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purpose of insurance is not to avoid or eliminate risk, but
to transfer risk. So, a formal definition of insurance would
be: A contract or device for transferring risk from a person,
business or organization to an insurance company that agrees,
in exchange for a premium, to pay for losses through an accumulation
of premiums. Risk is the chance or uncertainty of loss.
first automobile liability insurance policy was issued in
1897 to a Westfield, Massachusetts mechanic, Gilbert J. Loomis,
who had built himself a one-cylinder car and founded the Speedwell
Motor Car Co. in Dayton. He bought a $1,000 policy for $7.50,
which, when compared with today’s premium for $1 million
of auto liability and “umbrella” protection, was
astronomically expensive. A year or so later, a doctor in
Buffalo purchased a public liability and property damage contract
to apply to an electric car that he sometimes used to make
early policies for automobiles or horseless carriages were
modeled on “teams” insurance - insurance that
protected the owner of horsedrawn carriages against liability
for injuries to his driver and to the public caused by the
horses or the carriage. Since those early days, automobile
insurance, like the vehicle itself, has come a long way. It
now includes seven major coverages as well as some minor ones
such as towing and labor costs. In the process of expanding
coverage, automobile insurance has become much more complex.
And the need to deal with every possible eventuality in unambiguous
language has resulted in intimidating lists of what is covered
and what is excluded and definitions of what is meant by certain
after reading the policy from cover to cover, the average
policyholder may still be confused as to which part of the
policy will respond in a particular set of circumstances.
If a car is damaged in a multiple car accident, for example,
will the policyholder’s own insurance company or the
company of the other drivers deemed at fault pay for the damage?
When does the other driver’s liability policy apply?
If a person is injured in an auto accident, determining the
sources of compensation may be even more complicated. Depending
on state law, the circumstances of the accident and whether
the person is covered for medical care by other insurance
policies, the cost of medical treatment may be paid by the
no-fault portion of a policy, uninsured motorist coverage,
the medical payments section (in a state with a traditional
tort liability system for auto insurance), a group health
policy, workers’ compensation insurance or Medicare.
With so many complexities to master, no wonder many people
know more about the inner workings of their automobile than
the insurance policy that covers it!
are two major automobile exposures for which individuals seek
protection. First, people want to be protected against their
liability in case they injure someone or damage someone else’s
property through the use of their automobile. Second, people
want protection for damage to their own automobile in case
the auto is damaged in an accident or suffers others types
of damage, such as fire or theft.
personal Automobile policy consists of a Declarations page
and a policy form. The policy form contains four separate
coverages, each with its own insuring agreement, exclusions
and conditions. They are:
Part A---Liability Coverage
Part B---Medical Payments Coverage
Part C---Uninsured Motorists Coverage
Part D---Coverage For Damage To Your Auto (Physical Damage).
most other items of exposure, the value of a single automobile
tends to fall within fairly narrow limits. Also, certain forms
of physical damage are subject to a relatively high frequency
of loss. As a result, the automobile exposure must be considered
in relation to other values at risk. For example, to most
families the value of the automobile is second only to the
value of the home as an asset. On the other hand, an automobile
of similar value owned by a large business firm would be relatively
less important. Another consideration is the fact that automobiles,
especially in the early years, depreciate at a fairly high
rate with the result that the total value is decreasing but
the cost of repairing partial losses remains nearly constant
physical damage insurance recognizes a division between high-
and low-loss frequency exposures. Perils that have low frequency
such as fire and flood are usually written on a full coverage
basis. Collision and upset, which occur more frequently and
cause many small losses, are nearly always written using a
deductible. In this way, the inevitable nicks, scrapes, and
scratches are regarded as a maintenance cost.
insurance is usually a package made up of several
kinds of coverage. One standard package includes six basic
types of coverage: bodily injury liability, property damage
liability, medical payments insurance, uninsured and underinsured
motorist coverage, collision and comprehensive coverage. Liability
laws require a driver to pay for injured caused to other people
or their property by the negligent operation of a vehicle.
