Piecing Together the Auto Insurance Puzzle

Behind the almost universal dread of shopping for auto insurance is the consumer’s awareness that he doesn’t really understand-- indeed, cannot understand-- what he’s buying, never mind its comparative value.

This is not apprehension. It’s insight. The average human mind cannot keep straight all the separate and interlocking parts of one auto insurance policy, not to speak of the variations among policies, and figuring out what he gets from each is like doing battle with the mythical Proteus: He no sooner grasps one part than he finds himself holding something quite different at another company.

Under the insurance system in most states, bodily injury liability is fairly stable, covering injuries to others caused by the policy holder, his immediate family, someone authorized to drive his car, or indeed just the car. The injured could be occupants of another car, pedestrians, bystanders, even non-family passengers in the insured’s car. Property damage liability covers damage to other people’s cars, their fences, their plate glass windows.

Sometimes called the “basic building block” of auto insurance, liability coverage is most important to society and its officials, who may make designated minimums of such coverage mandatory so that no one goes around causing damage to others without paying for it. (In California, it’s $15,000 per person/$30,000 per accident.)

Liability can be a “lawsuit business,” says State Farm spokesman Jerry Parsons; “You’re covering yourself against what will be exacted from you.” Indeed, State Farm, for one, defines covered damages as those the insured “becomes legally obligated to pay.” In reality, most claims don’t require such judgment. “Most people try to settle with the insurance company, expecting it will take care of their needs,” says Robert Hunter, president of the National Insurance Consumer Organization. “If it doesn’t, they go to a lawyer.”

The usual rule-of-thumb is that the wealthy need the highest coverage, the poor being essentially “judgment-proof,” Hunter says, because there is nothing to take from them. “No lawyer is going to pursue someone with no financial assets, a 20-year-old living alone in an apartment and making $5 an hour,” says Stephen Bjelland, a Chino, Calif., agent of Farmer’s Insurance, “but someone with a half million in assets is worth a lawyer’s time in going to court, unless he can settle for a big amount right away.”

Most insurers recommend that anyone with substantial income and assets--in some areas, just a house--raise their limits to $100,000/$300,000 and more. Hunter recommends buying higher coverage outside the auto policy--a little-advertised and relatively inexpensive personal liability “umbrella policy” that takes over where auto or homeowners coverage stops: State Farm’s, for example, offers a million dollars extra coverage for less than $100 a year.

Uninsured motorist coverage traditionally takes care of the bodily injuries of the policyholder and his passengers if another car’s driver is at fault, but is uninsured. Underinsured motorist coverage--usually offered separately--covers any difference between the other driver’s liability coverage and the actual cost of injuries suffered, up to chosen limits. Some such coverages include injuries suffered in hit-and-run accidents; others apply only when the driver is known, leaving hit-and-runs to the policyholder’s medical insurance or collision coverage, if any.

Many people buy rather low limits of this coverage, as if it were very low-risk. Actually, the number of uninsured motorists can range from 5% to 50% of drivers, depending on the state, says Hunter. There’s also, says Parsons, “a very basic philosophic argument to what extent one should be required to protect oneself; you could argue that the other jerk is responsible and you shouldn’t have to pay, but it’s a fact of life.”

Indeed, it’s often suggested that one choose uninsured motorist coverage to match one’s personal liability limits. Some agents even require it because, says Bjelland, “the first person you want to protect is you.” Others, however, advise that one needs less if the family has good medical and disability insurance that will cover such costs.

To most everyone’s surprise, uninsured motorist insurance covered only bodily injuries until recently, when coverage for property damage was added to most policies. Unfortunately, it was added in so many different ways that any summary would probably misrepresent some offering. In some cases, it has simply been added to bodily injury without separate charge; in some, it’s separate, but available only if the insured has no collision coverage; in some, it’s also available specifically to cover the collision deductible, if the insured carries collision coverage.

In any case, since even the most expensive cars are worth less than the cheapest human bodies, such property damage coverage is probably less important than bodily injury coverage--a principle that pertains in the approach many agents take to selling insurance coverage, and in the approach some consumers take to buying it. Certainly it’s a distinction that separates this column from the next, which deals with what many feel are the more optional auto insurance coverages.