Car Insurance: Do you have enough coverage?
Understanding your car insurance coverage for car accidents is very important. Many people don’t know the ins and outs of insurance coverage, and sometimes this can cause a lot of problems. There are different types of insurance coverage, and there are a couple common problems that people face after a car accident. I’ll try to address those here.
Here’s how car insurance works (basically): A person, called an insured, buys an insurance policy from an insurance company, called the insurer, and this forms a contract between the insured and the insurer. The insured has a duty to pay his premiums, and the insurer has a duty to pay for losses covered by the policy and to defend the insured for claims against him covered by the policy. The policy is written to cover only certain pecuniary amounts; these amounts are called the policy limits. Mississippi only requires a person to carry $25,000 in coverage per person and $50,000 per accident. No matter what amount of loss occurs, the insurer does not have to pay anything above the policy limits (in most circumstances).
- The Minimum Limits Problem
Many people buy minimum limits policies to satisfy Mississippi law and to save money on premiums. Higher policy limits cost more money through premiums, and rightfully so. Where an insurer takes on a higher risk, it should be entitled to be paid a higher premium. There’s also nothing wrong with choosing to purchase a minimum limits policy in order to pay lower premiums (that’s exactly what I did for most of my life). However, you should be aware of what I call the “minimum limits problem”. The minimum limits problem occurs when losses exceed policy limits.
For the insured, the minimum limits problem is a big deal. The insurer is going to pay no more than the policy limits. Where does the rest come from? It comes from the insured. I’ll give an example: Paula Plaintiff is sitting at a red light when she is rear ended by Dodo Defendant. It’s a terrible accident, and Paula is taken to the hospital by helicopter. Over the next six months she has two surgeries and rehab. Paula’s medical bills total $50,000. Dodo is a middle-class man who lives in the county and owns a nice house, an ATV, and twenty acres of land. Dodo likes to save money when he can. When he bought his car insurance policy from ACME, Dodo bought the minimum limits: $25,000 per person. When Paula’s attorney files a claim with ACME under Dodo’s policy, ACME sends her a check for $25,000. Paula still needs $25,000 just to pay her medical bills. Her only option is to get it from Dodo. That means Dodo could lose his property, have his checks garnished, or have his bank accounts emptied. All of this could happen to Dodo simply because he did not have enough coverage.
When you buy car insurance, be sure to consider purchasing more than the minimum limits. Many times the increase in premium is not all that much, and it may be worth it in the end to keep you and your assets safe.
- The Uninsured/Underinsured Problem/Solution
Car insurance policies include an option called uninsured/underinsured motorist coverage. This type of coverage is for situations where a person who causes an accident either a) has no car insurance, or b) does not have enough to cover losses. Mississippi requires a knowing and intelligent waiver of this type of coverage, and so it should be discussed any time you buy a new car insurance policy. The minimum limits requirement in Mississippi is also $25,000/$50,000 for this type of coverage. In the example given above, if Paula had uninsured/underinsured coverage, she may have had coverage for the remainder of her medical bills and for her other losses, like pain and suffering and lost wages. Uninsured/underinsured coverage will increase your premium, but it is worth consideration. As with most things, uninsured/underinsured coverage has a quirk that you should be aware of.
The quirk is what I like to call the “wash rule”. The wash rule is somewhat complicated. Basically, in order for uninsured/underinsured coverage to take effect, you must have more uninsured/underinsured coverage limits than the liability limits of the person who caused the accident. For example: In the illustration above, Dodo Defendant had $25,000 in liability coverage. If Paula had uninsured/underinsured coverage, she would need $50,000 in limits; that would leave her with $25,000 of uninsured/underinsured coverage. The amount of uninsured/underinsured coverage under your policy is awash up to the amount of the other person’s policy limits – hence, the wash rule. Considering most people are carrying at least minimum limits ($25,000 per person), it is prudent to carry at least $50,000 per person of uninsured/underinsured coverage.
- The Bottom Line
The bottom line is this: when you purchase car insurance, make sure you’re covered. Don’t just walk in (or go online) and buy the cheapest coverage you can find. Take some time to really consider whether the policy is going to do what it’s designed to do: protect you and yours. Ask your agent how the policy will protect you, and don’t sign anything until you clearly understand what the policy provides and you are satisfied that it will protect you. Car insurance is an everyday thing, but don’t make the mistake of thinking it doesn’t matter.
Bonus Coverage: Click here to read about coverage that pays your medical bills.