By Selena Garrison, MS, Department of Family, Youth, and Community Sciences, University of Florida

Reviewed by Michael Gutter, PhD, Department of Family, Youth, and Community Sciences, University of Florida

You’re cruising along in your car, windows down. Your favorite song is playing on the radio, and you’re singing along—okay, maybe a little off key, but who cares? It’s Friday afternoon, and you’re feeling good. But suddenly, a light you just weren’t quite anticipating turns red right up ahead. You slam on the brakes–but it’s too late, and you hear a sickening crunch as you rear-end the car in front of you. You’ve just caused an accident.

Car insurance might not be the most exciting thing to talk about (or to shop for), but when situations like this happen, it suddenly becomes foremost in our minds! Making good decisions about car insurance is definitely an important part of financial management. Understanding your car insurance and what is and isn’t covered can save you a lot of money if and when an accident occurs.

There are four main parts to your car insurance policy, and it’s important to understand each one! In this first section of our two-part series on our car insurance, we’ll explain liability insurance and medical payments insurance.

Coverage A: Liability Insurance

Liability insurance covers you when you are held legally responsible for the losses of other people. In other words, if you are responsible for an accident, liability insurance covers the bodily injuries and property damage to the people in the other car(s). It is important to understand that liability insurance does not generally cover losses to you or the people in your car.

There are two types of liabilities that this insurance covers:

• Bodily Injury Liability – When you (or someone in your household) are held legally responsible for bodily injuries suffered by other people. For example, in that car accident we were talking about, neck injuries to the other driver would be a bodily injury liability.
• Property Damage Liability – When you (or someone in your household) are held legally responsible for damage to other people’s property, including cars, buildings, street signs, poles, etc. For example, in our accident, if the other car had damage or if a street sign was knocked over, those would be property damage liabilities.

If you have a family auto policy (FAP), which you probably do if there is more than one person on your insurance, your coverage limit will be quoted with three numbers, such as 100/300/50. Each of these numbers represents a multiple of $1,000. (If you have a personal auto policy, your limit will be stated as one number.)

• The first number (100 in our example) gives the maximum amount that will be paid out for one person’s injuries resulting from a car accident. (Reminder: Again, these numbers only apply to people who were NOT in your vehicle. You and your own passengers are covered under medical payments insurance, which we will discuss below.) For example, if one person from another vehicle was injured in the accident, and the cost of their injuries totaled $50,000, that whole amount would be covered. If the cost of the other person’s injuries totaled more than $100,000, however, you would be responsible for paying the additional amount.
• The second number (300 in our example) gives the maximum that will be paid out in total for injuries caused to others in a car accident. For example, if five people were injured, and the injuries totaled $400,000, the insurance would only pay the first $300,000, and you would be responsible for the other $100,000.
• The third number (50 in our example) gives the maximum that will be paid for property damages to other people’s property. So, in our example, if the damage to the car and pole you hit totals $35,000, you are covered. If it is more than $50,000, you will be responsible for the rest.

How much liability insurance should you have?

Each state has minimum legal requirements, but just going with the minimum requirement is not usually a good idea. For instance, in Florida, the minimum requirement in Florida is 10/20/10. (Check your state’s minimum requirements here). As you can see, this is much lower than the amounts in the example. Accident damages can quickly add up to amounts that are much higher than state minimums, leaving you responsible for the rest.

Experts suggest policy limits of 250/500/100. While these higher limits will result in higher premiums, they can help you avoid financial ruin in the case of a bad accident.

Coverage B: Medical Payments Insurance

Medical payments insurance covers you and your passengers, regardless of who was at fault. Costs for injuries occurring within one year of the accident (which are a direct result of the accident) will be covered up to the policy limit. This insurance also covers you and your other family members if you are injured in another car, or if you are injured by a car when you are walking or riding a bike. This type of coverage has a single policy limit (completely separate from the liability insurance) that is applied per person, per accident.

In no-fault states (like Florida), you would first collect from your own insurance company (regardless of whose fault the accident was) for injuries to you and your passengers. If you were not at fault, your insurance may then sue the other party and/or their insurance. This is called subrogation rights. Some states (like Florida) require drivers to have a minimum amount of medical payments insurance (also called Personal Injury Protection, or PIP).

This concludes the first part of our Understanding Car Insurance and Making Smart Choice series. In part 2, we’ll talk about Uninsured and Underinsured Motorist Coverage and Physical Damage Insurance.

(Photo credit: Untitled by Ricky Norris. CC BY 2.0.)

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