Wednesday, September 19, 2007

What little I know about: Auto Insurance

So today I'd like to take a little time to talk about Auto Insurance.

To be honest Auto Insurance, or any type of insurance is a very, very boring topic in general. That is, boring up until the point someone knocks out your window at 3 in the morning and steals your stereo! In that case, you're a member of one of two groups 1) fairly perturbed and angry because you weren't expecting this but, luckily you have insurance that will cover this - or- 2) extremely perturbed and angry because not only were you not expecting this but, you'll also be paying a bunch of money because you didn't have the right type of insurance at the time.
Q: Let's say you are driving home from work on the highway (in Ohio where you live), talking on your cell phone, you drop your cell on the floor bend down to pick it up then rear-end the car in front of you at about 50 mph , which in turn rear-ends the oil tanker in front of it and causes the oil tanker to explode and take out several cars surrounding the oil tanker. One car in particular veers off the road and into a building knocking out the majority of a wall.

You have $7500 PD limits. $12,500/25,000 BI limits. COLL with $1000 deductible. You have no LOU or MP coverage. The estimated property damage is in the range of $380,000. One person was killed, 3 were burned on over 50% of there bodies and 7 other people went to the hospital. The medical bills - so far for everyone , are around $500,000 Are you covered? we'll get to that later...

For now, I'll inform on some things you may or may not have heard of. Why? because I'm in the insurance industry now and know a little* about the subject.

First, some basic insurance terms**:
  • Liability(3rd party): this is a type of insurance that covers your liability to other parties up to a certain pre-determined limit. This is the most basic and usually most minimal form of coverage.
  • Bodily Injury(BI): this is one of the two main sub-types of liability coverage. As the name implies, this handles injuries to parties (usually) outside of your vehicle who were injured by you or someone using your vehicle in an accident.
  • Property damage(PD): this is the other sub-type of liability coverage. This covers, of course, other cars that your car may hit talking on your cell phone, but it also covers fences, buildings, guardrails (yes the government wants their money back for their guardrail even though you're a taxpayer), and other random things that might just 'come out of nowhere' and enter your path - while driving, talking on your cell phone (you know who you are!) It will be covered only up to the limit listed in your policy.
  • 1st party coverage: This is a broad term [used usually only by insurance people] that describes any coverage that helps you - the customer out in case of an emergency/claim.
  • Comprehensive(COMP): this is a type of optional coverage, [whereas liability coverages are usually NOT optional] that you can place on your car that will cover your car in case a deer (or sometimes another animal) jumps in front of you while driving and you hit it. Also covers you if your car magically catches on fire. Also covers you if some twerp brakes into your car and decides to steal your stereo as well as your dashboard and driver's side window in the process. Also covers you if that same twerp is so fascinated with your decade old vehicle that he(or she) decides to take it the local chop shop and sell your car for parts. This coverage includes a deductible.
  • Collision(COLL): This is another optional coverage. It's also one of the most expensive types of coverage and thus most sought after types of coverage because (with a few obvious exceptions) if you wreck your car - your insurance company will pay for it. All they'll ask in return is your deductible. Unless, you own a brand new 1.4 Million Lambo...you're insurance company most likely has a a clause that says something in really tiny print about the fact that they will replace the value of the car or say $250,000 whichever is less - but honestly, if you have money to spend 1.4 million on a car - what do you care, you have money to burn! That, and/or your really stupid.
  • Deductible: this is what you have to pay out of pocket for using your Comprehensive or Collision coverages to repair your car. If you damaged, or God forbid, injured someone else, your insurance company won't ask you to pay anything until they reach your policy limit - then it's all you.
  • Policy Limit: is a pre-set amount that your insurance company will pay for specific liability coverages. Assuming you have PD limits of $100,000 - that is the most your insurance company would pay in an accident. Anything above that limit you would be responsible for. BI limits would work the same way.
  • Rental(LOU): This is another optional coverage that gives you a rental car while your car is in the shop (usually) because of your Loss Of Use of your own car. This coverage generally only applies when you already have Comprehensive or Collision coverage. A further option generally given is how much coverage per day you can have.
  • Medical Payment(MP): This is another optional coverage in Ohio. medical coverage for anyone injured in your car regardless of fault. An amount that you decide on can be paid to your Doctor, hospital, etc if it's related to an accident. Other states have PIP coverage - which to be honest I know nothing about so I won't even go there.
SO back to the question:

Q: Let's say you are driving home from work on the highway (in Ohio where you live), talking on your cell phone, you drop your cell on the floor bend down to pick it up then rear-end the car in front of you at about 50 mph , which in turn rear-ends the oil tanker in front of it and causes the oil tanker to explode and take out several cars surrounding the oil tanker. One car in particular veers off the road and into a building knocking out the majority of a wall. There are several witnesses that saw you yakking away on your cell phone.

