What is auto insurance?

All insurance provides protection to consumers by covering certain risks and promising to pay for financial losses caused by these risks.

Auto insurance is one of the most used types of personal insurance. Most states require that you purchase some kind of insurance coverage to drive legally in the state. Auto insurance can be divided into two basic coverage areas: liability and property damage.

Liability

Most auto insurance policies contain three major parts: liability insurance for bodily injury, liability insurance for property damage and uninsured/under-insured motorists coverage.

Bodily injury liability insurance protects you against the claims of other people who are injured in an accident for which you were at fault. Their claims for bodily injury may include medical expenses, lost wages, and pain and suffering.

Property damage liability insurance pays for any damage you cause to the property of others. This includes not only damages to other vehicles, but also other property such as walls, fences and equipment. Uninsured motorists coverage protects the policy holder directly. This coverage pays if you are injured by a hit-and-run driver or a driver who does not have auto insurance.

Property Damage

Property damage coverage may include both collision coverage and comprehensive coverage.

Collision coverage pays for physical damage to your car as the result of your auto colliding with an object, such as a tree or another car. This coverage is optional and not required by law. However, collision insurance may be required by your lending institution or lessor. In the case of an accident involving an older car, the cost of repairing the car can quickly exceed the worth of the car. In this case, insurers will “total” the car and pay you what the car was worth rather than fixing it.

Comprehensive coverage pays for damage to your auto from almost all other causes, including fire, severe weather, vandalism, floods and theft. Comprehensive coverage also will cover broken glass, such as windshield damage. You are not required by law to carry comprehensive coverage.

Understanding Your Auto Insurance Policy

Your policy is divided into sections. It details types of coverage, rights and obligations under the policy and exclusions or limitations. Types of coverage may include liability, medical payments, uninsured/underinsured motorist, and coverage for damage to your auto.

Declarations Page

An insurance policy is a legal contract. Your policy begins with a declarations page. This identifies the policy number and provides important information including the policy term, coverage limits, and information about the insured. It also contains a description of the vehicles covered under the policy.

If you received a loan to purchase your car and there is still an outstanding balance, the lender will be listed as "loss payee" on the declarations page.

Insuring Agreement

Your policy contains a general insuring agreement consisting of a broad statement listing the perils and risks covered under the contract. The insuring agreement also identifies exclusions, which are specific events and circumstances the policy will not cover. It will contain definitions to help make the coverage clear and prevent any misunderstandings.

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