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Vehicle insurance
Vehicle insurance (or auto insurance, car insurance, motor insurance) is
insurance people can purchase for cars, trucks, and other vehicles. Its
primary use is to provide protection against losses incurred as a result of
traffic accidents. An insurance company may declare a vehicle totally
destroyed ('totaled' or 'a write-off') if it appears replacement would be
cheaper than repair.
Coverage levels
Insurance can cover some or all of the following items:
1. The insured party
2. The insured vehicle
3. Third parties
Different policies specify the circumstances under which each item is
covered. For example, a vehicle can be insured against theft, fire damage,
or accident damage independently.
Public policy
In many countries it is compulsory to purchase auto insurance before driving
on public roads. In the United States, penalties for not purchasing auto
insurance vary by state, but often involve a substantial fine, license
and/or registration suspension or revocation, as well as possible jail time
in some states. Usually the minimum required by law is third party insurance
to protect third parties against the financial consequences of loss, damage
or injury caused by a vehicle. Typically, coverage against loss of or damage
to the driver's own vehicle is optional - one notable exception to this is
in Saskatchewan, where SGI provides collision coverage (less a $700
deductible) (such as a collision damage waiver) as part of its basic
insurance policy. In South Australia Third Party Personal insurance from the
State Government Insurance Corporation (SGIC) is included in the license
registration fee. South Africa allocates a percentage of the money from
petrol into the Road Accidents Fund, which goes towards compensating third
parties in accidents.[1] Most countries relate insurance to both the car and
the driver, however the degree of each varies greatly.
Related research
A 1994 study by Jeremy Jackson and Roger Blackman[2] showed, consistent with
the risk homeostasis theory, that increased accident cost caused large and
significant reductions in accident frequency.
Basis of premium charges
Depending on the jurisdiction, the insurance premium can be either mandated
by the government or determined by the insurance company in accordance to a
framework of regulations set by the government. Often, the insurer will have
more freedom to set the price on physical damage coverages than on mandatory
liability coverages.
When the premium is not mandated by the government, it is usually derived
from the calculations of an actuary based on statistical data. The premium
can vary depending on many factors that are believed to have an impact on
the expected cost of future claims.[3] Those factors can include the car
characteristics, the coverage selected (deductible, limit, covered perils),
the profile of the driver (age, gender, driving history) and the usage of
the car (commute to work or not, predicted annual distance driven).[4][5]
Gender
Men average more miles driven per year than women do, and have a
proportionally higher accident involvement at all ages. Insurance companies
cite women's lower accident involvement in keeping the youth surcharge lower
for young women drivers than for their male counterparts but adult rates are
generally unisex. Reference to the lower rate for young women as "the
women's discount" has caused confusion that was evident in news reports on a
recently defeated EC proposal to make it illegal to consider gender in
assessing insurance premiums.[6] Ending the discount would have made no
difference to most women's premiums.
Age
Teenage drivers who have no driving record will have higher car insurance
premiums. However young drivers are often offered discounts if they
undertake further driver training on recognised courses, such as the Pass
Plus scheme in the UK. In the U.S. many insurers offer a good grade discount
to students with a good academic record and resident student discounts to
those who live away from home. Generally insurance premiums tend to become
lower at the age of 25. Senior drivers are often eligible for retirement
discounts reflecting lower average miles driven by this age group.
Distance
Some car insurance plans do not differentiate in regard to how much the car
is used. However, methods of differentiation would include:
Reasonable estimation
Several car insurance plans rely on a reasonable estimation of the average
annual distance expected to be driven which is provided by the insured. This
discount benefits drivers who drive their cars infrequently but has no
actuarial value since it is unverified.
Odometer-based systems
Cents Per Mile Now[7](1986) advocates classified odometer-mile rates. After
the company's risk factors have been applied and the customer has accepted
the per-mile rate offered, customers buy prepaid miles of insurance
protection as needed, like buying gallons of gasoline. Insurance
automatically ends when the odometer limit (recorded on the car’s insurance
ID card) is reached unless more miles are bought. Customers keep track of
miles on their own odometer to know when to buy more. The company does no
after-the-fact billing of the customer, and the customer doesn't have to
estimate a "future annual mileage" figure for the company to obtain a
discount. In the event of a traffic stop, an officer could easily verify
that the insurance is current by comparing the figure on the insurance card
to that on the odometer.
