All states require the purchase of at least a minimum amount of liability coverage. States may require other coverages depending on the regulation for each state. Auto insurance protects you against the financial risks associated with personal injuries and property damage to others caused by auto accidents for which you are legally liable.
The state law requires that you purchase a minimum amount of the following liability coverage:
Bodily Injury Liability (BI) – this coverage protects your assets if
you are deemed legally liable for an auto accident that injures or
Property Damage Liability (PD) – this coverage will pay to repair or
replace the other parties’ auto as well as other property damage.
Uninsured/underinsured motorist coverage – this coverage is required
unless you live in a “no-fault” state. This coverage covers you
against loss caused by other drivers who don’t have enough
(underinsured) or drivers who don’t have any auto insurance
The insurance coverage can also protect you against the financial risk associated with property damage you incur to your own vehicle (includes accidents, theft, vandalism or natural catastrophes), injuries to yourself or passengers. However, this type of coverage is not typically a state requirement.
Often, however, if you have a car loan your lender will require, as a condition of the loan, that you purchase a minimum amount of coverage that will provide protection for damage to the vehicle. This is in addition to the minimum liability requirements that states impose.
The automobile insurance policy is one of the most complicated of all insurance contracts. The complicated nature of the contract results from the need to provide a policy that will provide coverage against different types of losses under diverse circumstances. The ownership or operation of an automobile involves 3 types of loss:
1. Legal liability for injuries and/or property damage to others
2. Injury to the insured or members of the insured’s family arising out
of an auto accident; and
3. Damage to or loss of the automobile itself
In addition to covering various types of losses, the auto policy must provide protection in various situations. Most insureds, at some time, will need protection while they are operating or occupying an automobile that they do not own, or the auto they own will be operated by someone other than the named insured, which further adds to the complexity of providing the necessary coverage in an auto insurance contract.
The limits of liability provided by the auto policy are designed to be written with a single limit (referred to as combined single limit) for bodily injury and property damage. It may also be written with split limits of liability. In split limits, the first 2 limits refer to bodily injury liability limits. The first limit is the most the policy will pay for injuries to any one person; the second limit is the most the policy will pay for the injuries of 2 or more persons injured in a single accident. The third limit is the property damage limit for a single accident. These limits are per accident and are restored automatically for the next accident.
The liability portion of the policy will pay for bodily injury and property damage the insured becomes legally obligated to pay due to an accident. The maximum the policy will pay is the policy limit regardless of the number of insureds, claimants or vehicles involved. Damages include prejudgment interest.
State minimum liability limits will vary by state. For example in my home state, Indiana the minimum coverage limits required are as follows:
Policy limits expressed as 25/50/10 would provide $25,000 coverage per person for a maximum of $50,000 per accident, and $10,000 property damage coverage per accident.
Example: Brian’s auto policy has split limits of 25/50/10. An accident occurs which leaves the insured liable for $30,000 bodily injury damage to 1 person and $10,000 of property damage. Brian’s policy will only pay $25,000 for the bodily injury damages (the first limit), leaving $5,000 for the injured party to pay on his own. The policy will pay in full for the property damage since it does not exceed the $10,000 maximum.
If Brian had a combined single limit of $60,000, all damages would be covered since the bodily injuries of $30,000 and property damages of $10,000 do not exceed the specified limit of $60,000. (to come up with the $60,000 combined single limit we simply add the maximum limit per category: $50,000 for bodily injury per accident plus $10,000 for property damage per accident)