Why is a lapse in car insurance coverage bad?
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UPDATED: Mar 13, 2020
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When you buy car insurance, you enter a contractual arrangement between yourself and the insurance company: You pay your premiums, and the insurance company pays for damage according to the coverage you carry if you’re in an accident. If you don’t pay for the coverage, your insurance company cannot pay an accident.
Types of Coverage
You can purchase either liability or full coverage insurance. Liability pays only for damage that you cause to another person’s property; full coverage extends insurance to pay for damage to your own vehicle. Regardless of the coverage you carry, your insurance will pay for the agreed-upon amount listed in your policy whenever you are involved in a claim.
In the case of liability coverage, this means that the insurance company will pay up to the limits of your liability insurance; if the coverage is exhausted before the repairs are fully paid for, you are responsible to pay the difference out of your pocket. For first-party coverage, the insurance company will pay up to the replacement value of your vehicle.
When does my car insurance coverage lapse?
Your car insurance policy renews frequently, usually either every six months or year. You have the option in most cases to pay your premiums in one lump sum or to space payments out throughout the year. If you choose to pay monthly, you must be sure to make your payments regularly and on time. Late or missed payments can cause your policy to lapse.
Even if you correct the mistake and make up the money that you owe your insurance company, your policy will still be inactive for the dates between the lapse and the policy’s reinstatement. While such a lapse in coverage may not be a major concern, it could have catastrophic consequences if you are involved in an accident during the time of the lapse.
What happens when I am in an accident and my coverage isn’t active?
If you are involved in a car accident during a coverage lapse, additional investigation will be required to determine what to do with the claim. The insurance company will review the incident and confirm whether or not you had active coverage for that date. If not, the company will determine if the policy lapse was due to an error on its part, or if the insured failed to make a payment.
In the event that a policy lapses due to a missed payment or other fault on part of the insured, the claim will be denied. The car insurance company will issue a formal denial to you and any other individuals involved in the accident. At this point, you will be held personally responsible for paying the claim.
If you are at fault for the accident, the other party’s insurance company will pursue you for damages through a collections agency. You may also be taken to court by the person who you hit, especially if that individual sustained any injuries as a result of the accident. In some cases, you could end up owing damages to several individuals; claims payments add up quickly and can take a heavy toll on your finances.
In some situations, your license might be suspended if you are unable to pay for damage that you cause within a reasonable period of time. You will also need to fill out an SR-22 form with your DMV to prove that you have active insurance coverage. Otherwise, you will be unable to obtain a new driver’s license until your coverage is reinstated and you prove that you are able to pay for the damage.
Being involved in an accident when your coverage is lapsed can not only damage your driving history but wreck your credit as well. If the accident was severe, you may be financially impacted by the claim for several years. This is why it is imperative to always carry enough insurance coverage to pay for an accident and make your payments regularly.
If you are unable to make a payment on time, you can contact your insurance company to advise them of your situation. They may be able to work with you on rescheduling the payment or otherwise making arrangements for a late payment. This way you can avoid dangerous policy lapses. By communicating with your insurance company up front, you can guarantee that you will never be surprised by a denied claim.