8 myths about car insurance

This seemingly straightforward coverage may be trickier than you think. In fact, you—or those close to you—can unwittingly go bare.

By Brad, Burg Senior Editor

Something as routine as insuring a car involves a few simple rules that you can pretty well count on, right? So it shouldn't be hard to pick which of the following statements are true:

• When I'm insured, so is my immediate family—at least those living in my household.

• We're covered while driving any car.

• If I don't own a car, I don't need auto insurance.

• It's pointless to buy a rental firm's collision coverage in addition to my own.

If you said none is true, you're right. Each, as an absolute statement, is wrong. If you're making such assumptions, you or your loved ones may be underinsured or completely bare, even though you have auto policies.

Don't throw up your hands. It's not impossible to find and plug the most common car insurance gaps, but you need to know what to look for. Here are eight big misconceptions about coverage, plus advice on what to do about them.

1. My family and I are insured for every car we drive

"In one case I heard about, a doctor got a parent's nightmare call," says James Moore, an insurance consultant in Fairfield, CT. "His daughter phoned from college to say she'd injured someone while driving a classmate's car. The doctor was stunned, but reassured because he knew his insurance policy covered her."

That coverage did no good, though. "It didn't insure his daughter for this accident," says Moore. "She wound up liable for a large judgment, since she was of age." She'd fallen into an insurance gap, Moore explains—a big one most people don't know about. "The doctor's policy covered his daughter while she drove cars listed in that policy. It also covered her while driving other cars, in general—but not if those cars were available for her regular use. Her classmate's car had been regularly available to her; she'd had standing permission to take the keys."

What about the classmate's own insurance? Apparently, it was minimal. And there's no guarantee her insurer would have provided coverage in this situation, anyway. In short, when other people's cars enter the insurance equation, you can't be sure what the effect on coverage will be. To avoid trouble, you must understand that "regularly available" concept. "Insurers want to cover specific risks, because those have costs that can be statistically estimated," Moore explains. That's why auto premiums depend on which person driv-es which model, where, and under what circumstances.

Cars can become regularly available to various drivers in a host of ways—when a high school girl lets her boyfriend drive on dates, for instance, or when adults lend keys to long-term houseguests. The driver and the owner may face liability; depending on the terms of the policies, both might find their coverage won't protect them. So investigate before such a situation arises. The safest course, though, is for you and your loved ones to avoid sharing cars with others. Explain the hazards to family members who might be tempted to liberally hand over their keys or hop into driver's seats that aren't yours.

But if you suspect either situation may arise anyway, you can take two steps. First, to protect an insured driver in your family, you can get a "nonowned auto" endorsement, which keeps coverage in force even when that driver regularly borrows someone else's car. It won't be a blanket endorsement, though. "It will normally cover only a specifically named driver, not everyone on a policy," notes insurance consultant William Wilson of Hendersonville, TN. Second, as an owner, if your car will be used regularly by someone who's not on your policy, consider adding that person as a named driver.

Whatever you do, don't keep your insurer in the dark. That can backfire in more than one way. The company could interpret nondisclosure as an intentional attempt to avoid paying for a risk, warns Keith J. Cohen, a Philadelphia plaintiffs' attorney who often litigates with insurance companies. If that happens, refusing to pay a claim isn't the worst-case scenario, he notes: "They technically could go after you for fraud, too."

2. My insurance will cover my spouse or live-in partner

Typically, an auto policy covers the "named insured"—anyone who's an owner—plus family members in residence. Often, a husband and wife co-own a policy. But let's say a doctor owns his policy individually, because it predates his marriage. His wife is covered only as a family member. If she moves out after a separation, she leaves her coverage behind, and she might not realize that.

The same gap can open in a divorce. "And don't expect divorce lawyers to deal with auto insurance questions," says David Schiller, a tax and estate planning attorney in Norristown, PA. "They often don't watch out for such matters."

True, many new policies cover a spouse for the first 90 days of nonresidence, says insurance consultant Wilson. Some major insurers, such as State Farm, don't use standard policies, though, so check your coverage. Be sure to consider the opposite problem, too: After a divorce, if husband and wife still co-own the policy and one has an accident, the other runs the risk of sharing liability. To avoid that possibility, you'll probably want to split up your coverage as soon as possible.

