Vehicle insurance (or Auto insurance, car insurance, motor
insurance) is insurance consumers can purchase for cars, trucks, and other
vehicles. Its primary use is to provide protection against losses incurred as a
result of traffic accidents. An insurance company may declare a vehicle totally
destroyed ('totaled' or 'a write-off') if it appears replacement would be
cheaper than repair.
Coverage levels
Insurance can cover some or all of the following items:
The insured party
The insured vehicle
Third parties
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.
Public policy
In many countries it is compulsory to purchase auto insurance before driving on
public roads. In the United States, penalties for not purchasing auto insurance
vary by state, but often involve a substantial fine, license and/or registration
suspension or revocation, as well as possible jail time in some states. Usually
the minimum required by law is third party insurance to protect third parties
against the financial consequences of loss, damage or injury caused by a
vehicle. Typically, coverage against loss of or damage to the driver's own
vehicle is optional - one notable exception to this is in Saskatchewan, where
SGI provides collision coverage (less a $700 deductible) (such as a collision
damage waiver) as part of its basic insurance policy. In South Australia Third
Party Personal insurance from the State Government Insurance Corporation (SGIC)
is included in the license registration fee. South Africa allocates a percentage
of the money from petrol into the Road Accidents Fund, which goes towards
compensating third parties in accidents.[1] Most countries relate insurance to
both the car and the driver, however the degree of each varies greatly.
Basis of premium charges
See main article auto insurance risk selection
Depending on the jurisdiction, the insurance premium can be either mandated by
the government or determined by the insurance company in accordance to a
framework of regulations set by the government. Often, the insurer will have
more freedom to set the price on physical damage coverages than on mandatory
liability coverages.
When the premium is not mandated by the government, it is usually derived from
the calculations of an actuary based on statistical data. The premium can vary
depending on many factors that are believed to have an impact on the expected
cost of future claims.[2] Those factors can include the car characteristics, the
coverage selected (deductible, limit, covered perils), the profile of the driver
(age, gender, driving history) and the usage of the car (commute to work or not,
predicted annual distance driven).[3][4]
Gender
Men average more miles driven per year than women do, and have a proportionally
higher accident involvement at all ages. Insurance companies cite women's lower
accident involvement in keeping the youth surcharge lower for young women
drivers than for their male counterparts but adult rates are generally unisex.
Mistaken reference to the lower rate for young women as "the women's discount"
has caused confusion that was evident in news reports on a recently defeated EC
proposal to make it illegal to consider gender in assessing insurance
premiums.[5] Ending the discount would have made no difference to most women's
premiums.
Age
Teenage drivers who have no driving record will have higher car insurance
premiums. However young drivers are often offered discounts if they undertake
further driver training on recognised courses, such as the Pass Plus scheme in
the U.K. In the U.S. many insurers offer a good grade discount to students with
a good academic record and resident student discounts to those who live away
from home. Generally insurance premiums tend to become lower at the age of 25.
Senior drivers are often eligible for retirement discounts reflecting lower
average miles driven by this age group.
Distance
Some car insurance plans do not differentiate in regard to how much the car is
used. However, methods of differentiation would include:
Reasonable estimation
Several car insurance plans rely on a reasonable estimation of the average
annual distance expected to be driven which is provided by the insured. This
discount benefits drivers who drive their cars infrequently but has no actuarial
value since it is unverified.
Odometer-based systems
Cents Per Mile Now[6](1986) advocates classified odometer-mile rates. After the
company's risk factors have been applied and the customer has accepted the
per-mile rate offered, customers buy prepaid miles of insurance protection as
needed, like buying gallons of gasoline. Insurance automatically ends when the
odometer limit (recorded on the car’s insurance ID card) is reached unless more
miles are bought. Customers keep track of miles on their own odometer to know
when to buy more. The company does no after-the-fact billing of the customer,
and the customer doesn't have to estimate a "future annual mileage" figure for
the company to obtain a discount. In the event of a traffic stop, an officer
could easily verify that the insurance is current by comparing the figure on the
insurance card to that on the odometer.
Critics point out the possibility of cheating the system by odometer tampering.
Although the newer electronic odometers are difficult to roll back, they can
still be defeated by disconnecting the odometer wires and reconnecting them
later. However, as the Cents Per Mile Now website points out: "As a practical
matter, resetting odometers requires equipment plus expertise that makes
stealing insurance risky and uneconomical. For example, in order to steal 20,000
miles of continuous protection while paying for only the 2,000 miles from 35,000
miles to 37,000 miles on the odometer, the resetting would have to be done at
least nine times to keep the odometer reading within the narrow 2,000-mile
covered range. There are also powerful legal deterrents to this way of stealing
insurance protection. Odometers have always served as the measuring device for
resale value, rental and leasing charges, warranty limits, mechanical breakdown
insurance, and cents-per-mile tax deductions or reimbursements for business or
government travel. Odometer tampering—detected during claim processing—voids the
insurance and, under decades-old state and federal law, is punishable by heavy
fines and jail."
