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Myths of Auto Insurance no. 1 – I have “full” coverage!

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Myths of Auto Insurance no. 1 – I have “full” coverage!

Do you have enough insurance?                                                                                             3-1-16

A myth of shopping for auto insurance is that you can purchase sufficient coverage as easily as buying a can of soup at the grocery store – and one prominent carrier has even promoted an advertising campaign that does just that, complete with a “price check gun.”  Most companies now are competing for not just the cut-rate minimum coverage that is mandated by Ohio law, but also for “savings” and “discounts” for other auto insurance customers.  But be careful of getting what you pay for.  It would be terrible to realize after an accident that buying the cheapest insurance really means cheap protection.

Purchasing insurance for home or auto usually falls under the category of “got to have it, hope it never gets used.”  That is why many people opt for the cheapest coverage they can get in order to save money.  At first blush this seems like a wise financial decision.  Why pay a large sum for something I may never have to use?  After all, I am a safe driver with no tickets or accidents.

However, people often forget that insurance, particularly auto insurance, serves two purposes: one, to protect each one of us if we are at fault in a crash, and two, to pay our injuries and damages if we are not at fault in a crash, but the other driver has either no, or not enough, insurance coverage.

The first reason for insurance is protection.  While commonly viewed as a convenience and luxury, driving an automobile is actually the most dangerous thing we do.  More people are maimed or killed in car crashes each year than in all the wars combined.  This is astonishing.  And even though we may be careful drivers – we are human. We all make mistakes!  And because an automobile is a rapidly propelled one ton (or more) mass of metal, mistakes behind the wheel may turn out to be very catastrophic.

We can always believe each of us is a careful driver.  But, the one thing no one can control is the carelessness of other drivers.  Many accidents occur when someone is doing nothing more than waiting at a traffic light while another driver, approaching from behind, gets momentarily distracted – the cell phone rings, or a truck horn blasts from somewhere.  That is all it takes for the driver to fail to hit the brakes in time.

So if we find ourselves in the regrettable position of being at fault in a collision, we need to make sure we have enough coverage to pay not only for the damage to both cars, but also for the medical expenses, lost wages, and other damages for the injuries to others.

Furthermore, in this day and age when the insurance industry is tightening its belts and disputing even valid injury claims, many collisions that result in injuries end up in litigation.  If you are at fault, you need to make sure both that the insurance company pays for competent defense counsel, and that the coverage will be enough to pay for the full value of the injuries, or else you may be personally liable for any amount over the coverage limits.

Let us review this last point again, for it is a critical issue to consider when purchasing insurance. Under the law of Ohio, a person injured in an auto accident is entitled to recover as damages the cost of the medical care, any time off of work, and the cost to repair or replace their vehicle.  This is called “economic loss.”  In addition, an injured person is entitled to recover the value of the injuries sustained.  This includes scarring, disfigurement, loss of use of any limb or ordinary body function, death, disability and the magic words “pain and suffering.”  In Ohio, a person’s economic damages are not limited.  Non-economic damages are limited to the greater of three times the economic loss, or a ceiling of $250,000 to $500,000 depending upon the severity of the injuries.  For catastrophic injuries or death there is no limit to damages at all.

Injuries range from soft-tissue whiplash injuries which may cost less than $10,000 in medical charges to treat, to broken bones, paraplegia and death, with exorbitant costs of medical care carrying expenses into the millions of dollars.

As one can see, minimum coverage of $12,500 in Ohio can be quickly exceeded if the injuries to the person (or people) are even minor.  Several months of physical therapy for a strained neck or back can cost several thousand dollars in medical costs alone.  When you get into hospital admissions, the cost can be around $10,000 per day!

Let us use an example.  Mary is driving on a 35 mph road and her cell phone rings as she approaches an intersection.  The light is green as she picks up the phone.  But as she tries to flip it open, she drops it and it falls to her feet.  Without looking, she innocently reaches down to pick up the phone, not realizing that the traffic light has turned red as she fumbles the phone.  Bob and Nancy enter the intersection from the crossroad on green and are t-boned by Mary, who slams on the brakes at the last minute when she realizes to her horror what is happening.

Both cars are totaled in the resulting collision.  Colliding head-on, Mary is saved from serious injury by her driver’s side airbag.  Unfortunately for Bob, his car was made before side-curtain airbags were widely offered.  The impact of Mary’s car fractures his left arm and shoulder, in addition to head and neck injuries.  He is taken to the hospital by ambulance, where he has surgery.  After 3-4 days in the hospital, a month off of work and eight months of rehabilitation, Bob’s economic loss totals $55,000.  Bob’s wife, Nancy, does not suffer any broken bones, but is thrown around the car enough to suffer serious pain, bruising and swelling of her neck, shoulders and back.  While she does not miss any work, an emergency room trip, weekly doctor’s visits, and six months of physical therapy have her economic loss at $12,500.

What are Bob and Mary’s damages worth?  A lot depends upon whether or not Bob will suffer any future impairment from his damaged arm.  If he was left-handed, was an active person who golfed, played in softball and bowling leagues, and will be restricted or prevented from doing those activities again, the value of his claim could be quite expensive.  Even if he were to reach a full recovery, fair and reasonable compensation could exceed $100,000.

From an insurance coverage issue, whether Mary is sufficiently protected and Bob and Nancy are fairly compensated all comes down to the amount of the coverage.  If Mary is a student, rents an apartment, and the only thing of value she possesses is the car she just wrecked, it is likely that she purchased minimum coverage of $12,500 per person, $25,000 per accident.  So in this case, her insurance is insufficient to fairly compensate Bob and Nancy for their damages.  If the case were to proceed to litigation, Mary is at risk of being personally liable for the amount of damages in excess of her coverage.

However, if Bob and Nancy own a home, have been saving money for either their children’s college tuition or any “rainy day”, it would be prudent for them to have an amount of insurance coverage that would protect these assets – at least $500,000, and include uninsured/underinsured motorists (UM/UIM) coverage.  If this were the case, then after accepting Mary’s limits of coverage, their own insurance policy would take over and pay the value of the damages.

Unfortunately, many people try to save money by reducing the amount of insurance coverage.  As this story illustrates, if one were to simply switch the two drivers, and Bob crashed into Mary, tweaking the insurance coverage leads to dramatically tragic results. Let us assume that before the accident Bob and Nancy ran into a little trouble with their income and decided to decline to renew their full insurance policy.  Instead of having $500,000 in coverage, they opted for the state minimum coverage to save what may turn out to be only a couple of hundred dollars in premiums. However, because of the unexpected accident, they have now put at risk the equity in their home, the savings accounts, and any other assets they have been working a lifetime to grow. If Mary’s injuries were anything like Bob’s in the first example, $12,500 would not even pay for her medical costs.  Bob and Nancy would likely find themselves facing the untenable situation of having to sell assets in order to pay for the damages in the legal claim brought by Mary to recover for her injuries – all because they tried to save a little on insurance coverage.

As a consequence, the general rule is that not only should you purchase as much insurance as you can afford, you have to make sure that at the least, you have enough coverage to protect your assets, and provide yourself with the necessary UM/UIM protection from other drivers who elect to purchase minimum coverage.  Remember, just as you cannot control how others drive their vehicles, you also have no control over how much insurance coverage other motorists carry.  However, you CAN control how much insurance you carry for your own vehicles.

Simply being penny wise can certainly end up being pound foolish in the unlikely event of an accident.