Zaneta Wood, Ed.S. has over 15 years of experience in research and technical writing bringing a keen understanding of data analysis and information synthesis to reach a wide variety of audiences. She studied adult education and instructional technology at Appalachian State University as well as technical and professional communication at East Carolina University. Zaneta has prepared technical p...

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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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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: May 19, 2021

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Here's what you need to know...

  • Currently, 47 states require vehicle owners to prove that they have either auto insurance or proof of financial means to pay for third-party damages
  • Auto insurance is an agreement between the policyholder and the auto insurance carrier
  • Under the financial product, the carrier agrees to pay for specific claims up to a specified limit as long as the policyholder pays their premiums and agrees to the terms and conditions of the policy
  • Liability coverage is typically required by law. It pays for damage losses and for injury claims filed by another party.
  • Insurance companies also pay to represent you in court if you’re sued for a covered accident. The court fees don’t take away from your liability limits.
  • If you decide to carry physical damage coverage on your vehicle, your auto insurance will pay up to the car’s Actual Cash Value to either repair or replace it

If you own a car and you’re licensed to drive, you’ve probably heard about auto insurance at least once or twice. Just because you’ve heard of the product doesn’t mean that you’re really familiar with how auto insurance works. As a financial contract that’s full of different terms and conditions, auto insurance can be very difficult to understand. Compare car insurance rates now by using our FREE tool above!

While it can take time to learn the terms and conditions of an insurance contract, it’s imperative that you do. In virtually every state, drivers who own their own cars are required to buy insurance. Instead of just buying a product because it’s mandatory, you should buy a product because you understand just what it does. This is why you will need to understand what a basic policy does and doesn’t do before you will feel like you’re fully protected on the road.

What’s the purpose of auto insurance?

Auto insurance isn’t just a piece of paper, it’s a financial contract. Under the contract, the owner of the vehicle agrees to pay a specified amount of money for coverage and the company agrees to pay for your losses as long as they are covered under the policy provisions.

While most people hope to avoid crashing their car or falling victim to a vandal, no matter how responsible you are there’s a likelihood that it could happen to you.

The purpose of your insurance contract is to protect you as the policyholder against financial loss if you need to file a claim. You will be required to purchase state minimum limits but are also free to purchase additional protection for greater peace of mind.

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Why do most states require auto insurance?

Not all forms of insurance are required. In most cases, you can choose whether you want to buy renter’s insurance, life insurance, disability insurance or sometimes even home insurance. Unfortunately, when it comes to auto insurance you don’t have much of a choice. This is because driving a car doesn’t just put you at risk, it puts others at risk as well.

Virtually all states require that registered owners insure their cars. This is primarily because of the financial damages that others could suffer if a vehicle owner caused a crash. Since states can’t reasonably go and check bank account balances to verify that everyone has the financial means to pay for damages, the alternative is to require auto insurance that will pay for a minimum amount third-party damages.

What type of auto insurance is required by law?

What’s actually required by the state depends on the state that you reside in. In most states, you’re required to carry nothing more than third-party liability coverage. Some states have also added other requirements that protect against the rising number of uninsured motorists on the roadways. Here’s what required coverage options might look like on your declarations page:

  • Bodily Injury Liability: Third-party coverage that pays for hospital bills, rehabilitation costs and other medical treatment expenses when someone else is injured in an accident that you’re found to be negligent for. Check your state’s requirements to see how much you must carry.
  • Property Damage Liability: Third-party coverage that pays to fix someone else’s property when you’re at fault for a loss. Real property includes fences, gates, lights, cars, buildings and residences. The required limits for Property Damage are separate from the Bodily Injury limits.
  • Uninsured Motorist Protection: States might require that you have auto insurance to pay for third-party damages, but not everyone obeys the law. Drivers who choose not to obey the law are putting you as someone on the roadway at risk. This is why some state legislatures are requiring Uninsured Motorist Protection (UM). UM pays for your medical bills, rehabilitation costs, and lost wages when you’re injured in a loss with someone who doesn’t have liability coverage.
  • Medical Payments or Personal Injury Protection: Medical payments isn’t always required, but you may have to sign a rejection stating you’ve been offered it. Medical payments, which is called Personal Injury Protection in no-fault states, is a form of protection that pays for your medical bills regardless of who caused the accident. It’s an immediate form of coverage that will pay out even before the claim is fully investigated.

What does car insurance do if you’re taken to court?

Auto insurance provides you with more than just the limits of liability coverage that you carry. Insurance companies have huge legal teams that protect the company and the company’s clients. One of the benefits that’s often overlooked is that your policy will pay for the cost of legal defense in addition to the limits that you carry. This means that your policy will pay to defend you if a claimant takes you to court or if someone makes unfounded claims against you. Legal fees can add up and having this added barrier of protection is enough to justify the car insurance premiums that you pay.

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Does car insurance protect your car?

You’re now familiar with how liability coverage works, but that doesn’t mean that any of this protection protects your car. As you’re building a policy you have the option to buy physical damage coverage to protect your car.

Unless you have a classic or rare vehicle with specialty coverage, your policy will only pay up to the vehicle’s Actual Cash Value at the time of the loss.

Just remember that you will have to pay your deductible for comprehensive or collision based on the type of claim that’s filed.

Having car insurance can turn a devastating situation into one that’s bearable. If you’re interested in shopping around for coverage through a company that’s known for taking care of its clients, it’s time to start comparing rates. You can easily do a rate comparison in just one sit down by using an online rating tool that connects you with all of the leading carriers in the industry. Be sure to enter your information as accurately as possible, consider choosing higher limits for more protection, and get directed to instant quotes that you can choose from. Compare car insurance rates now by entering your zip code in our FREE tool below!