Under the cents-per-mile system, rewards for driving less are delivered
automatically without need for administratively cumbersome and costly
technology. Uniform per-mile exposure measurement for the first time provides
the basis for statistically valid rate classes. Insurer premium income
automatically keeps pace with increases or decreases in driving activity,
cutting back on resulting insurer demand for rate increases and preventing
today's windfalls to insurers when decreased driving activity lowers costs but
not premiums.
GPS-based system
In 1998, Progressive Insurance started a pilot program in Texas in which
volunteers installed a GPS-based technology called Autograph in exchange for a
discount. The device tracked their driving behavior and reported the results via
cellular phone to the company.[7] Policyholders were reportedly more upset about
having to pay for the expensive device than they were over privacy concerns.[8]
In 1996, Progressive filed for and obtained a US patent (US patent 5,797134) on
their process. Progressive has also filed corresponding patent applications in
Europe and Japan. UK auto insurer, Norwich Union, has obtained an exclusive
license to Progressive's European patent application. They have recently
completed a successful pilot test of the technology and it is now available
commercially under the tradename "Pay As You Drive™"[9]
OBDII-based system
In 2004, Progressive launched another pilot program to allow policyholders to
earn a discount on their premiums by consenting to use its TripSense device.
TripSense connects to a car's OnBoard Diagnostic(OBD-II) port, which exists in
all cars built after 1996. The discount is forfeited if the device is
disconnected for a significant amount of time.[10]
Auto Insurance in the United States
Coverage Available
The consumer may be protected with different coverage types depending on what
coverage the insured purchases.
In the United States, liability insurance covers claims against the policy
holder and generally, any other operator of the insured’s vehicle, provided they
do not live at the same address as the policy holder and are not specifically
excluded on the policy. In the case of those living at the same address, they
must specifically be covered on the policy. Thus it is necessary for example,
when a family member comes of driving age they must be added on to the policy.
Liability insurance sometimes does not protect the policy holder if they operate
any vehicles other than their own. When you drive a vehicle owned by another
party, you are covered under that party’s policy. Non-owners policies may be
offered that would cover an insured on any vehicle they drive. This coverage is
available only to those who do not own their own vehicle and is sometimes
required by the government for drivers who have previously been found at fault
in an accident.
Generally, liability coverage does extend when you rent a car. Comprehensive
policies ("full coverage") usually also apply to the rental vehicle, although
this should be verified beforehand. Full coverage premiums are based on, among
other factors, the value of the insured’s vehicle. This coverage may not apply
to rental cars because the insurance company does not want to assume
responsibility for a claim greater than the value of the insured’s vehicle,
assuming that a rental car may be worth more than the insured’s vehicle. Most
rental car companies offer insurance to cover damage to the rental vehicle.
These policies may be unnecessary for many customers as credit card companies,
such as Visa and MasterCard, now provide supplemental collision damage coverage
to rental cars if the transaction is processed using one of their cards. These
benefits are restrictive in terms of the types of vehicles covered.[11]
Liability
Liability coverage provides a fixed dollar amount of coverage for damages that
an insured becomes legally liable to pay due to an accident or other negligence.
For example, if an insured drives into a telephone pole and damages the pole,
liability coverage pays for the damage to the pole. In this example, the insured
also may become liable for other expenses related to damaging the telephone
pole, such as loss of service claims (by the telephone company).
Liability coverage is available either as a combined single limit policy or as a
split limit policy:
Combined Single Limit
A combined single limit combines property damage liability coverage and bodily
injury coverage under one single combined limit. For example, an insured with a
combine single liability limit strikes another vehicle and injures the driver
and the passenger. Payments for the damages to the other driver's car, as well
as payments for injury claims for the driver and passenger, would be paid out
under this same coverage.
Split Limits
A split limit liability coverage policy splits the coverages into property
damage coverage and bodily injury coverage. In the example given above, payments
for the other driver's vehicle would be paid out under property damage coverage,
and payments for the injuries would be paid out under bodily injury coverage.
Note that bodily injury liability coverage is also usually split as well into a
maximum payment per person and a maximum payment per accident.
Collision
Collision coverage provides coverage for an insured's vehicle that is involved
in an accident, subject to a deductible. This coverage is designed to provide
payments to repair the damaged vehicle, or payment of the cash value of the
vehicle if it is not repairable. Collision coverage is optional. Collision
Damage Waiver (CDW) is the term used by rental car companies for collision
coverage.
Comprehensive
Comprehensive (a.k.a. - Other Than Collision) coverage provides coverage,
subject to a deductible, for an insured's vehicle that is damaged by incidents
that are not considered Collisions. For example, fire, theft (or attempted
theft), vandalism, weather, or impacts with animals are just some types of
Comprehensive losses.
Uninsured/Underinsured Coverage
Uninsured/Underinsured coverage, also known as UM/UIM, provides coverage if
another at-fault party either does not have insurance, or does not have enough
insurance. In effect, your insurance company acts as at fault party's insurance
company.
