amount of coverage required by law varies by state. For example, minimum bodily injury liability coverage requirements range from $30,000 in Arizona to $100,000 in Alaska and Maine, while minimum property damage liability requirements range from $5,000 to $25,000 in most states. 

Common Auto Insurance Terms 

The specific terms of vehicle insurance vary with legal regulations in each state. But in general, when buying your auto insurance, you will see or hear a bunch of confusing terms which makes it difficult for you to understand and discuss your policy. To help, we’ve listed and explained the top 12 most common auto insurance terms used on the market.

Full Coverage – the term Full coverage insurance commonly refers to the combination of comprehensive and collision coverages. Liability is generally also implied. Full coverage may not be necessary if you have an old vehicle.

Full coverage is actually a misnomer because, even within traditional “full coverage” insurance, there are many different types of coverage, and many optional amounts of each. “Full coverage” is an inaccurate designation that causes many drivers and vehicle owners to unconsciously underinsure their vehicles.

Deductible – In insurance, deductible  is the amount paid out of pocket by the policy holder before an insurance provider will pay any expenses. The higher your deductible the lower your premium, but in case of an accident you will have a higher amount paid out of your pocket.

Collision Coverage: This type of insurance provides coverage for vehicles involved in collisions. Collision coverage is subject to a deductible. It is designed to provide payments to repair the damaged vehicle, or payment of the cash value of the vehicle if it is not repairable or totaled. Collision coverage is optional; however, if you plan on financing a car or taking a car loan, the lender will usually insist you carry collision for the finance term or until the car is paid off.

Comprehensive Coverage: Comprehensive provides coverage, subject to a deductible, for cars damaged by incidents that are not considered collisions. For example, fire, theft, vandalism, weather, or impacts with animals are types of comprehensive losses.

Additionally, a few insurance companies list “Acts of God” as an aspect of comprehensive coverage, although this is an old term that is not ordinarily used today. By definition, it includes any event or occurrence that is beyond human control: tornado, flood, hurricane, hail storm, and others. 

Declarations Page – Also known as information page, this is usually the first page of an auto insurance policy that specifies the most important info about the personal insurance policy, including:

  • named insured
  • address
  • policy period
  • location of premises
  • policy limits
  • and other key elements which vary from insured to insured.

Gap Auto Insurance – Often referred to as debt and financing coverage – GAP Insurance is an optional, add-on car insurance coverage pays for the difference between the value of a car at the time it’s totaled or stolen and the balance of its loan or lease. 

Liability Insurance – Liability insurance is designed to offer specific protection against third-party insurance claims which result in injuries and damage to people or property. That is, the payment is not typically made to the insured, but rather to someone suffering the loss who is not a party to the insurance contract. 

No-fault Insurance – Also known as personal injury protection insurance (PIP), nofault insurance is any type of insurance contract under which the insured party is indemnified by their own insurance company for losses, regardless of the source of the cause of loss. 

Personal Injury Protection (PIP) – this is an extension of car insurance that covers medical expenses and, in some cases, lost wages and other damages. Personal Injury Protection is designed to be paid without regard to “fault,” or more properly, legal liability. 

SR-22 Insurance – commonly called Certificate of Financial Responsibility, an SR-22 is a vehicle liability insurance document required by most state Department of Motor Vehicles (DMV) offices for “high-risk” insurance policies. A DMV may require an SR-22 from a driver to reinstate his or her driving privileges following an uninsured car accident or conviction of another traffic-related offense, such as a DUI. 

Property Damage Liability – this type of coverage covers damages to someone else’s property due to a car accident you caused. Property damage liability insurance offers financial protection for things.

Medical coverage – Medical payments coverage helps pay for the driver or passengers’ medical and funeral expenses if the insured gets involved in a car accident, regardless of who caused the accident. It is sometimes called medical expense coverage, or just “med pay.”

Rental Reimbursement Coverage – This coverage pays for the cost of transportations, such as a rental car or public transportation fare, while your own vehicle is being repaired after a covered insurance claim. Rental reimbursement coverage is available for a nominal extra amount with almost every auto insurance policy.

Roadside Assistance / Towing – towing coverage, also known as roadside assistance coverage, helps drivers when their vehicle breaks down or becomes disabled. It covers towing, battery service, flat tire service, fuel delivery, lockout service, and extrication. Roadside assistance coverage is an option on almost every auto insurance policy.

Uninsured and Under-insured Coverage – Unlike what some people think, uninsured coverage is not the same underinsured coverage. “Uninsured motorist coverage protects you if you’re in an accident with an at-fault driver who doesn’t carry liability insurance. Underinsured motorist coverage, on the other hand, steps in when you’re in an accident with an at-fault driver whose liability limits are too low to cover the damage or medical expenses.” 

Auto Insurance Coverage levels

Auto insurance can cover some or all of the following items:

  • The insured party (medical payments)
  • Property damage caused by the insured
  • The insured vehicle (physical damage)
  • Third parties (car and people, property damage and bodily injury)
  • Third party, fire and theft
  • In some jurisdictions coverage for injuries to persons riding in the insured vehicle is available without regard to fault in the auto accident (No Fault Auto Insurance)
  • The cost to rent a vehicle if yours is damaged.
  • The cost to tow your vehicle to a repair facility.
  • Accidents involving uninsured motorists.

Different policies specify the circumstances under which each item is covered. For example, a vehicle can be insured against theft, fire damage, or accident damage independently.

Types of Auto Insurance Claims

An insurance claim is a formal request by a policyholder to an insurance company requesting compensation for accident, damage to property covered by the policy. The insurance claim can result in partial compensation or total loss. 

Total loss or write-off

In insurance claims, a total loss or write-off is a situation where the lost value, repair cost or salvage cost of a damaged property exceeds its insured value. Such a loss may be an “actual total loss” or a “constructive total loss“. 

7 most common auto insurance claims in the United States are as follow:

  1. Fender benders
  2. Whiplash
  3. Back injuries
  4. Windshield damage
  5. Theft
  6. Vandalism
  7. Animal collisions.

Tips to Save on Your Auto Insurance Premium

Here are 10 simple tips that can help you save 100s on your auto insurance:

  1. First and foremost, determine what type of coverage you need.
  2. Shop around and compare car insurance quotes before you buy.
  3. Assess your insurance costs and the coverage you will receive.
  4. Raise your deductible: the lower the deductible, the higher the premium.
  5. Take and pass a Defensive Driving Course to get discount on your premium.
  6. Reduce optional coverage on your older vehicle.
  7. Bundle your insurance and/or stick with the same company.
  8. Improve your credit score to pay lower insurance premium.
  9. Take advantage of low mileage discounts.
  10. Move to a different location which has lower car insurance rate.

If you have a suggestion, comment or question regarding auto insurance, kindly comment below.

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I am a psychologist and human nutritionist. I am also blog writer with more than 10 years experience and marketing director of www.looloone.com .

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