Liability insurance covers the costs of such injuries and
damage up to the limits specified in the insurance policy.
Bodily Injury Liability. Bodily injury liability
insurance pays for claims against the policyholder resulting
from injuries to pedestrians, persons riding in other cars
or passengers in the policyholder’s car. If a policyholder
should accidentally kill or injure someone, he or she can
be held liable under the law for hospital and medical bills
and many other items, such as the costs of rehabilitation
and long-term nursing care, pain and suffering of the injured
person, or the victim’s lost earnings or potential future
earnings. If an injury is serious or fatal, these expenses
can run into many thousands of dollars. Bodily injury liability
coverage is designed to pay these expenses. It also pays legal
expenses involved in defending the policyholder against a
lawsuit. Coverage applies when the car is driven by the policyholder,
resident family member or anyone driving with the policyholder’s
consent. The policyholder and resident family member are also
covered while driving someone else’s car with permission.
law dictates that person A is responsible for paying the cost
of injuries to the person or property of person B when A caused
B’s injuries through negligence. If A runs a red light
and his car crashes into B’s car, most people would
agree that A is clearly at fault for B’s injuries and
damage to B’s car. Let us suppose, however, that there
are no witnesses to the accident, and A states that he believes
the light was green. Or suppose that the light was out of
order, or that there was no light at the intersection, or
that A ran into B because he swerved to avoid a child who
ran into the street. Suppose both A and B are injured and
each says the other was at fault. Liability law and bodily
injury liability insurance both require that fault be established.
When neither party is willing to admit fault, which frequently
happens, fault must be determined by the courts.
many cases, the insurance companies of both A and B will hire
lawyers and the case will be tried before a judge and jury
who will decide who was at fault after hearing various testimony.
Needless to say, this is a time-consuming and expensive process.
of the enormous legal expenses and delays in using the courts
to establish fault in traffic accidents, a number of states
have enacted some form of so-called “no-fault”
law for bodily injury (but not property damage) liability.
In general, these laws provide that for damages below a certain
dollar amount (for example, injuries costing $1,000 or less
to treat), or a certain degree of seriousness, each driver’s
own insurance company will pay the cost regardless of who
was at fault. This avoids the expense and hassle of going
to court for relatively minor claims.
every state, however, the fault system is in use for serious
injuries or death, and drivers need bodily injury liability
insurance to protect them from the cost of these claims and
to defend them against allegations of negligence.
Property Damage Liability. Property damage liability
insurance pays for legal defense and claims against the policyholder
resulting when the policy owner’s car damages the property
of others. Often the property is another car, but coverage
includes damage to such property as personal belongings, trees,
buildings, lamp posts and telephone poles as well. The policyholder
and resident family members are covered while driving their
own car or someone else’s car with permission.
Uninsured Motorist (UM) Coverage. Sometimes at-fault
drivers who injure other people or property have no insurance
to cover the damage they have done and also lack sufficient
personal assets to cover the cost. In these situations and
also in hit-and-run accidents, uninsured motorist coverage
pays for bodily injuries and, in some states, for car damage.
The coverage provides compensation not only for such out-of-pocket
expenses as medical costs, but also for non-economic damages
such as pain and suffering. In most states the coverage also
pays when the driver at fault has auto insurance with an insurer
that is insolvent (bankrupt). Coverage applies to the insured,
to family members and to any non-paying passengers in his
Underinsured Motorist (UIM) Coverage. The
driver responsible for an accident might be insured but not
have sufficient coverage to pay the full cost of the victim’s
injuries. Underinsured motorist insurance is designed to make
up the difference, subject to the limits of the insurance
buyer’s policy. It pays the buyer’s medical and
other expenses in excess of the bodily injury liability limits
of the driver who causes the accident. Usually this coverage
is optional. In some states, it is automatically included
when uninsured motorist coverage is purchased.
Medical Payments Insurance. Medical payments
insurance covers medical expenses that the insurance buyer
and any passengers incur as a result of a traffic accident.