When unmarried couples live together, coverage issues can be trickier. If you lend your car to a licensed driver, that driver has basic protection through your policy, but not the same level of protection provided to a spouse or resident family member, Moore points outs. "For example, the driver might not be covered by the provisions that protect insureds against harm caused by uninsured motorists."

If your unmarried partner drives your car frequently, you should consult your insurer, because of the "regularly available" problem mentioned earlier. Depending on your circumstances, it might make sense to get a joint ownership endorsement, says Wilson.

3. I'm insured, so my kids are, too

What happens as your kids get licenses? Don't be like one doctor client of Philadelphia attorney James Lewis Griffith Sr. "I was with him when he learned his son had been involved in an accident," Griffith recalls. "Understandably, he panicked at first. Then he felt relieved to learn that the incident was relatively minor. Soon he got upset again, because he couldn't remember whether he'd listed his son as a driver with his auto insurer."

It turned out he had, but you don't want to experience that frantic memory search. Make sure you've taken care of this. Yes, insurance policies generally say they will protect a driver who's a "family member in residence" (or falls into some similar category). But don't assume the coverage takes effect automatically, says Loretta Worters of the Insurance Information Institute, in New York City. "Better check, when a child is about to pass that driving test. You may be obligated to notify your carrier, either immediately or at your policy's next renewal date."

And be extra careful if you're divorced. Suppose your ex-spouse has custody of your teenage son, who frequently visits you and drives your car. That son is no longer a relative in residence. "You'd likely need to name him specifically, to make sure he's covered," says attorney Keith Cohen.

Indeed, in any unusual family situation, you'd do well to consult an adviser, because determining residency may be more complicated than you think, adds Griffith. While trying to decide for insurance purposes whether a daughter lived in her father's home, a US district court recently considered 49 facts—including how many boxes of property she stored in Dad's attic and whether she had the right to throw parties in his house.

To avoid trouble, you should check on your policy's rules whenever a family member is about to make any significant lifestyle change. When your son lives in a college dormitory, he may still be covered, because your home remains his permanent residence. But a college student who moves into an apartment may also move outside of coverage. The same could apply to a child who passes a certain birthday. It's wise, then, to ask which events can end a child's coverage, as Birmingham, AL, attorney Thomas Martin notes, based on his own experience: "We were very surprised to learn that our son's marriage meant he had to get his own auto insurance."

4. My policy makes a rental firm's insurance unnecessary

Conventional wisdom says it's a waste of money for insured driv-ers to pay a car-rental company for any kind of insurance protection. That's not always the case.

Consider collision coverage first. If you have an old car, you may have dropped this coverage from your own policy, notes Loretta Worters. Even if you haven't, if you're driving a new rental car, you may have too little coverage. Some even less obvious problems may leave you short of the amount you might owe the rental company if the rental car gets damaged. For example, your own collision coverage may pay only the cash value of a totaled vehicle, yet the rental contract could obligate you for the full replacement value, notes William Wilson. Another complication: Your insurer probably has the right to inspect and appraise the rental car before repairs begin, but the rental company may go ahead with the fixes anyway, which could invalidate your claim. Given such possible complications, it may make sense to pay for the "waiver" the rental company offers. This means the company agrees not to hold you liable for damage. "It's often an unreasonable amount, but it may be your best option," Wilson says.

If you use a credit card to charge the rental, you may have automatic collision coverage through the card. You probably won't get liability insurance as a credit card perk, though, notes Linda Sherry of Consumer Action, an advocacy group in San Francisco. If you don't, you'll have to arrange for that coverage yourself.

Even if you have your own insurance, be sure you list all possible drivers of the rental car in your party—even those unlikely to get behind the wheel. You don't know who might have to drive, in case of illness or other emergency. Don't assume your own policy will cover a driver you don't list, cautions insurance consultant Jim Salisbury Sr. of Walnut Creek, CA. "Rental situations are special cases, and you may not know all your policy's exceptions," he says.

Moreover, you won't have time to study the fine points while standing at the rental counter, so you'll need to check on possible coverage in advance. To keep things simple, Moore suggests, read the details of one rental company's contract, and then stick with that company whenever possible.  

