How to Understand Your Auto Insurance Policy

If you’re driving and you’re legal, you have an auto insurance policy. Perhaps you bought it from a local agent you’ve known for years. Maybe you bought it from a cute little lizard with a vaguely Cockney accent you saw on TV once. Or is it a somewhat British accent? Either way, it’s all good.

Now you have your car insurance policy and you know you’re legal. You have your insurance certificate you keep in the glove box. You also have something called “declarations” and a policy booklet that talks about things like “perils” and “exclusions.” You’re going to read that, right? No seriously, you’re going to read that? Yeah, we didn’t think so. Fortunately, we’re just giving the highlights.

What is a Car Insurance Policy?

Just what is an auto insurance policy anyways? What exactly do all these terms mean and what does it do? While we can’t answer every question in a short article, we can look at the nuts and bolts of car insurance policy – terms and concepts to help you better understand just exactly what you’re buying.

In its most basic form, like all other forms of insurance a car insurance policy is a form of risk management. You others pay an insurance company a premium which they then use to indemnify, or recoup losses suffered by policyholders in certain driving situations.

Car insurance is part of a larger group of insurance products known as “property and casualty” or P&C. This group includes insurance such as homeowners insurance and most commercial insurance. Car insurance policies are available in both personal and commercial varieties. While there are some differences, the basic concepts are the same.

Of Perils and Exclusions

Your policy itself is usually a booklet of boilerplate language that applies to all policies issued by your insurance company under a particular brand name. It’s here where one typically finds perils and exclusions.

In insurance parlance, a “peril” is a potential negative event causing a loss. Perils commonly associated with car insurance policies include collision, theft and vandalism. There are usually others listed.

An exclusion is a peril that is not covered. Typical exclusions in car insurance policies include intentional damage, depreciation and any damages incurred outside the policy period.

Car insurance policies may also employ a set of perils and exclusions known as a form. There are three types of forms. The “basic form” covers a small set of perils only, usually around 10. The “broad form” covers a few more perils, up to around 20 or 25. The best form is the “special form,” which covers any peril except those specifically excluded. Of course, one should get the special form if available. Since the special form is the most commonly used, this is generally not a problem.

Understanding Your Declarations

Whereas the policy booklet is boilerplate language, your policy declarations include information specific to you. If you read only one item in your car insurance policy, this is it.

Your declarations will tell you what liability limits you have, as well your comp and collision deductibles if you have “full coverage”. Different companies print their declarations pages differently; there are no set rules for abbreviations or style. Hopefully your company has the good sense to publish their declarations pages in something resembling plain English.

Liability limitations are usually expressed in 1 of 2 ways. The first and more common way is the “split limit,” using numbers such as 50/100/50. This stands for liability limits of $50,000 for bodily injury to any one person in an accident, $100,000 to any group of people in a single accident, and $50,000 in property damage in a single accident. The other method is the “combined single limit,” or CSL. As its name suggests, it features the same limit for all possible liability scenarios.

Full coverage deductibles are usually pretty straightforward. For example, if you have a collision deductible of $500 and a comprehensive deductible of $100, it should say so pretty plainly. If not, talk to your insurance agent to help your decipher your declarations. After all, an insurance agent should know how to read his or her declarations page.