Coverage applies to the policyholder, resident family members
and passengers in the policyholder’s car. It also covers
injuries sustained by the policyholder or family members injured
by a vehicle while walking or while riding in another car.
of medical payments insurance is generally voluntary - that
is, not required by state law.
Personal Injury Protection. Personal injury protection
(PIP) is a form of protection that is sold in all states with
no-fault laws. Like medical payments insurance, it pays for
medical costs that result from traffic accident injuries.
Although both forms of protection pay medical expenses, there
are two main differences between PIP and medical payments
insurance. The first is that whereas purchase of medical payments
insurance is generally voluntary, purchase of PIP is usually
mandatory and the amount of total benefit’s the insurance
buyers can receive is specified by state law. These benefits
vary significantly from only a few thousand dollars to an
unlimited amount. PIP also covers lost earnings and other
medical payments, and UM/UIM are often also called
first-party insurance, because the insurance company (the
second party to the contract; the policyholder is the first
party) pays the injured person’s own expenses. This
is in contrast to third-party liability insurance under which
the injured person’s expenses are paid for by the insurer
of the other, at-fault, driver in the accident.
Compulsory Insurance, Financial Responsibility and
Policy Limits. Every state requires that motorists
be financially responsible for the damage they may cause to
other persons or their property, and, as of June 1, 1988,
39 states plus the District of Columbia require people to
purchase automobile liability insurance for this purpose.
The states have different rules about the dollar limits of
liability. Most drivers will have the option of purchasing
greater amounts of coverage if they wish. For example, the
limits in the state-mandated minimums for the District of
Columbia is 25/50/10, for the state of Virginia is 25/50/10
and Maryland is 20/40/10. The first two figures refer to bodily
injury liability limits and the third figure to property damage
liability. For example, 10/20/5 (Florida) means coverage up
to $20,000 for all persons injured in an accident, subject
to a limit of $10,000 for one individual, and $5,000 coverage
for property damage. (Source: American Insurance Association).
Collision Insurance. Collision insurance
pays for damage to the policyholder’s own car, regardless
of who caused the accident. This coverage applies to damage
to the policyholder’s car as the result of a collision
with another vehicle or a stationary object, or as the result
of turning over. If another driver was at fault, the insurance
company may pay the policyholder, then seek reimbursement
from the other driver’s insurer.
is limited in two ways. First, the amount the policyholder
can collect is no more than the current market value of his
or her car immediately before the accident. Second, the person
buying collision insurance selects a deductible. The deductible
is the amount of each loss that the policyholder pays before
the insurance company makes any payment. So, for example,
with a deductible of $200, the insurance buyer pays the first
$200 of any collision claim, and the insurance company pays
the rest. Generally, deductibles range from $50 to $1,000.
The higher the deductible, the lower the premium for collision
Comprehensive Coverage. Comprehensive coverage
is an option covering losses due to most kinds of damage other
than collision. It covers such risks as fire, theft, vandalism
and malicious mischief, glass breakage, falling objects, collision
with animals or birds, explosions, earthquakes, windstorms,
floods, hail and the like. However, some kinds of objects
and events are usually excluded; for example, most policies
do not cover tape decks or CB radios.
insurance provides broad coverage. For instance,
if a car is stolen, the insurance company reimburses the policyholder
for the value of the car and even pays a reasonable amount
for substitute transportation, such as a rental car, perhaps
for as long as 30 days. Some policies extend coverage to include
damage or theft of rented cars. And, although comprehensive
is intended to pay for damages to the policyholder’s
car rather than to property in the car, some policies provide
limited coverage for personal effects in the car when the
loss is caused by fire or lightning.
broken glass has been covered by comprehensive rather than
collision insurance. However, insurers usually agree to pay
for broken glass under the collision coverage if the breakage
results from collision so that the policyholder is not subject
to two deductible amounts.
coverage is usually sold with a deductible of $50 to $500.
practically every state in the union, you can’t drive
unless you have some type of automobile insurance. As a matter
of fact, driving without insurance is considered a crime in
some states. If you are a driver, it’s obviously one
of your most important insurance decisions. Essentially, there
are no great differences in auto policies from company to
company. There are, however, big differences in how much you
pay for an auto insurance policy. The following factors determine
the cost of premiums you pay for the policy you want:
The type of car you drive * The age of the car * Your
driving record * Where you live * How much coverage you want
* The amount of deductible.