You have $7500 PD limits. $12,500/25,000 BI limits. COLL with $1000 deductible. You have no LOU or MP coverage. The estimated property damage is in the range of $380,000. One person was killed, 3 were burned on over 50% of there bodies and 7 other people went to the hospital. The medical bills - so far for everyone , are around $500,000 Are you covered?

A1: Yes you are covered.

A2: Yes you are covered but, not by much. Your liability coverage, would cover the damage done to all those vehicles and the building up to previously specified limit of $7500. In Ohio - they would all most likely split the $7500 amongst themselves. You would be responsible for the $372,500 left. So the oil company, the building owner and a couple other angry people would most likely start calling you about the remaining balance.

Also assuming you had say the state minimum limits for Ohio - $12,500/$25,000 for Bodily injury. Your insurance company would pay for up to 12,500 for injuries to any one person and 25,000 for all parties involved. Seeing as unfortunately, someone ultimately lost their life due to this accident - that person's family would most likely get $12,500 for their pain and suffering. The remaining $12,500 would be split up amongst the the 10 other injured parties. Those burned severely, would most likely get first priority. You would be responsible for the $475,000 (or more) in medical bills. You would most likely also become fairly familiar, maybe even on a first-name basis, with several attorneys in your area.

As far as your car - yeah you're covered. But first you have to pay your $1000 deductible that you thought didn't seem that much at the time you signed up. You also have to hitch a ride to work while they fix your car - because you have no LOU coverage. Oh and that neck injury and broken nose you got? I hope you have health insurance cause your auto insurance ain't paying squat. You told yourself you didn't need no silly Medical Payment coverage. You're an excellent driver. You only got that Collision coverage cause your lease company said you had to...You now have $847,600 of debt all cause you dropped your cell phone. But hey, you were 'covered'
Hopefully, that gives everyone a slightly better understanding on auto insurance. To be honest, back in the day (before I got into the insurance biz) I used to think insurance was the biggest scam. All these big faceless insurance companies charging hundreds of dollars for accidents that never really happen.

Now, after being in the biz for a bit - you hear some horror stories. Of course the above example is a little extreme but similar accidents happen everyday. If nothing else, stop using your cell phone when you drive (you know who you are) or at least buy a Bluetooth phone or use your speaker phone.... jeez!

*by 'little' I mean extremely close to 'none' on the aforementioned subject
**these definitions are in all likelihood very far off from the equivalent definition on your own policy. Honestly, you should call your personal insurance agent and ask him or her what's on your policy and what isn't.

6 comments:

Single Ma said...

"You told yourself you didn't need no silly Medical Payment coverage. You're an excellent driver. You only got that Collision coverage cause your lease company said you had to..."

How do you have collision without medical? I thought the only options were liability or full with the whole kit n' caboodle. There have been times I've rejected roadside assistance because I had AAA, but I never knew rejecting medical (when you had collision/full coverage) was even an option. That's risky AND odd.

Great post!

Reggie said...

Thanks Single Ma,

Again, I base all of my information on Ohio laws. In Ohio MP (coverage for people in your car) is optional.
BI (coverage for people in other cars, hurt by you) is mandatory - honestly it is probably that way in EVERY state or at least should be, for the BI coverage.

Depending on if you are in an at-fault or no-fault state (Ohio's an at-fault state)- there may be MP or PIP coverage. MP is optional in most states. I don't dare to guess if PIP coverage is mandatory or not everywhere. According to this website:

http://www.insurance.wa.gov/factsheets/factsheet_detail.asp?FctShtRcdNum=40

PIP is NOT required in the state of Washington, but that's just WA. Where you live may be completely different.

again, like the (*) points out, I know very little about this.

Ernesto the Insurance geek said...

Your Med Pay in Ohio is for 2nd party claims not first party (covers unrelated passangers in your car, not the policy holder or family)

You kill someone while yaking on the cell phone in Ohio and civil damages will be the least of your concerns. They'll be trying to collect assets from you while you serving time for vehicular homecide.

Reggie said...

Ernesto,

Although, I'd agree with you with the latter part (don't kill someone while driving) I'd have to disagree with you on the former.

As far as Auto insurance goes in Ohio, I deal quite often with people who seek their 1st party coverage that their own MP coverage provides them being an insured. I think it depends a lot on policy language though.

I'll try an post more on this in a little bit after some more research - maybe you can post on the law you're referring to...that denies MP coverage for named insureds?

Reggie said...
This comment has been removed by the author.
Reggie said...

Ernesto - Please check out this blog by a local, Ohio law firm that specializes in bodily injury.

Most specifically this excerpt that talks about 1st party coverage:

"Finally, there is Medical Payments coverage. This is sometimes referred to as “med pay” or “family protection ” coverage. This insurance coverage is a stated amount available to you for the payment of medical expenses. This is not the only amount available for payment of medical expenses but is an additional source of protection."

Hope this helps - by the way I don't work for a law firm...