Almost every car you see on the road carries an insurance policy to cover against some form of damage. Some might not, but it is illegal to drive a car without liability insurance.
With over six million passenger car accidents in 2019 alone, the roads are very dangerous, and it has been predicted that they will get even more dangerous in 2022.
This makes getting car insurance very important, and knowing about auto insurance in detail is even more important.
This article will describe in detail the differences between liability insurance coverage, sometimes also called third-party car insurance, and a personal damage protection plan.
This is a confusion that arises frequently, especially amongst first-time insurance buyers. So let’s get rid of all the confusion.
Liability Insurance: The Mandatory One
Liability insurance is the insurance coverage that is mandatory to have. The government has made it compulsory to have liability insurance to legally drive a car.
But why so? Why is it legally mandated to have liability insurance?
Think of this scenario; you are driving your car and while changing the track or talking on the phone (which is illegal), you hit someone else’s car.
The other car is almost totaled, the driver is injured and the cops have arrived. Who will pay for the cost of repairs of the car, and the cost of medical treatment?
All the costs must be covered by the person who is at fault, which in this case is you. But what if you do not have the money to pay for it?
The other driver can and will sue you, but that will only prolong the process. This is why the government has made it mandatory to carry liability insurance to pay for the damages and medical treatments.
Liability insurance is not for the policyholder, but for the person who gets injured in an accident caused by you. You cannot claim your liability insurance.
Similarly, if you get in an accident that’s someone else’s fault, you can claim their liability insurance and get the money for your medical treatment and repairs.
Components of Liability Insurance
Liability insurance has three components that represent the coverage. Every state has its minimum coverage limit.
This limit means that in the case of an accident, the policyholder’s insurance company will only pay the maximum coverage amount.
Different states have different minimum liability coverage limits and your liability coverage limit must be equal to or greater than the state-mandated limit.
For example, liability coverage is represented by three numbers, like 50/100/25. This number represents the maximum amount the insurance company will pay.
Each number is in the thousands of dollars. So the amount covered in this policy would be $50,000/$100,000/$25,000.
The first part of the limit (50) represents the amount the insurance company will pay to cover the medical treatments of an individual who is injured in the accident.
The second part (100) is the maximum amount the company will pay to cover the medical treatment of all the passengers of the car.
If more money is needed, you’re on your own (or you’ll have to use other insurance policies to cover it).
The final part of the insurance (25) is the maximum amount the insurance company would pay to cover the cost of property damage repairs.
This not only includes damages to the car but also to any other property.
If the coverage limit of your policy is lacking,i.eThe cost of repairs or treatment is more than what your insurance company is willing to give, you’ll have to bear the extra cost yourself.
There are other policies such as umbrella policies that pay for the remaining amount. This is the reason why it is recommended to have a liability coverage limit of more than the minimum limit.
Own Damage Insurance
While liability insurance coverage is mandatory, this policy cannot be used by you. So who pays for the repair costs and medical treatments?
There are personal auto insurance plans that cover different repairs and treatments. These policies are not mandatory but are recommended.
Some cost a lot and hence it is better to compare prices and choose the best and most affordable car insurance carriers.
Collision insurance coverage is one of the most popular “own damage” auto insurance. This policy covers all the damages to your car that may occur in an accident, regardless of whose fault it is.
Let’s say that you hit someone else’s car. There’s no doubt that your car will be damaged too. While the other person can claim your liability insurance, you can claim your collision insurance.
If you get in a road accident and it is not your fault, you can claim the other driver’s insurance policy, and if the coverage limit is not enough, you can use your collision insurance policy to pay for the remaining amount.
Collision insurance can also be used if your car is parked and another car hits it.
A comprehensive insurance policy is another coverage that covers the cost of repairs if your car gets damaged due to natural calamities or “Act of God”.
This includes floods, fire, earthquakes, hailstorms, projectile damage, falling tree, animal damage, theft, riots, vandalism, etc.
Since the car must be parked when the damage occurs, it is also called parking insurance.
Apart from these two, there’s a personal injury protection plan that covers the cost of medical treatments, regardless of whose fault the accident was.
Personal injury protection coverage is mandatory in 12 states, while in other states, people choose integrated medical insurance (that includes injuries in car accidents).
Another major difference between liability insurance and personal auto insurance is that claiming someone else’s liability insurance does not increase your insurance rates, but claiming your personal auto insurance policies will increase the insurance rates (or if someone makes a claim against your liability insurance).
