Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Laura Walker graduated college with a BS in Criminal Justice with a minor in Political Science. She married her husband and began working in the family insurance business in 2005. She became a licensed agent and wrote P&C business focusing on personal lines insurance. Laura serviced existing business and wrote new business. She now uses her insurance background to help educate drivers about...

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Reviewed by Laura Walker
Licensed Agent for 10 Years

UPDATED: Sep 9, 2019

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Have you ever wondered how your auto insurance policy premiums are figured? Do you know what your auto insurance actually pays if there is an accident? What about deductibles—how much are they and when do you have to pay them?

These are all questions that many people have when they compare auto insurance coverage. In order to answer them, it is important to understand exactly how auto insurance works.

First, an automobile insurance policy is not one “policy” but a collection of different types of coverage. How much coverage you have depends on which of these pieces you choose to purchase and what the “limits” are on your policy.

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What is Liability Insurance?

Liability is what pays for the damage to the other person if you cause an accident. Liability will cover a certain portion of the victim’s medical bills incurred by the injured party. If you have no-fault coverage, your liability pays your own bills, no matter who is at fault.

Liability “limits” tell you how much the insurance company will pay. If you have a $50,000 per accident limit on your liability policy, your insurance will pay up to $50,000 of the other person’s bills if you cause an accident (or up to $50,000 of your bills if you have no-fault insurance).

If another person causes a wreck under the tort liability system, your bills will be covered by their liability insurance. If the costs are more than the liability limits, the at-fault driver will be responsible for the difference.

What is an auto insurance policy deductible?

Your deductible is the amount you must pay before the insurance company will pay any money. In the previous example, if you have a $500 liability deductible, you will be required to pay the first $500 of the damages before the insurance company begins to pay the bills.

Are you covered for property damage?

Another type of coverage you probably have is property damage. Property damage pays for damage to property such as buildings, telephone poles, or other objects. It does not pay any medical bills.

You may purchase additional personal injury protection, however, which is usually called “medical” or “personal” coverage.

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How about Collision, Comprehensive and Uninsured Motorists?

Uninsured motorist coverage is an additional policy which pays your damages if you are hit by an uninsured driver. If you do not have this coverage, you must try to collect the money from the at-fault driver, which is often difficult to do.

Collision pays for the damage to your car if you cause an accident; liability will not cover this cost if you are at fault. Comprehensive coverage pays for all types of damage not caused by a wreck, such as weather-related damage, falling objects, or vandalism and theft.

Each of these portions of your policy have their own deductibles, as well.

Now that you know how an insurance policy is structured, what about rates? Why are you paying more (or less) than another driver similar to you?

Auto insurance companies figures rates based on complex formulas which take into account your age, driving record and habits, your location, and other factors.

These are all calculated and the risk that you will file a claim is determined. You are considered higher risk if you are younger, live in a densely populated area, have an expensive vehicle, or have previous driving infractions.

If these things are true, you are statistically more likely to have an accident resulting in a claim, or your claim will cost more to settle. Your rates may go up or down as these factors change.

What about Filing a Claim?

Understanding how a claim is filed is also important if you want to truly comprehend your insurance process.

If you are involved in an accident which is not your fault, an adjuster for the company insuring the vehicle (or your own adjustor, if you file under uninsured motorist coverage) will examine the damage and any medical bills.

It is the adjustor’s job to be sure that the amounts claimed are covered under your policy and are reasonable.

For this reason, insurance companies sometimes “approve” certain repair shops to do work without a great deal of investigation. If you choose to use a different provider, you may have to talk to an adjuster about the cost.

Your agent is a representative of an insurance company who sells you a policy and administers the filing of any claims. If you need to speak with your agent, you can contact him or her directly. Some companies rely on an “agentless” system in which you deal directly with the company in the event of a claim.

Before buying any type of auto insurance it’s important to know what type of coverage you are buying, the policy limits, policy deductible and more.

In comparison to most insurance policies auto insurance is pretty easy to understand, however, you need to take the time to learn how auto insurance works well before committing to any particular coverage. This will not only save you time in the event of an accident but possibly even money also.

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