In the US, the
insurance industry is regulated at the State level, which means every State can
have its own guidelines to how insurance is bought, sold and primarily used.
One of the most forward-facing regulations that each State must have is the
minimum liability insurance requirement each driver must have in order to
operate a motor vehicle on public roads. This amount is referred to as the
“State Minimum Liability Insurance Requirement.”
Insurance comes in
different forms, and when it comes to car insurance the different types are
called liability, comprehensive and collision. Liability is what we will be
discussing in this post.
Liability insurance
protects the policyholder (usually the driver) in the event, they are in a wreck
and determined to be at fault. The liability portion of their insurance policy
would pay for damages to other parties involved in the accident up to the
stated amount.
Each State has its own
requirement for the minimum amount of liability insurance a driver must have.
For example, California’s minimum requirements look like this:
- $15,000 for injury or death to one person.
- $30,000 for injury or death to more than one person.
- $5,000 for damage to property.
Source – DMV.CA.GOV
Liability Insurance Categories Defined
Now let us take a
look at what each of these categories actually covers:
Injury or death to
one person
– This amount is the maximum the insurance company will pay for medical bills
for one person. If the individual dies, this is also the most, the company is expected
to pay if the surviving family sues the policyholder.
Injury or death to
more than one person
– This is a combined total the insurance company will pay for injuries or death
for the entire accident. If the policyholder hit a school bus with 50 kids, and
each one had $1,000 worth of medical bills, the insurance company would only
pay up to $30,000.
Damage to property – This is how much the insurance
carrier will fork over for damage done to just about anything that is not a
person. That could be another car, a mailbox, the side of a house, or even a
city light pole. If it does not fall under the first two categories, it more
than likely fits here.
What Happens When You Are Underinsured?
Here is an example
why it is not a good idea to carry state minimums. Let’s say a driver in
California has a policy with the above-listed state minimums. This driver runs
into a minivan that has two adults and four kids in it. All four kids and the
adults need medical care that costs $10,000 each. In addition, the newer
minivan is totalled, and the replacement cost is about $20,000.
For simplicity
purposes, we are using whole numbers to make the math easy.
Luckily, each of the
personal injuries fell under the maximum $15,000 per person, but the total gross
cost is $60,000, which is $30,000 more than the insurance company will pay for.
The $5,000 value of property damage will go towards the replacement of the
minivan, but, unfortunately, that is $15,000 less than what it will actually
cost.
In the end, this
driver will be on the hook for $45,000 (plus their deductible). This is, in
addition to what the insurance, company is going to pay.
The moral of the
story is that auto insurance is not the place to cut corners and save a few
dollars. Most drivers can double, triple, or even quadruple their protection
for a few more dollars each term. If you are driving with State minimum
coverage, now is the time to recheck your policy.
About the author-
Eric Stauffer is a former agent and
currently reviews companies like AllState Insurance. His website helps
families to find the best insurance coverage to protect their assets and shows
them where the first place is to get it.
1 comment:
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