How Car Insurance Works: What’s Included in Your Policy and How to Use It

Figuring out how your policy functions, what coverages you have and what they cover should be done well before you’re involved in an auto accident. Learn what each coverage does, how to use your auto insurance policy and how to make a car insurance claim so you can make the best decision for your needs.

Car insurance provides financial protection if the insured is at fault in an accident. Purchasing more coverage than a liability-only plan provides can also cover the insured and their vehicle.

Auto insurance is usually sold as a package, which includes liability-only protection as basic coverage. Add–ons can expand benefits to include medical payments, damages to the insured driver’s vehicle and even gap insurance to pay off the loan if it’s totaled.

Most drivers need more than basic liability-only coverage to protect their income and assets in the event of a large auto claim. According to the Insurance Information Institute, 78% of insured drivers purchase comprehensive coverage in addition to liability coverage, and 74% also purchase collision coverage.

The more financial risk you have, the better auto insurance policy you should have to protect yourself and your family. Understanding how auto insurance works can help you find the best car insurance quotes.

Each state has its own minimum amount of liability coverage you’re required to carry to legally drive a vehicle. If you’re involved in an accident and deemed responsible (at fault), then your car insurance will pay up to a specified amount for the other person’s property damage and injuries. Liability coverage will pay for:

• Bodily injury to the other driver and their passenger(s).
• Damage to their car(s).
• Damage to property (mailbox, house, guardrail, utility pole, etc.).
• Lawsuit fees and costs incurred if you are sued because of the accident.

Comprehensive insurance, an optional coverage, will pay for damages caused that are not considered a collision, including:

• Theft of the car.
• Vandalism, including damage caused by fire or explosions.
• Windshield and glass damage.
• Accidents involving animals.
• Falling objects (rocks, tree limbs, etc.).
• Weather damage (hail, flood, earthquake, lightning, wind, etc.).

You can use this optional coverage when involved in an accident with another vehicle, regardless of fault. Instances where collision coverage would be used include:

• Auto damage from a collision with another vehicle caused by you or another driver.
• Damage to your car from an object on wheels (golf cart, shopping cart, trailer, etc.).
• Overturned vehicle.
• Damage from a pothole or debris in the road.

This coverage protects you if you are injured and/or your vehicle is damaged by another driver with little or no liability coverage. Uninsured and underinsured motorist coverage can pay for lost wages, pain, suffering and medical payments. Here are some instances where uninsured or underinsured motorist coverage would kick in:

• Another driver totals your $50,000 vehicle but only has $25,000 in coverage (underinsured).
• Another driver injures you, causing $20,000 in lost wages and medical bills, but only has $15,000 in bodily injury coverage (underinsured).
• Another driver causes an accident which damages your car but they don’t have any insurance at all (uninsured).
• A hit-and-run accident.

Not all states and companies offer this coverage. Gap insurance, also called loan/lease payoff, will pay for the "gap" created when a vehicle is totaled and the book value is less than the remaining auto loan:

• You owe $10,000 on your car but when it’s totaled, the insurance company only offers $6,000. The gap insurance will pay the remaining $4,000.
• You lease a vehicle and still have $25,000 to pay before the car is returned. The vehicle is totaled in an accident with a book value of $17,000. The gap insurance will pay the remaining $8,000 to cancel the lease agreement.

This coverage will pay for your injuries as well as passenger injuries up to the policy limit if you are involved in an accident. If injuries are involved, Medical payments coverage pays for:

• Medical bills for injuries to you or your passengers when you are the driver in an accident, no matter who is at fault.
• Injuries causing medical bills to you as a passenger in an auto accident, regardless of fault.
• Medical bills caused by injury when you are walking or riding a bike and are hit by a vehicle.

This coverage is not offered in all states and is broader than medical payments coverage. Personal injury protection, also called PIP or no-fault medical, includes:

• Costs for injuries sustained in a car accident, regardless of fault (hospitalizations, copays, etc.).
• Lost wages due to injury.
• Rehabilitation costs (surgery, physical therapy, etc.).
• Funeral costs (if you or your passenger were to die as a result of the accident).

Roadside assistance coverage provides coverage if the vehicle breaks down or other covered causes, including:

• Key lockout
• Battery jumpstart
• Fuel delivery (you have to pay the cost of fuel)
• Towing to the nearest service facility
• Winching your vehicle when it’s stuck in mud, snow, sand or water
• Changing a tire

Each scenario involving your auto insurance will cause different coverages to come into play. To illustrate this, we’ve come up with five common car insurance claim scenarios to show how the three most common car insurance coverages would work.

Though no one wants to be at fault in an auto accident, having the right insurance coverage in place will make the situation easier. If there are injuries in your car or theirs, call the police to the location and an ambulance if needed. Exchange information with the other driver, including your car insurance policy number so you can file a claim once you’re home.

• Liability: Liability coverage will pay up to the policy limits for damage to the other person’s car, as well as for bodily injuries to them and their passengers.
• Comprehensive: Not applicable.
• Collision: Collision coverage will pay for your car damages or the book value of the vehicle if it’s totaled, whichever is greater, less your deductible (usually between $250 and $1,000).

If your car is hit by another driver, most likely they will be deemed at fault in the accident. If they have auto insurance, their liability coverage will pay for your injuries and car damage. You could also collect for medical payments under your own policy. Uninsured/underinsured motorists coverage would be used if the other person was not insured or did not have policy limits high enough to pay for your damages and/or injuries.

• Liability: Not applicable.
• Comprehensive: Not applicable.
• Collision: In some instances, you may use your collision coverage to get your car fixed if there were delays with the other person’s auto insurance. If you use this coverage, the deductible may still apply.

Damage caused by a storm is covered under comprehensive coverage. Hopefully, you were not in the car when it happened but if you were, you could also use the medical payments or PIP coverage.

• Liability: Not applicable.
• Comprehensive: Comprehensive coverage would pay to fix the car or total it for the book value, less the deductible on the policy (between $0 and $1,000).
• Collision: Not applicable.

Including uninsured and underinsured motorist coverage on your auto policy is a great idea for scenarios like this. When someone hits your car and doesn’t have insurance, you should call the police to file a report. Get as much information from the other driver as possible, including driver’s license number, name and address. Deductibles vary on this coverage and are usually mandated by the state, where required.

• Liability: Not applicable.
• Comprehensive: Not applicable.
• Collision: This coverage does not apply unless you lack uninsured motorist coverage. If you don’t have uninsured motorist coverage, but you do have collision coverage, your insurance company may fix the vehicle (less your deductible) and then sue the other person for the costs incurred.

Being severely injured in an accident is one of the worst-case scenarios, but it is an unfortunate reality for many people. Data from the CDC shows medical costs and productivity loss due to auto accidents cost more than $75 billion per year. Some costs can be paid with medical payments/PIP coverage. Uninsured and underinsured motorist coverage might also come into play if someone else was at fault.

• Liability: This coverage does not apply unless you’re deemed at fault and cause injuries or property damage to another person.
• Comprehensive: Not applicable.
• Collision: This coverage may apply if you were at fault and your car needs to be fixed or totaled.