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Auto Insurance 101: Coverage Types and Rates

By NAIC on 6/19/23 10:00 AM

Topics: Insurance

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.

Two factors determine what you pay for auto insurance. The first factor is underwriting, where insurance companies assess the risk associated with an applicant. The second factor is rating; the rating assigns a price based on what the insurer believes it will cost to assume the financial responsibility for the applicant’s potential claim.

Types of Coverage

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 policyholder 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.

How is your rate determined?

Two factors determine what you pay for auto insurance. The first factor is underwriting and the second factor is rating. Insurance companies underwrite to assess the risk associated with an applicant, group the applicant with other similar risks, and decide if the company will accept the application. Based on the results of the underwriting process, the rating assigns a price based on what the insurer believes it will cost to assume the financial responsibility for the applicant’s potential claim.

Each company adopts its own rating system, although there are general guidelines that all companies follow. The single greatest influence on the rating process is claim frequency. This does not mean how many times you specifically have made an insurance claim, although that will have an additional effect. Claim frequency measures how often an insured event occurs within a group relative to the number of policies contained in that group. Persons sharing characteristics with high claims groups will be charged more for insurance coverage.

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