The basics of car insurance

Car insurance—every driver needs it, but not everyone understands it.

In their simplest forms, insurance policies are financial products used to protect and manage what one has. Policies are used to protect individuals, families, and businesses and to transfer wealth by sharing and transferring risk.

Most people's first encounter with insurance is when it's time to take out a policy for the first car. That first car is something that just about every teen looks forward to with bated breath. The privilege of driving comes with a great responsibility: the safety of the driver, his or her passengers, and everyone else on the road. The likelihood of being involved in some kind of auto accident is fairly high.

Everyday driving, especially by teenagers, can lead to auto accidents, resulting in damage to property and severe injuries. Unfortunately, statistics show that car accidents are the number one killer of teenagers. The negligent party in the accident will be responsible for any damages and/or injuries.

That's where insurance steps in. Basic auto insurance has two types of benefits: first-party coverage and third-party coverage.

First-party coverage
The policyholder's damages and injuries are paid for by first-party coverage.

Collision coverage pays for damages to the policyholder's car arising from a collision with an object, animal, or person, regardless of who is at fault. Normally, collision coverage is subject to a deductible payment (the amount of money that the policyholder is responsible for) chosen by the insured.

Comprehensive coverage is applied to everything other than collision—again regardless of who's at fault. Examples of incidents covered by comprehensive coverage are theft, vandalism, fire, water, and weather-related damages. Comprehensive coverage is also subject to a deductible selected by the policyholder.

Personal injury protection is applicable only in states with "no-fault" insurance laws. In the Southeast, only Florida is a no-fault state. No-fault coverage pays for the policyholder, resident relatives (people related to the policyholder by blood or marriage and living in the household) and, in some cases, a passenger's medical bills and lost wages up to $10,000 regardless of which party is at fault.

Medical payments coverage will pay for injuries to the policyholder and passengers up to a preset limit, regardless of who is at fault.

Rental reimbursement coverage pays for the cost of renting a car while the policyholder's covered auto is being repaired.

Uninsured/underinsured motorist coverage will pay for the injuries to the policyholder and passengers in cases where the other party is at fault or otherwise legally responsible for the crash and has no—or not enough—bodily injury liability insurance. In simple terms, the policyholder purchases this coverage to protect herself and her passengers from other drivers who either carry low policy limits or don't carry bodily injury coverage.

Third-party coverage
Payments to another person besides the insured are made through third-party coverage.

Liability coverage will pay others for damages and/or injuries caused bythe policyholder. Payment amounts and limits vary widely from state to state, depending on the particular tort laws in that state. Tort laws essentially determine the degree of liability (negligence or wrongdoing). Claims adjusters evaluate the negligence of each party involved based on the facts and state's statutes. Tort laws vary across the Southeast:

Alabama has the strictest of tort laws—"pure contributory negligence"—under which a damaged party cannot recover any damages if he is even 1 percent at fault for the incident.

Florida, Louisiana, and Mississippi have laws that allow damaged parties to recover damages only for the percentage of the incident for which they are not at fault. This is called "pure comparative fault."

Georgia and Tennessee use a slightly different version of the pure comparative fault law called "modified comparative fault—50 percent bar." This law means that a damaged party cannot recover any damages if he is 50 percent or more at fault for the incident. If he is deemed to be 49 percent or less responsible, then the recovery is governed by the degree of fault.

Shopping for the best coverage
Just about every state requires that drivers have some sort of minimum automobile insurance to be able to drive their vehicles. For additional information on these requirements, visit your state's relevant website (see links in the table). These state guidelines should be seen only as the mandatory minimum and by no means should determine what coverage is purchased. It is critically important to speak with a licensed and reputable insurance agent who can help assess risks and needs and find the appropriate policy for the individual.

Auto insurance minimums and requirements for Southeastern states
State Bodily/property damage liability required Minimum limits*
Alabama yes/yes 25/50/25
Florida no/yes 10/20/10
Georgia yes/yes 25/50/25
Louisiana  yes/yes 15/30/15
Mississippi yes/yes 25/50/25
Tennessee yes/yes 25/50/15
*For minimum limits the first number is bodily injury per person, the second number is per accident, and the third is the property damage limit

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By Gloria Guzman, economic and financial education specialist, Miami Branch
January 27, 2011