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Property Damage Coverage

Written by Todd Clay. Posted in Definitions Last Updated: 11/01/2010

What is property damage, what property damage coverage does, it’s limits, and differences from full coverage.

Burning Car Needs Property Damage Coverage

I hope this guy had property damage coverage for his old beater.

Property damage is a fact of life. It’s one of the main reasons insurance exists. But property damage from an insurance company’s point of view might be different than how you understand it.

Insurers are interested in paying back policyholders back for property damage. It’s also called “indemnification”.

Indemnification is the replacement of items lost in a claim in such a manner that the insured neither gains nor loses in the process. Indemnification can come in the form of repairs, a payment equal to the value of the lost item at the time of the claim, or in some cases an actual replacement of the item.

In auto insurance, property damage coverage is inextricably linked to indemnification. As part of auto liability coverage, property damage shouldn’t be confused with full coverage collision and comprehensive insurance coverage. While these coverages ultimately do much the same thing, they are different and apply in different scenarios.

What Property Damage Coverage Does

Property damage auto insurance coverage covers you in an accident if you’re found at fault. In essence, it’s the coverage that fixes the other guy’s car (unless you’re in a no fault state, in which case it helps fix your car).

Property damage coverage can also apply to other tangible assets that could be damaged or destroyed in an auto accident, such as trailers, buildings, road signs or other items.

Yes, if you take out a speed limit sign in an accident, the government entity which owns it could bill you for it.

Property Damage Limits

In a traditional split limit liability insurance setup, property damage is represented by the third number. For example, if you carry a typical state minimum of 25/50/15 on your auto liability insurance, that means you have a maximum of $15,000 in property damage coverage for any single claim.

Given that most new cars are valued well in excess of $15,000 these days, it’s not hard to see how that can pose a problem in anything other than a minor accident. Many insurance professionals recommend carrying property damage coverage of at least $50,000.

If you are able to purchase an umbrella policy via your homeowner’s policy or other means, this can often apply to your auto insurance coverage as well. Umbrella policies provide liability coverage over and above the underlying policy limits.

If you have a $1 million umbrella with your auto insurance, in essence add $1 million to your policy liability limits. Although umbrella policies are relatively inexpensive, often times they need to be applied to underlying policies written by the same company. In addition, these policies need to carry certain underlying limits to qualify. Consult with your agent for more information.

Differences from Full Coverage

In a traditional tort auto insurance state, property damage coverage by definition doesn’t fix your car. Instead it provides for repairs to the other party’s vehicle. Full coverage protection fixes yours. Property damage coverage can help to fix your car in a no fault state, but if you’re found at fault in an accident you may be subject to a premium upcharge at renewal.

Also unlike full coverage, property damage coverage never carries a deductible. The insurance company pays for repairs up to the stated limit amount.

Renewals for Auto Insurance

Written by W. Lane Startin. Posted in Definitions Last Updated: 11/01/2010

What is a renewal, what happens at a renewal, what doesn’t have to happen at renewal, and canceling coverage before renewal.

dictionary definition for change

Change is good, renewals are good!

No auto insurance policy is forever. All must be renewed at a regular interval, usually every six months or one year.

Renewals are important times for any insurance policy. It is important to understand what can only be done at renewal as well as what can be done with a policy at any time.

What Must Happen at Renewal

As with other lines of insurance, what companies can and cannot do with auto insurance policies is determined by the renewal date. For example, by law a company cannot change auto insurance rates based on accidents, tickets or claims until the renewal date.

This fact can give you some time to shop for a new policy if you expect a significant rate increase without fear of being dinged before the appointed time. Conversely, it also means the company cannot reduce your rates if an accident or claim drops off until the renewal date.

A good insurance agent will review your policy with you at or around the policy renewal date. This is a good time for both of you to see if the coverages on your policy still make sense, or if changes need to be made.

What Doesn’t Have To Happen at Renewal

Many people are under the impression they can’t cancel an auto insurance policy or make changes until policy renewal. Some agents tacitly encourage this perception.

The fact is: it’s just not true.

As the policy owner you have the right to cancel a policy, make changes to a policy, add or drop coverages at any time for any reason, or for no reason at all.