In the United States, the definition of an uninsured/underinsured motorist, and
corresponding coverages, are set by the state you reside in.
Loss of Use
Loss of Use coverage, also known as rental coverage, provides reimbursement for
rental expenses associated with having an insured vehicle repaired due to a
covered loss.
Loan/Lease Payoff
Loan/Lease Payoff coverage, also known as GAP coverage or GAP insurance, [12]
[13] was established in the early 1980's to provide protection to consumers
based upon buying and market trends.
Due to the sharp decline in value immediately following purchase, there is
generally a period in which the amount owed on the car loan exceeds the value of
the vehicle, which is called "upside-down" or negative equity. Thus, if the
vehicle is damaged beyond economical repair at this point, the owner will still
owe potentially thousands of dollars on the loan. The escalating price of cars,
longer-term auto loans, and the increasing popularity of leasing gave birth to
GAP protection. GAP waivers provide protection for consumers when a "gap" exists
between the actual value of their vehicle and the amount of money owed to the
bank or leasing company. In many instances this insurance will also pay the
deductible on the primary insurance policy. These policies are often offered at
the auto dealership as a comparatively low cost add on that can be put into the
car loan which provides coverage for the duration of the loan.
Consumers should be aware that a few states, including New York, require lenders
of leased cars to include GAP insurance within the cost of the lease itself.
This means that the monthly price quoted by the dealer must include GAP
insurance, whether it is delineated or not. Nevertheless, unscrupulous dealers
sometimes prey on unsuspecting individuals by offering them GAP insurance at an
additional price, on top of the monthly payment, without mentioning the State's
requirements.
In addition, some vendors and insurance companies offer what is called "Total
Loss Coverage." This is similar to ordinary GAP insurance but differs in that
instead of paying off the negative equity on a vehicle that is a total loss, the
policy provides a certain amount, usually up to $5000, toward the purchase or
lease of a new vehicle. Thus, to some extent the distinction makes no
difference, i.e., in either case the owner receives a certain sum of money.
However, in choosing which type of policy to purchase, the owner should consider
whether, in case of a total loss, it is more advantageous for him or her to have
the policy pay off the negative equity or provide a down payment on a new
vehicle.
For example, assuming a total loss of a vehicle valued at $15,000, but on which
the owner owes $20,000, the "gap" is $5000. If the owner has traditional GAP
coverage, the "gap" will be wiped out and he or she may purchase or lease
another vehicle or choose not to. If the owner has "Total Loss Coverage," he or
she will have to personally cover the "gap" of $5000, and then receive $5000
toward the purchase or lease of a new vehicle, thereby either reducing monthly
payments, in the case of financing or leasing, or the total purchase price in
the case of outright purchasing. So the decision on which type of policy to
purchase will, in most instances, be informed by whether the owner can pay off
the negative equity in case of a total loss and/or whether he or she will
definitively purchase a replacement vehicle.
Car Towing Insurance
Car Towing coverage is also known as Roadside Assistance coverage.
Traditionally, automobile insurance companies have agreed to only pay for the
cost of a tow that is related to an accident that is covered under the
automobile policy of insurance. This had left a gap in coverage for tows that
are related to mechanical breakdowns, flat tires and running out of gas. To fill
that void, insurance companies started to offer the Car Towing coverage, which
pays for non-accident related tows.
European Union and United Kingdom Laws regarding motor insurance
In 1930 the UK government introduced a law that required every person who used a
vehicle on the road to have at least third party personal injury insurance.
Today UK law is defined by the The Road Traffic Act which was last modified in
1991.
The Act requires all motorists to be insured against their liability for
injuries to others (including passengers) and for damage to other persons'
property resulting from use of a vehicle on a public road or in other public
places. This is called Third Party Insurance. It is an offence to drive your
car, or allow others to drive it, without at least Third Party insurance.
The insurance certificate or cover note issued by the insurance company
constitutes legal evidence that the vehicle specified on the document is indeed
insured. The Law says that an authorised person, such as the police, may require
a driver to produce an insurance certificate for inspection. If the driver
cannot show the document immediately on request, then the driver will usually be
issued a HORT/1 with seven days, as of midnight of the date of issue, to take a
valid insurance certificate (and usually other driving documents as well) to a
police station of the driver's choice. Failure to produce an insurance
certificate is an offence.
Insurance is more expensive in Northern Ireland than in other parts of the UK.
Motorists in the UK are required to display a Vehicle excise duty disc in their
car when it is kept or driven on public roads. This helps to ensure that most
people have adequate insurance on their vehicles because you are required to
produce an insurance certificate when you purchase the disc. However it is a
known practice for some people to purchase insurance to gain the certificate and
then to cancel the insurance and gain a full refund within the statutory 14 day
cooling off period.
The Motor Insurers Bureau compensates the victims of road accidents caused by
uninsured and untraced motorists. It also operates the Motor Insurance Database,
which contains details of every insured vehicle in the country.
|