Is Liability Enough?
By: Gary Foreman
Dear Dollar Stretcher,
I have liability insurance on my car. I know my coverage will take care of the other party. But does my liability pay for anything else after I have a wreck?
The simple answer to Kathryn's question is no, liability insurance only pays for the other guy's losses. But, let's take this opportunity to look at what types of coverage are available and what each one does.
First, consider what types of damage can be done when you're involved in an auto accident. Obviously, there could be damage to your car and to the other car. There could also be injuries to you, the other driver or passengers in either car. And, finally, bystanders or their property could suffer loss. Damage to any of these could cause you financial loss. For most of us, auto insurance is the method that we use to protect against that loss.
Next, let's review the different types of coverage you can buy. Your state may require a minimum liability coverage. After that you can pick and choose what type and how much insurance you want.
We'll begin with the liability insurance that Kathryn mentioned. She's right. Liability insurance pays for injuries or damage that you caused to someone else. You are responsible or liable to correct the damage. Liability does not pay for your losses. Only others hurt by your auto.
Liability comes with "limits" or maximum amounts that the insurance company will pay. State required minimums are often not sufficient to protect you financially if you're involved in a serious accident. For any damages over the maximum covered you'll be on your own. Remember that $10,000 doesn't go as far as it used to.
There are two types of liability insurance. "Bodily Injury" covers pedestrians, your passengers and people in any other car you hit. It will pay for claims against you and for your legal defense up to the amount of your policy. You're not the only one protected. It covers your car when you, your family members or anyone else drives it with your permission.
If you're responsible for damaging other people's property you'll need "Property Damage" coverage. The damage could be to their car or anything else that they own. Again, legal defense is also included. Your property is not covered.
Now to the heart of Kathryn's question. Liability doesn't cover your loss in an accident. If you want help to pay for any loss you suffer you'll need additional coverages.
"Collision" pays for repairs to your car when you're involved in an auto accident regardless of who was at fault. After a deductible is reached, your insurance company will be responsible for repairs to your car.
"Comprehensive" is for damage to your car that's not caused by an auto accident. Theft, fire, storm damage are common causes of damage that are covered. Again, you'll receive payment once a deductible amount is reached.
Suppose you're hit by someone who doesn't have enough or any insurance. That's when "Uninsured or Underinsured Motorist" coverage comes in. It pays you and others in your car if someone else is at fault, but they don't have resources or sufficient insurance to cover the loss. In effect, it's like you're buying extra insurance for the 'other guy'.
How can you get the most for your auto insurance dollar? First, by comparing quotes. You'll probably be surprised at how much the prices vary for the exact same coverage.
Higher deductibles can lower your bill. If you can afford to pay for an $800 repair to your car, you'll save quite a bit by increasing your deductible from $500 to $1,000. Remember, that you'd still pay the first $500 of an $800 accident. So the difference isn't as large as it seems.
If you're driving an older car it might make sense to drop the collision and comprehensive coverage. Your old car might be valuable transportation to you, but the insurance company will only pay you based on the car's "book value". If book value is $1,000 there's very little sense buying insurance that will pay you $1,000 less the deductible.
Check on low mileage and other discounts. Each insurance company offers different discounts. Ask for a list of available discounts. You may already qualify and merely need to apply.
Finally, a caution. An auto can do a lot of damage in a very short period of time. To people and to property. So it's important to have enough insurance to cover any situation that you might get into. But it's also important to take the necessary steps to avoid accidents. Make sure your car is well maintained. Don't drive while impaired. Be cautious when you drive and anticipate problems. After all, the best accident is the one that doesn't happen.
Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website (www.stretcher.com) You'll find hundreds of free articles to stretch your day and your budget.