In addition, you can also make changes to a personal or commercial auto insurance policy as many times as you like. Indeed, it’s even expected that multiple changes will be made to commercial auto insurance policies during a policy term.

If you cancel a policy or make a change that reduces the overall premium, the insurance company is required to credit your account accordingly to the date the change was made. If you make a change that raises your premium, such as decreasing a deductible, the company will raise your rate accordingly.

Remember, rate increases due to driver ratings can only be executed at renewal, but rate increases due to increases in coverage must occur immediately.

Canceling Your Policy Before Renewal

While you have every right to cancel a policy mid-term (by law, a company must honor such a request), it is important to understand the possible ramifications of doing so. Obviously, canceling an insurance policy means one must replace it in order to continue driving legally.

Also, while changing insurance companies mid-term may save you money in the long run, remember the new company will probably charge your down payment which is more than the normal premium. This means you could come out behind in the short run. While you will probably get a premium refund from your old company by canceling mid-term as most companies have you pay your premium approximately six weeks ahead, it won’t be refunded right away.

In order to ensure there are no coverage gaps or unnecessary double coverages, make sure your new insurance is written effective the same day your old insurance is canceled. Bear all these things in mind when canceling mid-term.

Auto Insurance Premium

Written by Todd Clay. Posted in Definitions Last Updated: 10/29/2010

What is car insurance premium, why it’s different for policyholders, and what it pays for.

car keys and hundred dollar bills

Now you have the keys, you'll have to pay for insurance.

Perhaps no insurance term creates more interest or controversy than “premium.” Premium is the money you pay to your insurance company for your car insurance policy.

Everyone knows they have to pay it. Everyone wants to save as much as possible on premium. But what does premium do?

Premiums Are Different for Policyholders

Strictly speaking, insurance is communally financed by premiums paid by all policyholders. This financing in turn pays for claims. How much a particular policyholder pays is based largely on risk. Policyholders deemed riskier pay more than those who are considered less risky. There’s nothing particularly earth-shattering about any of that.

Premiums are determined by specialized insurance company employees called actuaries. Actuaries are experts in statistics who determine premium rates based on factors such as risk exposure, claims history and business concerns. These rates are then approved by the company’s board of directors.

Premiums Go To Insurer’s Reserves

By far the largest portion of your premium, well over 60 percent of it in most cases, goes towards a company’s fund to pay out claims. Since the primary function of an insurance company is to pay legitimate claims, this is taken very seriously.

Insurance companies are required by law to keep a certain amount of cash on hand at all time for claims. This amount is based on company size and amount of policies in force, but it is invariably quite substantial.

If a company drops below its acceptable cash on hand, it can face increasing sanctions from the state, up to and including receivership and dissolution. Accordingly most companies keep cash reserves well in excess of what the state tells them they need.

Third party rating companies such as A. M. Best annually rate insurance companies on their financial strength. Claims-paying ability is preeminent in the factors they look at. These ratings, such as A++ and A+ for companies in outstanding financial shape, are made available to the general public. Most insurance companies are quite proud of these ratings and use them in their marketing campaigns.

Commissions Paid By Premiums

Another significant cost of insurance is agent commission. Agents typically work for insurance companies as independent contractors. Their compensation from the insurance company is in many cases is based solely on commission.

Agent commissions for most auto insurance and other property and casualty lines usually range from six to 12 percent of total premium. The exact amount is determined by several factors, including product sold, whether the policy is new business or a renewal, and perhaps the agent’s past sales performance.

Some companies cut out the agent and sell directly to the consumer via the Internet or other means. While this can result in some cost savings to the consumer, that’s not necessarily the case.

Many companies have figured out that cutting out the middleman leads to increased profits for them, as consumers are used to paying premium prices that take agent commissions into consideration. The result can be a lack of service, as the policyholder has no agent to turn to in these situations.

Premiums Pay Other Costs

Most of the rest of your premium dollar goes towards company operating costs such as salaries for home office staff, building maintenance, and other factors. Premiums are regulated by state governments, but states give companies enough leeway to allow them compete in a free market.

As a result companies with similar financial strength ratings can offer very different premiums for similar coverages. You will pay premiums if you have insurance. That’s why it pays to shop around.

Auto Insurance Policy

Written by Todd Clay. Posted in Definitions Last Updated: 10/24/2010

What is a car insurance policy, standard definitions in your policy, including exclusions and endorsements.

