What is Automobile Insurance?

Automobile insurance is simply a contract that helps pay for certain types of financial losses or obligations resulting from the use or ownership of an automobile.  To obtain this contract (insurance policy), you pay a specified amount of money called a premium. In return for the premium paid, the insurance company agrees to pay certain expenses and legal liabilities depending on the terms of the insurance policy.  Having the right insurance coverage may prevent you from suffering a large financial loss in the event of an automobile accident.

What are California’s Legal Requirements for Financial Responsibility?

If you drive an automobile in California, state law dictates that you must be financially responsible for your actions.  All drivers must show their ability to pay for damages  or injury to others resulting from the ownership or operation of a motor vehicle.

As of January 1, 2006, all insurance companies are required to report insurance status information to DMV for all private use vehicles (CVC §16058).

As of July 1, 2006, law enforcement and court personnel have access to DMV records to verify that your California registered vehicle is currently insured (CVC §16058.1).

Effective October 1, 2006, your vehicle registration is subject to suspension if the liability insurance is cancelled, OR if your insurance company has not electronically provided evidence of insurance when you purchase and register your vehicle, OR if you provide DMV with false insurance information (CVC §4000.38).

Financial Responsibility Laws

California’s Compulsory Financial Responsibility Law requires every driver and owner of a motor vehicle to be financially responsible for their actions.  The statutory minimum limits of liability insurance inCalifornia are as follows:

Bodily Injury

$15,000 for death or injury of any one person, any one accident.

$30,000 for all persons in any one accident.

Property Damage

$5,000 for any one accident.

There are four ways to accomplish financial responsibility:

1. Coverage by a motor vehicle or automobile liability insurance policy;
2. A cash deposit of $35,000 with the Department of Motor Vehicles (DMV);
3. A certificate of self-insurance issued by DMV to owners of fleets of more than 25 vehicles; or
4. A surety bond for $35,000 obtained from an insurance company licensed to do business inCalifornia.

All California drivers and owners must have at least the statutory limits of minimum liability insurance or an approved alternative way to pay for injury or property damage they may cause.  Penalties are very severe for non-compliance with this section of the vehicle code.

When your car is in an accident for which you are found legally liable, bodily injury (BI) liability covers your liability to others for injuries to them. Property damage (PD) liability covers your liability for damage to someone else’s property.

A policy with BI of $15,000/$30,000 and PD of $5,000 will pay out as follows:

• The maximum limit for one person’s injuries, medical expenses is $15,000 under the bodily injury portion;
• If two or more people are injured, the maximum limit for the accident will be $30,000;
• The maximum limit for damage to other people’s property (their car, their fence, etc.) is $5,000.

Comprehensive coverage (other than collision), uninsured motorist, medical payments and collision insurance are not required by law.

What Other Coverages are Available?

Insurance companies must offer the following coverage with every automobile policy:

Uninsured /Underinsured Motorist

Provides liability insurance when the party at fault does not have the state required minimum liability coverage, or the minimum liability coverage is insufficient to cover the injuries sustained in the accident.  Likewise, uninsured motorist property damage covers possible reimbursement for damages your car sustains (BI and PD).

Most insurance companies will also offer the following optional coverages:

Medical Payments

Provides for the payment of medical and similar expenses without regard for liability.

Physical Damage (collision and comprehensive):

Neither of these cover mechanical breakdown or normal wear and tear.  Collision covers damage to your vehicle caused by collision with another vehicle or with any other object, regardless of fault.  Collision insurance covers vehicle upset (overturn), but does not cover bodily injury or property damage liability.  Comprehensive coverage covers damage to your car caused by reason other than collision, such as fire, theft, windstorm, flood, vandalism, etc.

Endorsements/Riders

Special equipment (i.e. after-market additions such as premium stereos, tires, and other misc. equipment), towing, and rental reimbursement.

Actual Cash Value (ACV) – Unless otherwise defined in the policy, actual cash value in Californiameans fair market value. The fair market value of an item is the dollar amount that a knowledgeable buyer (under no unusual pressure) is willing to pay, and a knowledgeable seller (under no unusual pressure) is willing to accept.

Additional Equipment Endorsement – Provides coverage for certain parts and equipment that are not installed by the manufacturer. Coverage is subject to a maximum limit listed on the endorsement.

Adjuster – The person who evaluates the damage caused by an accident or other covered loss and determines the amount to be paid under the policy terms.

Agent – A licensed individual or organization authorized to sell and service insurance policies for an insurance company.

Assigned Risk– A driver who is not acceptable to a standard lines insurance company due to a poor driving record and is assigned to an insurance company participating in the assigned risk pool. All insurance companies licensed to sell auto insurance in California agree to accept a share of high-risk drivers based on the percentage of auto policies they issue in the state.

Automobile Insurance – A type of insurance that protects against losses involving automobiles. Auto policies contain a variety of coverages that can be purchased depending upon the needs and wants of the policyholder. Liability for bodily injury and property damage, medical payments, uninsured motorist, comprehensive, and collision are some of the common coverages offered under an auto insurance policy.

Binder– A short-term agreement that provides temporary insurance coverage until the policy can be issued or delivered.

Broker – A licensed individual or organization who, on your behalf, sells and services insurance policies.

