Car insurance is required in almost every U.S. state to help make sure everyone is financially protected in a car accident. However, some states have very low required minimum levels of insurance, which means it is easy to cause more damage in a car accident than your insurance will cover.
Choosing to have just the minimum levels of car insurance required in your state is enough to be able to legally drive, but in many cases it won’t be enough to pay for the damage you cause in an accident, which could leave you responsible for tens of thousands of dollars or more.
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What happens if I don’t have enough insurance to cover an accident?
Okay, so you’ve caused a car accident. Maybe you backed out of your driveway without looking, or you made an illegal left turn into traffic. There are some important steps to follow when you file a claim, including:
Make sure everyone is okay and file a police report
Provide information about the accident to your insurance company, including any pictures and relevant information such as driver’s license numbers and a copy of the police report
If anyone needed medical care, make sure to save copies of all medical paperwork and provide insurance information to the doctor or hospital
Get estimates for any necessary repair work
Work with your insurance adjuster to make sure the process goes smoothly
Now comes the hard part — you find out your insurance policy, which is set to the state’s minimum required levels of coverage, doesn’t cover all of the damage you caused.
If a claim exceeds your coverage limits, you are still responsible for the damage caused in the accident. You can be sued for the damages you caused that went beyond the coverage limits and can be forced to pay by the court, which could mean having future earnings garnished and personal property auctioned off to pay for the damage.
This can vary from state-to-state, however, depending on whether you are in an at-fault or a no-fault state.
Who pays for damages that exceed the policy limits?
Most of the time, the person who is at fault for the accident is legally responsible for 100% of the damage caused in an accident and can be taken to court and forced by the state to pay the damages that exceed their policy limits.
However, this can vary depending on the laws in your state. For example, no-fault states require all drivers to have insurance that pays for their own injuries, no matter who is at fault in an accident.
Additionally, some states operate under the concept of comparative negligence, which means damages are reduced in proportion to the degree of negligence. For example, if one party is found to be 75% responsible for an accident, they will be responsible for paying for 75% of the damage.
How do liability limits work?
Your liability coverage is the part of your policy that pays for damage you cause to other people in an at-fault accident. Most auto insurance is written as a split level policy, which shows you the various liability levels you have on your coverage, like 100/300/50.
It is broken into two parts:
Bodily injury liability: This is the coverage that pays for medical expenses if you injure someone else in an accident. This is listed as a per person amount and a per accident amount on your auto policy. In the example above, the 100/300 stands for $100,000 of coverage per person and $300,000 of coverage per accident.
Property damage liability: This is the coverage that pays for property damage you cause to other people in an at-fault accident. In the example above, the 50 stands for $50,000 of coverage per accident.
What if I’m hit by a driver without enough insurance?
If you’re hit by a driver whose insurance doesn’t fully cover the cost of the accident and you purchased uninsured motorist coverage, your insurance can help pay for the damage or injuries. Uninsured motorist (UM) and underinsured motorist (UIM) coverage are designed to protect you if you are injured in an accident that is not your fault.
If the other driver has no insurance, your UM coverage will pay for your medical bills (up to the limits of your policy). If the other driver has insurance but they caused more damage than their coverage will pay for, UIM coverage will step in and pay the difference between the other driver’s liability coverage and your medical bills, also up to the limits of your policy.
How does uninsured motorist coverage work?
Say you’re hit by another driver whose liability limits are set at 25/50/25. In a fender bender this is a decent amount of insurance, but if you are saddled with $45,000 worth of medical bills and their bodily injury coverage only goes to $25,000 per person, you may be left with $20,000 in medical expenses.
While you can take the at-fault driver to court to get your bills paid, that is a process that can take years and leave you with mounting unpaid medical bills in the meantime.
In this scenario, UIM would pay the difference between the other driver’s liability limits and your total medical bills, up to the limits of your policy. UM and UIM are set to match your bodily injury liability levels, so having higher levels of liability insurance can help you in more ways than one.
What does personal injury protection (PIP) do?
In some states, drivers are required to carry PIP coverage to pay for their own medical bills in the event of an accident. Also referred to as no-fault coverage, PIP insurance helps cover medical expenses for you and your passengers in the event of an accident, regardless of fault. PIP coverage is required by law in some states and covers more than just medical expenses, including:
Lost income when you can’t return to work after an accident
Child care expenses due to the accident
There are laws limiting your ability to sue the at-fault party in most no-fault states, but it is still possible in some situations. If the damage is significant enough, some states will allow you to sue the at-fault party. Also, a lawsuit is often allowed in cases of gross negligence, like being hit by a drunk driver.
Do I need umbrella insurance?
Sometimes referred to as personal liability insurance, umbrella insurance is a separate policy that provides additional liability coverage to protect you and your assets if you are sued for damages, usually sold in one million dollar increments.
For example, if you accidentally crash your car into a Tesla Model X SUV and total it, that is easily more than $100,000 in property damage. Having an umbrella policy would cover you beyond your auto insurance limits so you would not be held responsible for paying that cost out-of-pocket.