Auto Insurance Policy

What you should know about your car insurance policy.

An auto insurance policy is detailed in a lengthy and confusing booklet given to you when your policy is issued.

Unlike the declarations which are specifically tailored to you, the policy invariably consists of boilerplate language which is applies to everyone who holds your particular insurance product.

In addition, policy language must be approved by a state insurance commission. Because of this and other factors, the basics don’t vary much from company to company, although there are certainly differences.

If you read and understand your policy, you’ll not only understand your own insurance, but in many respects you’ll be well on your way to passing your state’s insurance licensing exam for property and casualty lines. That is, if you want to.

If not, that’s OK. We understand.

Definitions in Your Policy

In order to truly understand auto insurance policy language it is important to define several terms used in the insurance industry. Some of these terms are fairly self-explanatory, while others are not necessarily discernible by context alone.

Regardless of what line of insurance you’re looking at, all insurance claims must be tied to at least one proximate cause. This specific cause is known as a peril.

Examples of perils that commonly apply to auto insurance policies include vehicular collision, theft and vandalism. Perils may be covered on a stated “basic form” or “broad form” basis, meaning that companies will only pay claims on perils specifically mentioned in the policy.

Also, they may be covered on a “special form” basis, meaning that all possible perils are covered except those that are specifically excluded in the policy language. Naturally, special form is the best available coverage.

Exclusions & Endorsements In Your Policy

An exclusion is a peril that is specifically not covered by an insurance policy. Examples of common exclusions in auto insurance policies include general maintenance, depreciation and intentional damage. Sadly insurance companies won’t cover you if you blow up your car on purpose, even if it’s ugly.

Amendments to the standard policy language are known in the insurance industry as endorsements. Endorsements can be policy options or blanket changes to the policy language initiated by the company. Examples of endorsements include accidental death and dismemberment coverage and so-called “accident forgiveness” options.

Changes to Your Policy

As with base insurance rates, insurance companies can only make changes to policy language at renewal. In addition many changes to policy language must be approved by your state’s insurance commission beforehand.

In other words wide-reaching policy changes are not particularly common. Even so, it’s always a good idea to periodically review your insurance with your agent. A good agent will alert you to any upcoming changes.

Personal Injury Protection (PIP)

Written by Todd Clay. Posted in Definitions Last Updated: 10/24/2010

What is PIP coverage, how it works in no-fault states, and how it’s different from medical payments coverage.

Motorcycle and Ambulance

Looks like this motorcycle's owner may need PIP Coverage.

Personal injury protection, or PIP, is an integral part of any auto liability policy section. It covers the medical costs of treating injuries sustained in an auto accident up to a certain stated limit.

In certain cases it can also provide coverage for court awards such as pain and suffering as well as an accidental death benefit.

In a traditional tort auto insurance state in which the insurance policy for the party found at-fault pays for the other party or parties in an accident, the term is often used synonymously with bodily injury. Personal injury protection is typically expressed as a limit for both injuries to a single person and for injuries to any group of people in a single accident.

On a policy declarations page which lists liability as a “split limit,” these limits are the first two numbers.

PIP In a No-Fault State

Personal Injury Protection is more closely associated with auto insurance liability in no-fault insurance states. Since auto liability insurance in no-fault states pays for damages to you, your passengers and your car regardless of fault, the coverage stands in for medical payments coverage found in traditional tort states.

In certain cases it can also provide coverage to others if you’re found at-fault in an accident. PIP coverage in no-fault states is often capped at $50,000.

PIP vs. Medical Payments

Both Personal Injury Protection and medical payments coverage provide insurance protection above and beyond any medical insurance coverage you have. Generally speaking higher PIP or medical payments coverage limits are recommended for motorcycle insurance policies than for auto policies.

The reason: motorcyclists are much more likely to be injured in accidents than other motorists.

As with medical payments, PIP coverage can be lowered or even eliminated if you have excellent health insurance, although few insurance professionals would recommend eliminating the coverage entirely. Both coverages comprise a relatively small portion of your overall auto insurance premium, therefore dropping either medical payments in a traditional tort state or PIP in a no-fault state will not realize significant cost savings for you.

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