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Low-Liability Auto Coverage Is a Good Deal--if You Don't Have Much to Lose
It would seem to be an ideal solution for cash-strapped drivers: Just as auto insurance premiums are poised to rise, the state is requiring insurance companies to offer a low-cost alternative.
Starting July 1, 2000, good drivers with low incomes can qualify for the new bare-bones policies, which will initially cost $450 a year in Los Angeles and $410 in San Francisco, the only two cities where the experimental coverage will be available.
Applicants can have no more than one ticket or "point" for a moving violation on their records in the past three years, and their incomes cannot exceed 150% of the federal poverty level, which means a four-member household could not make more than about $26,000 a year. Men ages 19 to 24, who are considered the highest-risk drivers, will pay an extra 25% for the policies; the coverage is not available to those under 19.
The policies will be available through insurance agents and will be administered by the California Automobile Assigned Risk Plan, the nonprofit organization that provides coverage for high-risk drivers.
The Legislature mandated the policies to try to combat the problem of uninsured drivers. The Insurance Information Network of California, a trade group, estimates that 1 out of 3 Los Angeles drivers has no insurance despite a state law that requires coverage. Statewide, the proportion of uninsured drivers is about 1 in 5.
The insurance industry, however, doubts that many uninsured drivers will sign up. That means the program may be of greatest interest to the working poor who have insurance.
To make the low premiums feasible, the Legislature lowered the amounts of liability coverage the policies offer. Instead of the current minimum required by law--$15,000 in coverage for bodily injury per person, $30,000 of total bodily injury coverage per accident and $5,000 for property damage--the low-cost policy limits are $10,000, $20,000 and $3,000.
Liability coverage essentially pays for any harm a driver inflicts on other people; bodily injury liability, for example, pays for the medical costs, lost wages and pain suffered by the other driver and any passengers, while property damage basically covers the dings and dents to the other car.
Because most accidents are fender benders that cause less than $1,000 in property damage and don't result in injury, it would seem that the new low-cost policies would provide enough coverage for most situations.
And that's true, as long as you don't have much to lose. If you have a home, a decent job or any savings, however, the bare-bones policy--and the state's regular minimum policy, for that matter--could be the most expensive choice in the long run.
Kenneth Brownlee, a sales and service center manager for Nationwide Insurance Cos., which recently opened three new offices in urban Los Angeles, said he frequently encounters consumers with far more at stake than they realize.
Brownlee, who manages Nationwide's Crenshaw office, estimates at least one-third of the people he contacts have too little liability insurance. Some own homes free and clear, yet carry the minimum insurance required by state law, Brownlee said.
One bad accident could rob these drivers of everything they own if the victims, or their insurance companies, decide to sue for more than the policy limits.
Those who don't have home equity or savings to lose could find their paychecks garnisheed to pay the cost of a lawsuit judgment.
Although premiums vary wildly by company and area, a woman in Compton with 10 years of driving experience and a clean driving record could pay $466 to $2,312 a year for basic liability insurance, according to the state Department of Insurance's 1999 premium survey.
Most major insurers would charge her $600 to $1,200 for coverage.
So if the woman worked a low-wage job, had little savings and rented rather than owned a home, the new low-cost policy probably would make more sense for her than most coverage currently available.
Most drivers have enough to lose, however, that higher liability limits are advisable. (See accompanying "Financial Planner" for a liability checklist.)
Financial advisors and insurance experts recommend that most people carry liability coverage of $100,000 per person and $300,000 per accident, with at least $50,000 of property damage. Once your income or net worth surpasses six figures, even higher limits are usually recommended. Most auto insurance liability tops out at $500,000 per person or accident, but personal liability or "umbrella" coverage is available to stretch that limit to $10 million.
Interestingly, it doesn't cost all that much more to dramatically increase coverage. Boosting liability coverage from the state's minimums to $100,000 per person for bodily injury, $300,000 per accident and $50,000 property damage--or about 10 times the state minimum--would add about $200 to the average annual premium, according to State Farm actuaries.
That may be money a low-income driver doesn't have, of course, and if it's a choice between groceries and added coverage, there's no choice at all.
For those who do have the option, however, it makes sense to do a little comparison shopping and understand the risks before deciding to opt for the cheapest policy.