Critics point out the possibility of cheating the system by odometer
tampering. Although the newer electronic odometers are difficult to roll
back, they can still be defeated by disconnecting the odometer wires and
reconnecting them later. However, as the Cents Per Mile Now website points
out: "As a practical matter, resetting odometers requires equipment plus
expertise that makes stealing insurance risky and uneconomical. For example,
in order to steal 20,000 miles of continuous protection while paying for
only the 2,000 miles from 35,000 miles to 37,000 miles on the odometer, the
resetting would have to be done at least nine times to keep the odometer
reading within the narrow 2,000-mile covered range. There are also powerful
legal deterrents to this way of stealing insurance protection. Odometers
have always served as the measuring device for resale value, rental and
leasing charges, warranty limits, mechanical breakdown insurance, and
cents-per-mile tax deductions or reimbursements for business or government
travel. Odometer tampering—detected during claim processing—voids the
insurance and, under decades-old state and federal law, is punishable by
heavy fines and jail."
Under the cents-per-mile system, rewards for driving less are delivered
automatically without need for administratively cumbersome and costly
technology. Uniform per-mile exposure measurement for the first time
provides the basis for statistically valid rate classes. Insurer premium
income automatically keeps pace with increases or decreases in driving
activity, cutting back on resulting insurer demand for rate increases and
preventing today's windfalls to insurers when decreased driving activity
lowers costs but not premiums.
GPS-based system
In 1998, Progressive Insurance started a pilot program in Texas in which
volunteers installed a GPS-based technology called Autograph in exchange for
a discount. The device tracked their driving behavior and reported the
results via cellular phone to the company.[8] Policyholders were reportedly
more upset about having to pay for the expensive device than they were over
privacy concerns.[9]
In 1996, Progressive filed for and obtained a US patent (US patent 5,797134)
on their process. Progressive has also filed corresponding patent
applications in Europe and Japan. UK auto insurer, Norwich Union, has
obtained an exclusive license to Progressive's European patent application.
They have recently completed a successful pilot test of the technology and
it is now available commercially under the tradename "Pay As You Drive™"[10]
OBDII-based system
In 2004, Progressive launched another pilot program to allow policyholders
to earn a discount on their premiums by consenting to use its TripSense
device. TripSense connects to a car's OnBoard Diagnostic(OBD-II) port, which
exists in all cars built after 1996. The discount is forfeited if the device
is disconnected for a significant amount of time.[11]
Auto Insurance in the United States
Coverage Available
The consumer may be protected with different coverage types depending on
what coverage the insured purchases.
In the United States, liability insurance covers claims against the policy
holder and generally, any other operator of the insured’s vehicle, provided
they do not live at the same address as the policy holder and are not
specifically excluded on the policy. In the case of those living at the same
address, they must specifically be covered on the policy. Thus it is
necessary for example, when a family member comes of driving age they must
be added on to the policy. Liability insurance sometimes does not protect
the policy holder if they operate any vehicles other than their own. When
you drive a vehicle owned by another party, you are covered under that
party’s policy. Non-owners policies may be offered that would cover an
insured on any vehicle they drive. This coverage is available only to those
who do not own their own vehicle and is sometimes required by the government
for drivers who have previously been found at fault in an accident.
Generally, liability coverage does extend when you rent a car. Comprehensive
policies ("full coverage") usually also apply to the rental vehicle,
although this should be verified beforehand. Full coverage premiums are
based on, among other factors, the value of the insured’s vehicle. This
coverage may not apply to rental cars because the insurance company does not
want to assume responsibility for a claim greater than the value of the
insured’s vehicle, assuming that a rental car may be worth more than the
insured’s vehicle. Most rental car companies offer insurance to cover damage
to the rental vehicle. These policies may be unnecessary for many customers
as credit card companies, such as Visa and MasterCard, now provide
supplemental collision damage coverage to rental cars if the transaction is
processed using one of their cards. These benefits are restrictive in terms
of the types of vehicles covered.[12]
Liability
Liability coverage provides a fixed dollar amount of coverage for damages
that an insured becomes legally liable to pay due to an accident or other
negligence. For example, if an insured drives into a telephone pole and
damages the pole, liability coverage pays for the damage to the pole. In
this example, the insured also may become liable for other expenses related
to damaging the telephone pole, such as loss of service claims (by the
telephone company).
