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Old 02-10-2005, 03:22 PM   #1
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Default Insurance

This will probably be the least interesting topic in the FAQ section, but unfortunately, there is always a possibility that you may need it someday. Understanding what insurance is for and how it works can make an often frustrating experience a little bit easier.

What is Insurance?

The most basic concept of insurance is the transfer of risk. You pay a premium and an insurance company agrees to absorb some or all of the financial impact of any accidents you may be involved in. Insurance is designed to put you back in the same position financially that you were before the loss occurred. Insurance is NOT set up for you to profit from an accident, although you will see just that happen quite frequently these days, where, through lawsuits, people collect millions of dollars for the simplest of things. This is part of the reason that insurance costs seem to always be rising. Your premium is based on many things: age, location, prior history, and in some cases your credit history. The insurance company gathers data about people in your age range that live in your area and then predict the average amount of losses per year and the average amount that was paid out per accident to figure what your premium will be. Insurance payouts vary by location. Some people are happy with just getting their car fixed and back on the road, while some people want to become wealthy. Likewise, some courts offer reasonable settlements while others will award outrageous payments. Insurance companies track these things, and if you live in a city where courts tend to offer huge settlements you will end up paying more for insurance than you would in a city that is more conservative.

For those of you still awake, let’s talk about the various forms of coverage…

I. Liability

This is what gets paid out if you are at fault in an accident. Each state regulates the minimum coverage that can be offered. Typically the coverage is shown as 10/20/40, which means $10,000 per accident is allotted for property damage (cars, buildings, etc.), $20,000 per accident, per person is allotted for injuries, and $40,000 is the maximum that will be paid out for all injuries per accident. For example, if you were to injure four people in an accident, each of them could potentially get $10,000 based on the severity of their injuries, or one person could end up getting $30,000 for themselves, leaving the remaining $10,000 to be divided up between the other three people.

II. No Fault

No fault insurance is pretty self explanatory: no one is considered at fault in an accident and everyone collects through their own carrier. No fault coverage is not available in all states, and is a prime target of insurance fraud.

III. Medical Payments

If you are hurt in an accident this type of insurance will help to cover your medical bills. This coverage is provided through your carrier and is not available to someone in a different car. It does apply however, to passengers of the insured person’s vehicle.

IV. PIP (Personal Injury Protection)

This type of coverage works on the same basis as medical payments but can also include lost wages. PIP is not available in all states and is often limited by state regulation. PIP limits are usually set around $2,500.

V. Uninsured Motorist/Underinsured Motorist (UM/UIM)

UM/UIM covers you if you are hit by someone without any insurance (UM) or by someone doesn't have enough coverage to pay for your damages (UIM). UM also covers "hit & run" or "phantom" vehicles; however, individual states will set guidelines as to whether contact has to be made or not. If not, a witness may be required. Example: your vehicle is forced off the road by someone who then leaves the scene, and you are unable to identify the vehicle.

VI. Collision

This type of coverage is available to you in cases of hitting a fixed object or if your vehicle is hit while sitting in a parking lot. There is almost always a deductible on this coverage. The higher your deductible is, the cheaper your premium will be, since you are "absorbing" some of the financial risk.

VII. Comprehensive

Comprehensive covers everything OTHER than a collision, theft, fire, vandalism, etc. It is also subject to a deductible.

Now, onto the real workings of insurance…

Some insurance companies are better at explaining the insurance process than others. Those that don't openly explain things are basically just presuming that no one actually reads their policy. Policies are usually pretty straight forward, and since insurance companies are heavily regulated by state governments they need to be

Insurance policies are a legal contract. If you pay your premium then you have lived up to your end of the deal, now the ball is in the insurance company's court. The contract basically says that the insurance company, once they accept the premium, will do nothing until an event occurs. If or when an accident does occur, then both you and the insurance company must do what the policy says. They are obligated to determine coverage and investigate the loss, and you are obligated to cooperate with their investigation and preserve your property as best as you can to prevent further damage.

Here are a few of the most common misconceptions that people tend to have with insurance…

Most policies offer ACV (actual cash value) of the vehicle. This is the replacement cost minus depreciation (or what that car costs new, minus how much value the car has lost over time). Exceptions are sometimes made with classics & specialty vehicles that go up in value over time.

Next is personal property versus the vehicle itself. Say that your car is broken into and the stereo system is stolen. Unless the policy specifically puts a limit on this it is paid on ACV. In theory, if you turn your car upside down, anything that falls out is personal property and is not covered under most auto policies. So what if your clothes, CD's etc are stolen? That should be covered under a homeowner’s or renter’s policy. If you live with your parents your personal items will be covered under their homeowner’s policy, regardless of where you are in the world (in most cases). For example, if you are on a family vacation in Germany and your laptop is stolen, homeowner’s insurance will most likely cover it.

There are all kinds of loopholes in insurance; the biggest misconception people have is that an insurance policy is a “personal account" where you deposit money in case of an accident. This is 100 % not true. As was mentioned earlier, the purpose of an insurance policy is to transfer risk. You’re paying the company for the agreement you made with them to absorb part of the financial impact of any accidents you may find yourself in.

Another big misconception is that your insurance company has no legal duty to help you. What if you get into an accident and it's not your fault? Will your premiums go up if you call your insurance provider and report the incident? This doesn't matter; you pay them hundreds or even thousands a year for insurance coverage so use it! Since they signed a legally-binding contract with you they are obligated to aid you in getting your car fixed, replaced, or providing legal defense if you get sued over an accident. Most courts and state insurance regulators are not very pleased with insurance companies jerking around the people who pay premiums to them. Insurance companies cannot mislead. Whatever they say they will, or give the impression that they will do, they MUST do it.

If any of you are still awake, please keep in mind that if you pay the premium then you do NOT have to tolerate being jerked around. If you are in an accident ask questions! If you don't understand what the insurance company is telling you or why they are doing something have them explain it to you again. Swearing and yelling at an adjuster and threats of lawsuits will accomplish very little. Trust me; I hear it five days a week, eight hours a day…

Last edited by 94accordex; 12-14-2007 at 04:11 PM.
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