What Is It and How Is It Useful?

Auto insurance is a form of protection against the risks associated with owning and driving an auto, which could potentially lead to significant financial loss if not properly covered by insurance.   The two basic categories of auto insurance coverage are liability and physical damage.

In addition, there are "no-fault" insurance states in which each auto owner is expected to insure damage to his or her auto, and his or her insurance policy must pay for the damage regardless of who is at fault for the accident. Under traditional insurance coverage, the party at fault is primarily responsible for paying the costs of an accident, either individually or through his or her insurance company.

Under a no fault insurance program, each driver's loss is covered by his or her own insurance company and no attempt is made to determine fault. No fault programs are designed to reduce the cost of auto insurance by reducing claims and litigation.

About one-half of the states have enacted some type of no fault or auto insurance reform legislation. The programs vary widely from state to state and the results have been mixed.

Liability coverage pays for liabilities you may incur by injuring others or damaging their property. This coverage generally includes payments for medical expenses incurred by the injured party.

Physical damage coverage pays you for damage to your auto if it is damaged in a collision in which you were negligent (or, in a no-fault state, regardless of your negligence). In addition, it covers the cost of repairs in certain non-collision situations such as damage by fire, theft and other similar causes.

How Do You Assess Your Needs?

To assess how much liability coverage is needed, consider the following factors:

• Driving record of covered driver(s)
• Anticipated use of auto(s) (is it business or personal?)
• Distance traveled each day
• Coordination with liability coverage under an umbrella policy.

To assess how much physical damage coverage is needed, you must evaluate the current market value of your auto taking into consideration the year, make and model. Generally, the amount of physical damage coverage will decline along with the market value of your auto until the premium costs as much or more than repairing or replacing the auto.

Tips:

Review your current auto and homeowner's policies to determine which liability risks are covered.

Review the dollar limits of your coverage.

Coordinate automobile coverage with liability coverage of other policies such as homeowner's and umbrella liability policies.

Review your current or proposed policy to determine if any types of damage are excluded from coverage. Examples of common exclusions include freezing and mechanical breakdown.

If you have multiple drivers in your household with different risk ratings, ask your insurance agent if there are other ways to insure multiple cars and multiple drivers.

What Products Are Available? 

There are several additional types of auto insurance coverage that are typically bundled together with liability and physical damage coverage. You should consider these additional coverages in light of your needs and the coverage required by state law.

Uninsured Motorist.  This coverage is required in some states and is optional in others. It covers your property damage and bodily injury costs caused by an uninsured driver.

What does this mean to you?

Is this coverage required in your state? If optional, some or all of the items covered may also be covered by your other insurance, such as health, disability and physical damage. Thus, the coverage may not be necessary. However, it is important to know that you are covered if you are involved in an accident with an uninsured driver.

Underinsured Motorist.  Similar to uninsured motorist coverage, it can be added to your auto policy to cover property damage and bodily injury caused by a driver whose liability limits are too low to cover adequately the damages you have suffered.

What does this mean to you?  

This coverage can pay for your deductible under your physical damage coverage for damage caused by another driver.

Additional Coverage.  Can be added to your auto policy to cover certain costs related to an auto accident or routine mechanical failure such as temporary transportation, towing, and labor costs.

What does this mean to you?  

These additional coverages are often available through various credit cards, car manufacturers and auto club memberships. If you are already covered, the additional coverage may not be necessary.

Premium and Policy Considerations

Insurance companies consider a number of factors when they calculate your auto insurance premiums. The following table illustrates which factors are considered for each type of coverage.

As you review your auto insurance coverage, you should also understand who is covered (Generally, your auto policy covers you, your spouse, family members, anyone driving the car with your permission, and anyone who reasonably believes he or she is entitled to drive your car. in your policy) and what vehicles are covered (The vehicles listed in the policy are covered. Autos that you borrow or rent are often covered. New autos are covered if you notify your insurance company within a specified period of time (generally 30 days)).

Tip: Check to see if your policy covers rental cars for personal and business purposes. If so, do not duplicate the coverage when you rent a car.

Other Considerations

Let's explore how different items affect the varied costs of your auto insurance policies. Click on the items below for more information:

Deductibles.  Having a minimal or low deductible can significantly increase your annual premium cost. If you're trying to reduce your premiums, consider a policy with a higher deductible on physical damage claims. This will increase the amount you agree to pay before the insurance coverage applies, but cut your premium.

WARNING: Make sure you have enough cash or liquid assets to pay the deductible!

Liability Limits.  The liability limit on your auto insurance is the maximum amount that your insurance company is obligated to pay on a liability claim. This limit should be coordinated with those in your umbrella policy. If you need more coverage, you can usually save money by obtaining umbrella insurance by increasing the liability limit on your auto insurance policy. However, be sure to check your umbrella policy to see what underlying liability limits it requires.

Discounts Available.  Take advantage of discounts available for multiple cars, driver training, a good driving record, anti-theft systems, senior citizens, and parents with teenage drivers.

Claims.  Avoid filing minor claims if you can afford to pay for the damage out of existing resources. Filing frequent small claims may result in a premium increase.

Shopping for a Car.  Consider the insurance costs when shopping for a car. For example, sports cars and luxury cars carry higher premium rates.

Help and More Information

Enjoy the following special features and information sources that Deloitte & Touche OnLine has put together to guide you through your insurance planning!

Books

Consumer Reports Life Insurance Handbook, by Jersey Gilbert & Ellen Schultz (Consumer Reports Books, Inc., Yonkers, NY 1994).

How to Buy the Right Insurance at the Right Price, by Bailard, Biehl & Kaiser (Dow Jones-Irwin, Homewood, IL 1989)

Personal Financial Planning, by G. Victor Hallman & Jerry S. Rosenbloom (McGraw-Hill, Inc., New York, NY 1993).

Policy Wise (an AARP book), by Nancy H. Chasen (Scott, Foresman & Company, Glenview, IL 1983).

The Guide to Buying Insurance: How to Secure the Coverage You Need at an Affordable Price, by David Scott (The Globe Pequot Press, Old Saybrook, CT 1994).

Periodicals

Are You Wasting Money on Insurance?, Redbook (March 1993).

Auto Insurance: How to Choose he Right Company, Consumer Reports (August 1992).

Getting the Best Deal on Auto Insurance, Readers Digest (May 1995).

Jumps to the Internet

Insurance Information Institute: This organization seeks to improve the public's understanding of property/casualty insurance by providing information and analysis to the media, individuals and organizations. The III publishes a number of helpful consumer guides (available at no cost) such as 12 Ways to Lower Your Homeowners Insurance Costs.

Insurance News Network: This organization provides unbiased consumer information about auto, home and life insurance, including premium costs by state and insurance company ratings from Standard & Poor's.

National Association of Insurance Commissioners: This is an organization of insurance regulators from the 50 states whose primary purpose is to protect the interests of insurance consumers. The NAIC publishes a number of consumer guides including 1995 Guide to Health Insurance for People with Medicare, Consumer's Guide to Home Insurance and Consumer's Guide to Auto Insurance.

SafeTnet: A comprehensive set of links to insurance-related Internet sites.

Click here to see State Insurance Departments.

Insurance Organizations

Insurance Information Institute
110 Williams Street, 4th Floor
New York, NY 10038
(212) 669-9200 or (800) 942-4242

National Insurance Consumer Helpline
(800) 942-4242

National Consumers League
815 15th Street, NW, Suite 928
Washington, DC 20005
(202) 639-8140

National Insurance Consumer Organization
121 North Payne Street
Alexandria, VA 22314
(703) 549-8050