Liability coverage is available either as a combined single limit policy or
as a split limit policy:
Combined Single Limit
A combined single limit combines property damage liability coverage and
bodily injury coverage under one single combined limit. For example, an
insured with a combine single liability limit strikes another vehicle and
injures the driver and the passenger. Payments for the damages to the other
driver's car, as well as payments for injury claims for the driver and
passenger, would be paid out under this same coverage.
Split Limits
A split limit liability coverage policy splits the coverages into property
damage coverage and bodily injury coverage. In the example given above,
payments for the other driver's vehicle would be paid out under property
damage coverage, and payments for the injuries would be paid out under
bodily injury coverage.
Note that bodily injury liability coverage is also usually split as well
into a maximum payment per person and a maximum payment per accident.
Collision
Collision coverage provides coverage for an insured's vehicle that is
involved in an accident, subject to a deductible. This coverage is designed
to provide payments to repair the damaged vehicle, or payment of the cash
value of the vehicle if it is not repairable. Collision coverage is
optional. Collision Damage Waiver (CDW) is the term used by rental car
companies for collision coverage.
Comprehensive
Comprehensive (a.k.a. - Other Than Collision) coverage provides coverage,
subject to a deductible, for an insured's vehicle that is damaged by
incidents that are not considered Collisions. For example, fire, theft (or
attempted theft), vandalism, weather, or impacts with animals are just some
types of Comprehensive losses.
Uninsured/Underinsured Coverage
Uninsured/Underinsured coverage, also known as UM/UIM, provides coverage if
another at-fault party either does not have insurance, or does not have
enough insurance. In effect, your insurance company acts as at fault party's
insurance company.
In the United States, the definition of an uninsured/underinsured motorist,
and corresponding coverages, are set by state laws.
Loss of Use
Loss of Use coverage, also known as rental coverage, provides reimbursement
for rental expenses associated with having an insured vehicle repaired due
to a covered loss.
Loan/Lease Payoff
Loan/Lease Payoff coverage, also known as GAP coverage or GAP
insurance,[13][14] was established in the early 1980s to provide protection
to consumers based upon buying and market trends.
Due to the sharp decline in value immediately following purchase, there is
generally a period in which the amount owed on the car loan exceeds the
value of the vehicle, which is called "upside-down" or negative equity.
Thus, if the vehicle is damaged beyond economical repair at this point, the
owner will still owe potentially thousands of dollars on the loan. The
escalating price of cars, longer-term auto loans, and the increasing
popularity of leasing gave birth to GAP protection. GAP waivers provide
protection for consumers when a "gap" exists between the actual value of
their vehicle and the amount of money owed to the bank or leasing company.
In many instances this insurance will also pay the deductible on the primary
insurance policy. These policies are often offered at the auto dealership as
a comparatively low cost add on that can be put into the car loan which
provides coverage for the duration of the loan.
Consumers should be aware that a few states, including New York, require
lenders of leased cars to include GAP insurance within the cost of the lease
itself. This means that the monthly price quoted by the dealer must include
GAP insurance, whether it is delineated or not. Nevertheless, unscrupulous
dealers sometimes prey on unsuspecting individuals by offering them GAP
insurance at an additional price, on top of the monthly payment, without
mentioning the State's requirements.
In addition, some vendors and insurance companies offer what is called
"Total Loss Coverage." This is similar to ordinary GAP insurance but differs
in that instead of paying off the negative equity on a vehicle that is a
total loss, the policy provides a certain amount, usually up to $5000,
toward the purchase or lease of a new vehicle. Thus, to some extent the
distinction makes no difference, i.e., in either case the owner receives a
certain sum of money. However, in choosing which type of policy to purchase,
the owner should consider whether, in case of a total loss, it is more
advantageous for him or her to have the policy pay off the negative equity
or provide a down payment on a new vehicle.
