Car Insurance

What It Means

A car insurance policy is a contract between an insurance company and the owner of a vehicle that protects the vehicle’s owner (or the person who leases the vehicle) from financial losses that result from car accidents. While many different types of car insurance policies are available, these policies in general cover the policyholder, the policyholder’s vehicle, and third parties. Third parties may include other drivers, pedestrians, or cyclists who suffer injuries from a collision with the policyholder or whose property is damaged in a collision caused by the policyholder. All vehicle owners and lessees in the United States must have car insurance. Specific requirements vary from state to state, but all U.S. drivers are required to have insurance against damages inflicted upon third parties.

An insurance policy can save a driver a considerable amount of money. For example, if an insured driver causes a collision that results in damage to another driver’s vehicle, the first driver’s insurance policy would pay a significant portion of the cost to repair or replace the other driver’s car. If the driver of the hit car also suffers bodily injury, the first driver’s insurance company would pay a significant portion of the injured driver’s medical fees.

Most car insurance policies in the United States last for six months. The person taking out the policy (the policyholder) pays the insurance company a fee called a premium, which is due every six months. If the policyholder is not involved in any collisions and does not cause damage with his or her vehicle, then most insurance companies will renew the insurance policy automatically at the end of each six-month term. In 2007 drivers paid on average $774 a year to insure a car in the United States. This means that U.S. drivers paid an average premium of $387 every six months for car insurance policies.

When Did It Begin?

The first car insurance policy on record in the United States was issued by the Travelers Insurance Company to Dr. Truman Martin of Buffalo, New York, in February 1898. Dr. Martin paid $12.25 for the policy, which gave him $5,000 worth of coverage. The Travelers Insurance Company wrote its first car insurance policy on forms it normally used for covering damages caused by horses and mules. In fact, Martin’s primary concern was to obtain a policy that would cover damages caused by horses. He was not worried about damage caused by other cars; at the end of the nineteenth century, an estimated 20 million horses and only 4,000 cars were used for travel in the United States. Other drivers soon followed Martin’s lead. By 1899 car insurance policies were common in the United States.

Collisions became more common in the United States during the early part of the twentieth century as more cars were produced and roads became more congested. The first measure taken to reduce damage caused by collisions was the installation of bumpers, which first appeared on U.S. cars in 1915. These bumpers were not included with the car but sold by car dealers as an additional feature. They were mounted on spring-and-steel brackets at the front of the car. It was not until 1973 that the U.S. government set standards for the placement and quality of bumpers.

More Detailed Information

Insurance rates (the cost for insurance premiums) vary widely and depend on a number of factors. One of the primary factors is the profile of the driver. Before entering into an agreement with a new client, an insurance company will assess the likelihood that the new client will make a claim against the policy (in other words, formally request that the insurance company pay for damages to the driver, to his or her vehicle, or to a third party). If the company determines that a client is likely to make a claim, the company will charge more money for the policy. If the person appears to be too great a risk, the company will not sell him or her a policy. The chief factor in assessing the risks associated with insuring a prospective client is the client’s past driving record. If the person has been in a number of accidents or received a number of traffic tickets, the insurance company will regard him or her as a greater risk than a person without any prior accidents or tickets.

Aside from the client’s driving record, insurance companies base their determination of risk on several other factors. Insurance companies make these determinations based on close analysis of statistics from traffic accidents and past claims made on insurance policies. For example, young drivers aged 18 to 25 are a greater risk than older drivers, and they are therefore charged higher rates. In the 18-to-25 age range, male drivers are a greater risk than female drivers. Single drivers are a greater risk than married drivers. Where the car will be most frequently driven also affects the premium. For example, it costs more to insure a car that will be driven in a densely populated urban center than it costs to insure a car that will be driven in a rural area.

There are many different types of car insurance. Liability insurance covers bodily injury to others and damages to other drivers’ vehicles. The extent of liability insurance is usually listed as a series of three numbers that show how much money, in thousands of dollars, an insurance company will pay if it is determined that a policyholder is at fault in an automobile accident. For example, in the event of an accident a 100/300/50 liability insurance policy will pay up to $300,000 of bodily injury coverage to the injured parties (other than the policyholder) not exceeding $100,000 to any individual and $50,000 for property damages to third parties. Although laws in most states require substantially less liability coverage (15/30/5 in California, for example), most experts recommend that a driver purchase 100/300/50 worth of liability insurance.

Since injuries and damages caused by car accidents can be extremely costly, victims of accidents often sue the people they believe to be responsible for the damages. These lawsuits can cost millions of dollars. To limit the number of lawsuits, 12 states in the United States have adopted what is called “no-fault insurance.” No-fault insurance policies require drivers to purchase personal injury insurance (PIP) for their own protection and limit policyholders’ ability to sue other drivers for damages. In a no-fault system, a policyholder’s insurance company will cover injuries to the policyholder regardless of who is at fault. Meanwhile, the other driver’s insurance will cover his own injuries. Only one party in the accident will be permitted to sue if an arbiter determines that the personal injuries were excessively severe and that the fault lay with the other driver.

Other types of insurance include collision insurance and comprehensive insurance. Collision insurance covers the policyholder’s vehicle in the event of an accident in which the policyholder is determined to be at fault. This sort of insurance includes a deductible, or an amount of money that the policyholder must pay before the insurance company will begin to cover expenses. For example, if a driver holding $10,000 worth of collision insurance with a $500 deductible is at fault in an accident that causes $3,000 worth of damage to his vehicle, the policyholder will pay $500 for the repairs to his vehicle and the insurance company will pay the remaining $2,500. Comprehensive insurance covers damages to the policyholder’s vehicle caused by incidents that are not considered to be collisions. Such incidents may include theft, fire, hurricane damage, or vandalism.

Recent Trends

Since the early years of the twenty-first century, Americans have been turning to the Internet in increasing numbers for car insurance information. From 2004 to 2006 an estimated 70 million prospective insurance customers received quotes for car insurance prices online. However, in 2004 and 2005 most of these people did not actually purchase car insurance online. That began to change in 2006, when online car insurance purchases increased by 58 percent. Through January and February 2007 online car insurance purchases were 45 percent higher than they were at the same time the previous year.

Market analysts attribute this trend to three factors. First, insurance companies have made a concerted effort to direct potential clients to the Internet. Most commercials for car insurance encourage customers to visit the company website, and some companies offer discounted rates for web clients. Second, insurance companies have invested large sums of money in upgrading their websites, which now typically display complex sets of information in a clear, easy-to-read format. Most of these websites have a “Frequently Asked Questions” (FAQ) section that covers the issues that most people discuss with insurance agents. Third, Americans have gradually become more comfortable sharing such confidential information as social security and credit card numbers online. Information of this sort is required for online car insurance application forms.