Auto insurance is a legal contract signed between the car owner and the insurance company, which financially protects the car owner in case of a traffic accident or other unforeseen circumstances.

In the U.S. and Canada, having the basic types of auto insurance is required by law in most states or provinces, although it might not be obligatory on the federal level.

Only the U.S. states of Wisconsin and New Hampshire do not mandate their drivers to purchase auto insurance. Instead, they use the laws of so-called “financial responsibility”, which means that the car owner is required to produce evidence of having satisfactory assets in order to cover the costs of a possible accident. If he is unable to show proof of sufficient funds, the purchase of a car insurance is obligatory. Regardless the law, buying a reliable car insurance is a good protective measure for any driver who wants to avoid costly repair bills and outrageously expensive accident-related lawsuits.

The III (Insurance Information Institute) singles out the following six types of auto insurance coverage, some of which are obligatory, while others are optional:

1. Bodily injury liability - one of the most important types of insurance coverage, which is required by law in many states of U.S. (except Florida) and provinces of Canada. Bodily liability insurance covers the costs of bodily injuries caused by a car accident, including medical bills, lost wages, and legal payments.

2. Property damage liability - another foundation of auto insurance policy, which protects the car owner from possible expenses related to property damage caused by a car accident, including replacement and repair of car parts or damaged light poles, buildings, shop windows, etc., so called “pain and suffering” expenses, and legal bills.

3. Medical Payments (MedPay) and Personal Injury Protection (PIP) - MedPay will pay for the driver’s and passengers’ medical expenses due to an accident, regardless who is responsible for it. PIP, which is currently required in 16 states, represents an extended variant of Medical payments, which will cover all costs in relation to injury, such as the costs of medical treatment, funeral, lost wages, and childcare.

4. Collision - the most expensive component of insurance coverage, which pays for the repair of your car in case of accident. This coverage is optional.

5. Comprehensive - not required, but a highly recommended type of auto insurance coverage, which pays for vehicle repairs in cases not foreseen by other types of coverage. In addition to repair expenses caused by an accident, good comprehensive insurance will also pay for repairing car damages caused by fire, natural disasters, theft, or vandalism. Purchasing comprehensive insurance would allow the car owner to avoid huge bills if her car is stolen (which happens in the U.S. every 25 seconds!).

6. Uninsured/Underinsured motorists coverage (UM/UIM) - UM/UIM coverage financially protects car owners from expenses due to injuries incurred to them by hit-and-run drivers or those who are not covered by any insurance, and, in some cases, from the costs of property damages. Underinsured coverage will also pay for your expenses if you, as a pedestrian, have been hit by an underinsured driver.

Phillip D. Wolf