For example, assuming a total loss of a vehicle valued at $15,000, but on
which the owner owes $20,000, the "gap" is $5000. If the owner has
traditional GAP coverage, the "gap" will be wiped out and he or she may
purchase or lease another vehicle or choose not to. If the owner has "Total
Loss Coverage," he or she will have to personally cover the "gap" of $5000,
and then receive $5000 toward the purchase or lease of a new vehicle,
thereby either reducing monthly payments, in the case of financing or
leasing, or the total purchase price in the case of outright purchasing. So
the decision on which type of policy to purchase will, in most instances, be
informed by whether the owner can pay off the negative equity in case of a
total loss and/or whether he or she will definitively purchase a replacement
vehicle.
Car Towing Insurance
Car Towing coverage is also known as Roadside Assistance coverage.
Traditionally, automobile insurance companies have agreed to only pay for
the cost of a tow that is related to an accident that is covered under the
automobile policy of insurance. This had left a gap in coverage for tows
that are related to mechanical breakdowns, flat tires and running out of
gas. To fill that void, insurance companies started to offer the Car Towing
coverage, which pays for non-accident related tows.
European Union and United Kingdom Laws regarding motor insurance
In 1930 the UK government introduced a law that required every person who
used a vehicle on the road to have at least third party personal injury
insurance. Today UK law is defined by the The Road Traffic Act which was
last modified in 1991.
The Act requires all motorists to be insured against their liability for
injuries to others (including passengers) and for damage to other persons'
property resulting from use of a vehicle on a public road or in other public
places. This is called Third Party Insurance. It is an offence to drive your
car, or allow others to drive it, without at least Third Party insurance
whilst on the public highway, on private land no such legislation applies.
The insurance certificate or cover note issued by the insurance company
constitutes legal evidence that the vehicle specified on the document is
indeed insured. The Law says that an authorised person, such as the police,
may require a driver to produce an insurance certificate for inspection. If
the driver cannot show the document immediately on request, then the driver
will usually be issued a HORT/1 with seven days, as of midnight of the date
of issue, to take a valid insurance certificate (and usually other driving
documents as well) to a police station of the driver's choice. Failure to
produce an insurance certificate is an offence.
Insurance is more expensive in Northern Ireland than in other parts of the
UK.
Motorists in the UK are required to display a Vehicle excise duty disc in
their car when it is kept or driven on public roads. This helps to ensure
that most people have adequate insurance on their vehicles because you are
required to produce an insurance certificate when you purchase the disc.
However it is a known practice for some people to purchase insurance to gain
the certificate and then to cancel the insurance and gain a full refund
within the statutory 14 day cooling off period.
The Motor Insurers Bureau compensates the victims of road accidents caused
by uninsured and untraced motorists. It also operates the Motor Insurance
Database, which contains details of every insured vehicle in the country.
Notes
1. ^ Petrol Structure (HTML). Department of Minerals and Energy, South
Africa. Retrieved on 2006-05-11.
2. ^ Jackson JSH, Blackman R (1994). "A driving-simulator test of Wilde's
risk homeostasis theory". Journal of Applied Psychology.
3. ^ McClenahan, Charles. Ratemaking (PDF). Casualty Actuarial Society.
Retrieved on 2006-05-11.
4. ^ What determines the price of my policy? (HTML). Insurance Information
Institute. Retrieved on 2006-05-11.
5. ^ How Are Auto Insurance Rates Calculated? (HTML). Countrywide Insurance
Services. Retrieved on 2006-05-11.
6. ^ "Women drivers' insurance threat" (HTML), BBC. Retrieved on 2006-09-05.
7. ^ Cents Per Mile Now (HTML). Retrieved on 2006-05-11.
8. ^ Progressive's "pay-as-you-drive" auto insurance poised for wide rollout
(HTML). insure.com. Retrieved on 2006-05-11.
9. ^ Insurance program rewards drivers who drive less and slower (HTML).
Aftermarket Business. Retrieved on 2006-05-11.
10. ^ Pay As You Drive™ Insurance (HTML). Norwich Union. Retrieved on
2006-05-11.
11. ^ New technology provides detailed info on driving habits (HTML).
Minnesota Public Radio®. Retrieved on 2006-05-11.
12. ^ Auto Rental Collision Damage Waiver Program Personal (HTML). Visa USA.
Retrieved on 2006-05-11.
13. ^ Buying or Leasing a Car: What you should know (HTML). State of New
York Banking Department. Retrieved on 2007-01-17.
14. ^ GAP Insurance (HTML). Washington State Office of the Insurance
Commissioner. Retrieved on 2007-01-16.
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