all the hazards and perils of life that threaten your fortune
and possessions, probably none is more constant nor greater
than the chance of having an accident with your car. Motor
vehicles maim, they kill, they destroy houses, wipe out families,
and even disrupt businesses. Even the most innocent of trips
can end in an accident that triggers hundreds of thousands
of dollars in claims against you or your estate. Sometimes
the results can be quite surprising - and staggering.
instance, one motorist accidentally crowded a flat-bed truck
off a highway. Although the truck wasn’t damaged, it
was carrying an intricate milling machine, and the machine
suffered several thousands of dollars worth of damage. But
that was just the start. The company that owned the machine
filed a claim against the motorist, alleging that the time
the machine was out of service for repairs would cost it in
lost business, and the company demanded $100,000.
automobile accidents should not wipe us out, because we have
automobile insurance. Unfortunately some of us don’t
have as much as we should. For instance, that motorist who
damaged the machine had only the required minimum coverage
for property damage liability - $5,000.
will actually increase during periods of inflation.
Auto Coverage Part
like individuals, need both Liability and Physical Damage
coverage for losses that arise out of autos owned by or used
in the business.
Commercial Auto policy can be written as a mono-line policy
or included in the CPP (Commercial Package Policy). A Commercial
Auto coverage part must contain:
Common Policy Declarations
Common Policy Conditions
One of five separate coverage forms: Business Auto, Business
Auto Physical Damage, Garage, Truckers, or Motor Carrier
Appropriate Declarations for coverage form selected
Business Auto Physical Damage form covers the insured’s
owned or hired business autos for physical damage only.
Business Auto coverage form is used to insure the private
passenger and commercial auto exposures of all businesses
other than garages, truckers and motor carriers. Because of
the specialized nature of these businesses and their unique
coverage needs, separate forms were designed to cover these
Business Auto coverage form includes:
Physical Damage coverage
(Comprehensive or Specified Causes Of Loss and Collision)
Motorists, Medical Payments and Underinsured Motorists coverage
can be added by endorsement.
note that the precise coverage afforded is subject to the
terms, conditions, and exclusions of the policy as issued.
This explanation is intended only as a guideline. This information
is not intended to be considered investment, tax or legal
advice. It is provided, for your education only. This is not
an insurance contract. All terms and coverages are defined
solely by your policy. Savings will vary based on individual
are in love with their cars, but they sure don’t love
their automobile insurance. Unfortunately, the joys of owning
a car are often diminished by the realities of automobile
insurance. Or, to put it more graphically, auto insurance
is to cars what buffalo chips are to bison.
unpleasant as it may be to purchase auto insurance, it will
be even more distasteful if you don’t fully understand
the who’s, why’s, what’s, and how’s
of your coverage. And since ignorance is never bliss when
it comes to insurance, it pays to know your policy, from the
declarations page to the fine print.
is full of uncertainty, but three things are constant: death,
taxes, and insurance. Without insurance, we would not be able
to purchase our homes, since no bank would give us the money.
Without insurance, many people would not dare to drive a car
because of the high financial risk should there be an accident.
Without insurance, “Force” could not be with us,
because the film Stars Wars would never have been made. Without
insurance, life and commerce as we know it could not exist.
we may be unable to prevent death or abolish taxes, we can
control the cost of insurance and become empowered consumers
simply by understanding how insurance works.
more details, please call a PaulBalep representative toll-free
1-800-964-8614 to receive a free, no-obligation
quote. Like so many satisfied clients, we think you’ll
be happy you did. And to set up a meeting to discuss additional
insurance and financial goals: Visit us online at www.paulbalep.com
, or e-mail us at email@example.com
will receive a no-obligation, customized proposal for your
individual or group automobile insurance. We have the experience,
knowledge, products and services to help you to reach your
insurance and financial goals.
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to find you the right combination of coverage and value.