Introducing international visitors to the basics of vehicle insurance in the United States of America.
American Auto Insurance Basics
In this section, we'll introduce you to the basic principles and terminology of auto insurance in the United States.
As with any insurance, you (the insured) pay the insurance company (the insurer) a premium to put a policy in place that will cover vehicle-related losses (or claims) that you may incur, up to the policy's limits, after you have covered the deductible.
The Insured (You)
You, as the first named insured, are covered against losses.
Under the permissive driving clause, anyone you permit to drive your vehicle is also covered by your insurance. This could be a partner, a friend - anyone legally allowed to drive.
If you're planning on having someone else drive your vehicle regularly, American insurance companies generally ask you to listed that person as an additional named insured.
If your vehicle is financed by a third party, or if you own your vehicle through a company, you can list that company as an additional named insured (financing companies generally require this to make sure they get their money back in the event of an accident).
Only insurers licensed in one of the 50 US states or the District of Colombia may issue insurance policies in the United States.
Before putting insurance in place, the insurer will generally require payment of the premium.
The premium compensates the insurer for the risk that they take on. So, the larger the amount the insurance company may have to pay out, or the more likely it is to happen, the higher the premium the insurance company will charge.
An insurance contract is called a policy. The policy specifies the terms of the contract, the vehicle to be insured, the driver, and the limits.
Losses and Claims
A loss occurs when an accident (identifiable in time and place) occurs which causes bodily or property damage.
A loss could arise from a collision (a moving vehicle striking an object or other vehicle) or a non-collision event (fire, theft, falling objects, etc.).
A claim occurs when an insured files a request with the insurer to pay for the loss.
An insurer will not pay for an unlimited amount of losses.
Instead, the insurer will pay claims up to a limit defined in the policy.
For example, if you have a policy with a $50,000 property damage liability limit and you hit someone else’s Tesla, you may be financially responsible for the damages beyond $50,000.
Deductible (known in other places as Excess)
If an insurance company paid for every single ding and scratch you put on your car, well, we would all be less careful about dinging and scratching our cars.
This is why many insurance policies include a deductible, or an amount that the insured must pay before the insurer will pay a claim. This amount (known in other parts of the world as an excess), incentivizes drivers to be a bit more cautious, as they know they’ll at least partly share any losses.
All else being equal, an insurance policy with a $1,000 deductible will cost less than an insurance policy with a $500 deductible.