Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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UPDATED: Jul 14, 2021

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Owning a vehicle can get expensive when you add up the costs. Not only must you agree to a sales price, you also need to title the car, register it, maintain it, and then maintain car insurance.

The cost to carry insurance can add up and become a very frustrating expense when you have no intentions of using it. Unfortunately, failing to buy coverage and keep it active can lead to serious monetary and criminal penalties.

If you have been loyal to your car insurance provider since you purchased your vehicle, you could be paying exorbitant premiums and not even know it.

Loyalty may land you special discounts, but when you keep paying inflated premiums with a sub-par insurer you are wasting your money.

This is why it is so very important to compare car insurance quotes with other insurers before you pay your next invoice or agree to your next policy renewal.

Read on, and learn more about why you need 3rd party insurance and why comparison shopping is so important in this industry.

Use our FREE comparison tool above to start your search for car insurance.

Why is carrying third party car insurance so important?

We learn a lot of subjects in school, but unfortunately we do not learn how to be financially literate people when you become independent. When you are licensed to drive a vehicle and you own a car that is registered to be driven on public roads, you as the registered owner are responsible for the damages that you cause while you are driving.

If you hit a tree, a fence, a light pole, or a vehicle owned by a third party, you must pay for the damages and the repairs so the real property can be repaired or completely replaced.

With the rising cost of repairs and materials, repairing even something as small as a lamppost can cost thousands of dollars.

One of the reasons why third-party car insurance is required in virtually every state is because no one can guarantee that they will have hundreds or thousands of dollars to hand over to someone to cover damages that they are negligent for.

Your third-party liability insurance is there as a buffer of protection to pass the financial burden of paying for claims to the insurer when you are at-fault for property damage or bodily injuries in a car crash. Carrying insurance can help you avoid lawsuits and protect your assets.

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How does liability coverage work?

Most people who get their license and buy a car know that they must legally buy insurance, but they are not familiar with how their policy works until they experience the claims process for the first time.

In any state that operates under a fault-based tort system, vehicle owners have no choice but to buy a minimum amount of liability coverage to prove that they are financially responsible. The liability coverage consists of Bodily Injury and Property Damage requirements. Here is a description of how the two work:

Bodily Injury:

As the name of the coverage suggests, Bodily Injury will pay for the medical expenses incurred by someone in a third-party vehicle if you were found to be at-fault for the crash.

This coverage does not apply when someone is injured in your vehicle.

It will, however, pay if someone is borrowing your car and does not have their own coverage.

State requirements vary, but you will need to buy a minimum amount of coverage.

Property Damage:

Property Damage pays for damages that you are negligent for to real property that you or your household members do not own.

The coverage will pay for repairs or replacement of property, up to the object’s fair market value. The limit that you select will apply to all property damaged in a single incident and not to each object separately.

When you buy an insurance policy, you must select limits that match or exceed the minimum requirements in your state. You also are required to buy your coverage from a carrier that is licensed by your state’s Department of Insurance to sell car insurance in the state.

You will have the limits of liability coverage that you select for a specified term.

What happens if you file a claim?

If, during the term, you are involved in an accident, you must call your insurer right away to report the loss. You will be asked for claims information so that the accident can be investigated.

Your insurer will act on your behalf to speak with the other party to negotiate settlement and to determine fault.

If the adjusters cannot agree and the claim goes to court, your insurer will represent you and pay the court costs for you separate from your limits. This is one of the biggest advantages to carrying third-party insurance.

What happens when my term ends?

If you do not file a claim within the term, the premiums are the insurer’s and the policy will be set for renewal. When car insurance policies renew, the insurer will have an underwriter assess the risk of your application again.

After assessing risk, your rates will be recalculated. If you have had any tickets, accidents, or changes that make you more of a risk, your rates may very likely go up.

It is also possible for your rates to go up when absolutely nothing has changed. This is referred to as a company wide rate increase, and is very common in the industry. When you notice that your rates are rising at each renewal, it may be time to start comparison shopping.

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Why Comparison Shopping for Affordable Insurance is So Important

When you initially bought coverage, you may have selected the most affordable premium that you were offered. Unfortunately, an affordable rate can quickly turn into an expensive one after just one renewal if you are not proactive.

This is why you should rate shop every time you receive a renewal to see if your insurer is still the best choice. In an industry where insurers set their rates, you as a consumer need to do your research before you pay for a product you hope you never need.

How the Auto Insurance Industry Works

Familiarizing yourself with the auto insurance industry will give you an understanding of why comparing premiums is a must. In the marketplace, insurers answer to the Department of Insurance.

This is the entity that will review rate filings and approve filings that are fair to consumers.

While rates must be approved, if the carrier can prove to the department that there is a need to raise rates for a specific group then they can.

Rising costs of repairs, medical care, fuel, and operations can all be used as excuses for rate increases.

While carriers raise rates regularly, there are insurers that are committed to staying competitive in a specific demographic.

They want to take on risk in a specific segment of the market and will price their products right to ensure that they get the most market share.

You, as the wise consumer that you are, need to find the companies that want to insure your segment of the market. By doing this, you will find the most affordable premiums without having to compromise.

The Factors That Will Affect Your Rates With All Carriers

The public may not really understand just how rates are determined because it can be very confusing when you look at the statistics and the formulas.

While some think that only driving records and vehicles affect rates, there is a long list of risk factors that can either bump your premiums up or knock them down.

You may be surprised to learn that some of the personal factors that are considered can affect the cost of your coverage. Here is a list of some of the factors that could be costing you more money than you ever imagined:

  • Vehicle safety record
  • Driving record
  • Accident record
  • Age of driver
  • Student grades and enrollment status
  • Years of driving experience
  • Named insured credit score
  • How much you use your car
  • Purpose for use of car
  • Where your car is parked
  • Your gender
  • Coverage types and amounts

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What to Consider Before you Select a Quote

Price may be important, but there is a lot more to selecting quality insurance than considering cost. You should always consider the reputation of the insurer before you give them your business.

You can check the complaint record of the company and their financial records by reviewing their grades through consumer rating agencies like A.M. Best. Once you have found a company that is financially secure and that has a history of replying to complaints, you can make your decision.

The quickest way to comparison shop is to use an online rate comparison tool. This will give you access to dozens of quotes for 3rd party car insurance policies on a single platform. Log in and see if you have been paying too much.

Be sure to use the FREE quote tool below!