Auto insurance is a complex field with its own set of terms and definitions that can be confusing for many. Understanding these terms is crucial for anyone purchasing or renewing an auto insurance policy, as it helps in making informed decisions about coverage and ensuring that you’re adequately protected. In this blog, we’ll break down some of the most common auto insurance definitions to give you a clearer picture of what they mean and how they impact your coverage.
1. Premium
The premium is the amount of money you pay to the insurance company for your auto insurance policy. This payment can be made monthly, quarterly, semi-annually, or annually, depending on the terms of your policy. The premium amount is influenced by various factors, including your driving record, the type of car you drive, your age, and where you live.
2. Deductible
A deductible is the amount you agree to pay out of pocket before your insurance company covers the remaining costs of a claim. For example, if you have a $500 deductible and are involved in an accident that results in $2,000 in damages, you will pay the first $500, and your insurance will cover the remaining $1,500. Choosing a higher deductible typically lowers your premium, but it also increases your financial responsibility in the event of a claim.
3. Liability Coverage
Liability coverage is a mandatory component of auto insurance in most states. It protects you financially if you are at fault in an accident that causes bodily injury or property damage to others. Liability coverage is typically split into two parts:
- Bodily Injury Liability (BIL): Covers medical expenses, lost wages, and pain and suffering of the other party if you are responsible for the accident. In Pennsylvania, you must provide at least $15,000 per person, and $30,000 per accident in coverage. In New Jersey, those state minimums are now $25,000 – $50,000.
- Property Damage Liability (PDL): Covers the cost of repairing or replacing the other party’s vehicle or property damaged in the accident.
4. Collision Coverage
Collision coverage pays for the repair or replacement of your vehicle if it is damaged in an accident, regardless of who is at fault. This coverage is particularly important if you have a newer or more expensive vehicle, as it helps protect your investment. However, collision coverage is usually optional and comes with a deductible.
5. Comprehensive Coverage
Comprehensive coverage protects your vehicle from non-collision-related damages, such as those caused by theft, vandalism, natural disasters, or falling objects. Like collision coverage, comprehensive coverage is optional and is subject to a deductible. This coverage is essential for those who want protection from a wider range of risks beyond just accidents. This does NOT give you Full Tort coverage, which is completely separate, as explained in the tort blog.
6. Uninsured/Underinsured Motorist Coverage (UM/UIM)
Uninsured/Underinsured Motorist Coverage is designed to protect you if you are involved in an accident with a driver who either doesn’t have insurance (uninsured) or doesn’t have enough insurance to cover the full extent of the damages (underinsured). This coverage can pay for medical expenses, lost wages, and other damages that you would otherwise have to cover out of pocket if the at-fault driver lacks adequate insurance. This is not mandatory and can be waived, but ViKing Law does not recommend waiving this coverage. If it is waived, you will be left with nothing following a serious accident if you happen to be struck by an uninsured or underinsured driver. These benefits can also be “stacked” meaning multiplied by how ever many vehicles you own. Example: If you have $15,000/$30,000 UM/UIM coverage, stacked, with three vehicles on the policy, you actually have up to $45,000/$90,000 in UM/UIM coverage total.
7. Personal Injury Protection (PIP)
Personal Injury Protection, also known as PIP or “no-fault” insurance, covers medical expenses, lost wages, and other related costs for you and your passengers, regardless of who is at fault in the accident. PIP is mandatory in Pennsylvania and New Jersey. It can also cover additional expenses like rehabilitation and funeral costs, making it a comprehensive protection for injury-related expenses. Pennsylvania’s mandatory minimum PIP coverage that must be provided by all insurance carriers is $5,000.
8. Gap Insurance
Gap insurance covers the difference between the actual cash value of your vehicle and the amount you owe on your car loan or lease if your car is totaled in an accident. This is particularly useful if you owe more on your vehicle than it’s worth, which can happen with new cars that depreciate quickly. Without gap insurance, you could be left paying off a loan for a vehicle you no longer own.
9. SR-22
An SR-22 is not an insurance policy, but a certificate that your insurance company files with your state’s Department of Motor Vehicles (DMV) to prove that you have the minimum required liability insurance. It’s typically required for drivers who have been convicted of certain offenses, such as DUI, or who have had their license suspended. The SR-22 shows that you are meeting the state’s insurance requirements, but it also usually comes with higher premiums.
10. Actual Cash Value (ACV)
Actual Cash Value is the amount your insurance company will pay to replace your car if it’s totaled, factoring in depreciation. This is different from the replacement cost, which would cover the cost of buying a new car of the same make and model. Understanding ACV is important because it means that as your car ages, the payout from your insurance in the event of a total loss will decrease.
Confused about your coverage and what rights you have after an accident? Call Viking Law.