Broker-Agent – A licensed individual who can act as an agent representing one or more insurance companies and also as a broker dealing with one or more insurance companies representing your interests.

Broker Fee Agreement – The contract between the policyholder and the broker which also specifies the charges for the services rendered by the broker.

California Automobile Assigned Risk Plan (CAARP) – This plan is available when a driver is unable to purchase private passenger or commercial liability auto coverage because of a poor driving record.

Commission – A portion of the policy premium that is paid to an agent by the insurance company as compensation for the agent’s work.

Commissioner of Insurance – This is the title of the head of the California Department of Insurance.

Comparative Negligence – The percentage of fault shared by each driver in an accident in which both contribute to causing the collision.

Comprehensive Coverage – Pays for damage to your car caused by reason other than collision, such as fire, theft, vandalism, windstorm, flood, et cetera.

Claim – Notice to an insurance company that a loss has occurred which may be covered under the terms and conditions of the policy.

Collision – Pays for damage to your car caused by physical contact with another vehicle or with another object, such as a tree, boulder, guardrail, structure, or person.

Declarations (DEC) Page – Usually the first page of an insurance policy that contains the full legal name of your insurance company, your name and address, the policy number, effective and expiration dates, premium payable, the amount and types of coverage, deductibles, the vehicle(s) insured, and the vehicle identification numbers (VIN).

Deductible – The amount of the loss that the policyholder is responsible to pay up-front before covered benefits from the insurance company are payable. This is applicable to comprehensive or collision coverage only.

Endorsement– A written agreement that changes the terms of an insurance policy by adding or subtracting coverage.

Exclusion – A contractual provision in an insurance policy that denies or restricts coverage for certain perils, persons, property, or locations.

First Party– The policyholder (insured) in an insurance contract.

Insured – The policyholder(s) entitled to covered benefits in case of an accident or loss.

Insurer – The insurance company who issues the insurance and agrees to pay for losses and provide covered benefits.

Liability Insurance– Coverage for a policyholder’s legal liability resulting from injuries to other persons or damage to their property.

License – A certificate of authority issued by the Department of Insurance to an insurer, agent, broker, or broker-agent to transact insurance business.

Limits – The maximum amount of benefits the insurance company agrees to pay in the event of a loss.

Loan Gap Coverage – This coverage pays the difference between the fair market value of your vehicle and the loan balance owed to your lender. This coverage is available on new vehicles only.

Low Cost Auto – A pilot program for the residents of Los Angeles and San Francisco Counties only, who meet specific lower income requirements. (Administered by CAARP)

Medical Payments Coverage– Covers the medical costs (up to the specified limit) resulting from an auto accident for you, your family, or others in your car. This coverage pays regardless of fault.

Non-Renewal – The termination of an insurance policy at its normal expiration date.

Policy – A contract that states the rights and duties of the insurance company and the insured.

Premium – The price of insurance paid to the insurance company for a policy.

Premium Finance Company – A lending institution that finances automobile insurance premium for a fee.

Producer – A term used by the insurance industry to refer to agents and brokers.

Quotation – An estimate of the cost of insurance based on the information supplied to the agent, broker, or insurance company.

Recision – The cancellation of a policy back to its effective date resulting in a return of all premiumcharged.

Rental Reimbursement Coverage – This coverage pays your expenses to rent an auto if you have a loss covered under Comprehensive or Collision benefits. Coverage is sold based on a daily amount of expense subject to a maximum limit.

Replacement Cost – The amount that it costs to replace lost or damaged property with new property of like kind or quality in the local market.

Salvage – Damaged policyholder property that is legally signed over to an insurer in a loss settlement. Insurance companies sell salvaged property in order to reduce their overall monetary loss.

Second Party – The insurance company in an insurance contract.

Subrogation – The process of recovering the amount of claims damages paid out to a policyholder from the legally liable party. When a company pursues the legally liable third party, they are required to include the policyholder’s deductible in the recovery process.

Surcharge – An extra charge applied to the premium by an insurance company, usually applied to an at-fault accident or moving violation.

Third Party– An individual other than the policyholder or the insurance company who has suffered a loss and may be able to collect compensation under the policy due to the negligent acts or omissions of the policyholder.

Total Loss – Damage or destruction to real or personal property to such extent that it cannot be rebuilt or repaired to its condition prior to the loss or when it would be cost prohibitive to repair or rebuild in comparison to the value of the property prior to the loss.

Towing Coverage – Addition to an automobile policy that pays a specified amount for towing and related labor costs.

Underinsured Motorist Endorsement – Addition to a Personal Automobile Policy (PAP) that covers an insured who is involved in a collision with a driver who does not have sufficient liability insurance to pay for the damages.

Uninsured Motorist Coverage (UMC) – Provides coverage for a policyholder involved in a collision with a driver who does not have liability insurance or who does not have sufficient liability limits to pay for damages. UMC comes in two parts: uninsured motorist bodily injury (UMBI) and uninsured motorist property damage (UMPD). UMBI coverage pays for injuries to you or any person in your car when there is a collision with an uninsured driver. UMPD coverage pays for the property damage to your car when there is a collision with an identified uninsured driver. UMC must be offered when you purchase liability coverage for your auto. If you decline UMC, you must sign a declination waiver.

HAIS lowered the insurance cost of my company’s trucks.

-Mark M.