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How Auto Insurance Works

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Auto insurance provides compensation for physical damage and injuries caused by a collision or other incident involving your vehicle. How you're compensated depends on your state's auto insurance system, what kind of coverage and how much you have, and how large your deductible is.

Types of Auto Insurance Systems

There are 4 main types of insurance systems used by the states and they differ in 2 main ways—whether a policyholder's insurance pays benefits regardless of who's at fault and if there's a restriction on the right to sue an at-fault driver.

  • A tort liability insurance system doesn't limit lawsuits. Drivers and passengers involved in an accident can sue the at-fault driver without restrictions.
  • A no-fault insurance system requires drivers to file a claim with their own insurance company, regardless of who caused the accident. Drivers are compensated for minor injuries under their own personal injury protection policy. They could sue for major injuries if their conditions meet "tort liability thresholds," which define the minimum financial amount that's eligible for filing a suit.
  • Choice no-fault insurance systems allow drivers to select either no-fault insurance or a traditional tort liability policy.
  • In add-on insurance systems, drivers are compensated from their own insurers, but also can pursue lawsuits against other drivers.

Regardless of the kind of system you have, you'll need to satisfy vehicle requirements as part of maintaining your contract. Your responsibilities include keeping your vehicle registration current and meeting your state's requirements for safety and emission inspections.

Car Insurance Deductibles

Deductibles are the amount of money you have to contribute out-of-pocket towards every claim before your insurance begins payment. The lower your deductible, the more you'll pay in monthly premiums, while higher deductibles result in lower payments.

One option that's becoming increasingly common with premium policies is a vanishing deductible. So long as you maintain a clean driving record, your deductibles will reduce over time until it reaches zero. Even if you do have an accident before you reach zero, your deductible will be lower than it would initially.

Ultimately, choosing a deductible is a personal decision related to how much you're willing to make in payments each month and the amount of funds you have to put towards covering any damages you might cause. Most insurance companies allow you to assign a different deductible to every vehicle on your plan, as well as different deductibles to different types of coverage.

Filing a Claim

Filing a claim requires providing your insurance company with details to help them determine whether your claim is valid. If you're not injured after an accident, try to record as much information as possible:

  • Other driver's address, phone number, insurance company, and policy number
  • Vehicle's make, model, year, color, license plate, and vehicle identification number (VIN)
  • Name and badge number of the responding police officer, if there was one
  • Names and phone numbers of any witnesses
  • Photos or description of damage to vehicles and other property
  • Description of obvious injuries to drivers and/or passengers

For step-by-step support, use the National Association of Insurance Commissioners (NAIC) WRECKCHECK smartphone app to collect information and submit directly to your insurer. Some insurance companies offer similar apps.

Can Auto Insurance Claims Be Denied?

Yes. Auto insurance claims can be denied because you didn't provide the type of information that's required, or you took actions that voided your coverage. You might have a claim denied for reasons such as:

  • You don't have coverage for the damages you're seeking
  • You changed cars without updating your policy
  • Your claim is higher than the policy limits
  • You didn't submit the claim within the specified time period
  • You're claiming bodily injury for a preexisting condition
  • You provided false information to the insurer when you purchased your policy
  • You didn't pay your insurance bill

If your auto claim is denied, request additional details. If you think it's an unfair denial, you can appeal your claim with your state insurance commissioner, file a bad faith claim against the insurer, or file a lawsuit against the at-fault driver or their insurance company.

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