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UPDATED: Mar 13, 2020
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There’s a lot of misinformation circulating among auto insurance consumers. Insurance is a complex topic, and many factors influence the cost of premiums or how claims will be handled. This means that even if your friends or family are well-meaning, they may give you inaccurate information. Rumors also circulate on the Internet and other sources, so it’s especially difficult to determine what’s true and what’s an insurance urban legend. Here are five insurance myths and the truths behind them:
“If I’m not at fault for an accident, I don’t have to pay my deductible”
Although there is some truth to this myth, it’s a little bit more complicated than this and whether you pay a deductible will largely depend on the facts of the accident, the state laws in your area and the way your insurance company handles things. For example, in Michigan, your deductible is waived when you’re not at fault and you carry broad-form collision. This is the exception, not the rule, and in most cases you will need to pay your deductible up-front and have it reimbursed later.
Once you file a claim, your insurance company will settle your damages and you will generally pay the deductible to the body shop that does your repairs. After the claim has been settled, your insurance company will pursue the at-fault party’s insurance to get their money back and reimburse your deductible. This process may take several weeks or months if the liability is unclear. If you want to avoid paying a deductible altogether, you will need to file the claim directly with the other person’s insurance company.
“If I’m not driving, I’m not liable for damages”
Insurance coverage follows the vehicle, and the vehicle’s owner is always liable for damages that it causes no matter who’s driving that car. This means that if your friend, roommate, child or spouse borrows your vehicle and gets into a collision, your insurance will pay for the damage and the accident may count against your driving history.
The only way to avoid this situation is to either report the vehicle as stolen or exclude other people from driving your vehicle. Excluding a driver from your policy can prevent their driving habits from increasing your premiums, but it also means that any damage they cause will not be covered by insurance. Never let anyone who is excluded from your policy drive your vehicle.
“If my car is totaled, my insurance company will pay off the loan”
New vehicles depreciate very quickly, and it’s possible that your car loan will actually be higher than the worth of the vehicle. When your vehicle becomes totaled as a result of an accident, the insurance company owes you for the vehicle’s actual cash value less any applicable deductibles. If that value is lower than the balance of your car payment, you will need to continue paying off your car payment.
The best way to prevent this situation is to either avoid buying a brand-new car or to purchase loan gap insurance. Gap insurance pays the difference between what the car is worth and the outstanding balance on the loan. It costs more per month but it’s worth purchasing if you have a new car.
“Full coverage insurance includes a rental car”
In most cases, “full coverage” auto insurance means that you carry collision and comprehensive coverage in addition to basic liability. Other coverages like rental reimbursement, roadside assistance and uninsured motorist all must be purchased independently and added to the policy.
If you only have one vehicle, you may wish to obtain rental coverage to ensure that you’re not left without transportation in the event of an accident. Also be sure that you purchase enough rental coverage to pay for the type of car you’ll need to rent; if you own a minivan, for example, you won’t be able to rent another one for $20. Buy rental coverage with high enough limits to accommodate your needs.
“Car insurance companies can charge whatever they want”
Although the cost of insurance will vary from one driver to the next and some insurance companies offer substantial discounts, insurance prices are actually regulated by state laws. All insurers must report their rates, and they must be consistent in their pricing. For example, all members of a certain target demographic must always be charged the same base rate, and the amount of discounts or rate increases must also be standardized.
Some states actually regulate the cost of insurance further. For example, state laws mandate the price of coverage in Massachusetts. For this reason, the cost of premiums is usually very similar from one company to the next in that state, and many national companies do not sell policies there because of these regulations.
Ultimately, the best source for information regarding your insurance policy is the insurance company itself. You can contact the customer service department or ask your agent for any questions you may have that are specific to your policy and situation.
Also keep in mind that every claim is different, so your experience may differ from other claims you have filed; be sure to listen to your adjuster and ask questions about things you don’t understand to ensure a smooth claims process any time you are involved in an auto accident.