5. I have personal and business coverage, so I'm fully protected

Do you ever ask a staffer to run a business errand in her own car—say, pick up office supplies on the way to work? If she has an accident while on that errand, your practice could be sued. The staffer's personal insurance may not apply. "During that errand, she's an agent of your practice," explains attorney Griffith. And even if her policy would apply, do you know its limits, or whether it has lapsed?

Your basic business coverage may not protect you, either, because it may apply only to automobiles your practice owns. Uh-oh. To plug this hole, you should get an endorsement that covers staffers' autos driven on practice chores—another form of coverage for "nonowned automobiles." In this case, the practice is the insured party.

Another possible hitch: "Some physicians have their corporation own a car so they can write off the costs fully, but they insure the car personally, because that's cheaper," says Salisbury. "However, some insurers don't permit this, so the coverage isn't effective." Don't try this before investigating—in detail. Even if it's allowed, you may still need an endorsement naming your corporation an "additional insured," says Salisbury. "And perhaps only corporate officers can then drive the car."

6. Auto insurance always allows grace periods

With some kinds of insurance, carriers may forgive missed premium payments. With life insurance, for example, you may have 30 days after the due date before coverage lapses, and then you might become reinstated without a physical if you pay within the next 30 days.

But with auto insurance, watch out. Some states, such as Wisconsin and Pennsylvania, require no grace period. So could your policy be canceled if you miss a payment? Yes, confirms Loretta Worters, though you should get a notice before that happens. "But you can't always count on receiving it in time," she cautions.

Indeed, insurers may play games, Moore notes. "Say a state requires 15 days' notice before cancellation. Some in-surers will send the notice to arrive on the date payment is due, which results in a 15-day grace period. Others will time that letter so it will arrive 15 days later, when the grace period runs out."

This may seem odd. An insurer normally wants your business to continue. So why cut you out, instead of just charging a late fee? "Because auto insurers may use such rules to weed out high-risk customers," cautions Keith Cohen. Does that mean if you're low-risk, you can count on being welcomed back if you do miss a deadline? No. With insurance, it's safest not to count on anything. Besides, you don't want to risk having even a one-hour gap in coverage. Accidents don't take long.  

7. My agent will inform me of everything that matters

An insurance agent may try to keep you informed, but he can't anticipate all your needs. Ultimately, it's your responsibility to get and maintain the proper protection. As we've seen, this territory is rife with exceptions, so whenever you become aware of any possible area of concern, ask whether you might need more protection or special endorsements.

In addition, any policy may have gaps you don't expect. You can't assume an agent will know every detail of every policy, says James Moore. That's especially true if the agent represents several insurers. Moreover, today it's less likely that "standard" policies will really be standard, says Salisbury. "Companies often cut back on coverage by putting in new limitations here and there."

Even if your agent seems knowledgeable, it's best to get queries answered by the carrier, in writing. That way, if trouble arises, you have a better chance of dipping into the deepest pockets.

Does your agent make you feel you're being too fussy? Consider shifting your business elsewhere.

8. I don't need insurance unless I own a car

If you don't own a car, you may not think about buying auto insurance, even if you sometimes drive. That means you're depending on other people's insurance coverage.

When you're driving a car that's inadequately covered, financially you're about as safe as motorcyclist Evel Knievel sailing over a row of buses. Yet you probably don't ask how much insurance coverage others have. Even if you do ask, you can't be certain their coverage hasn't lapsed or will fully protect you as a borrower.

What if you rent a car? Any collision insurance offered by the rental company will probably be adequate, because the rental agency is mainly concerned with its property, notes Wilson. On the liability side, however, you may be at risk, even if you opt for the rental company's insurance. The liability coverage may be only the state-mandated minimum, which is probably much less than you'd want. Typically, it's capped at $50,000, for all parties in an accident. In many states, the figure is even less. Florida doesn't require any liability coverage.

You may not be able to purchase additional liability coverage through the rental company. Even if you can, you won't be acquainted with all the policy's fine print. If you drive but don't own, then, consider getting your own policy, designed specifically for nonowners. It's generally called "named nonowner" or "named operator" coverage. "This coverage is not well known," Wilson says, "but without it, some drivers may be at great risk."

One final caution: Keep in mind that auto insurance isn't a good place to scrimp. Notes attorney Jim Griffith: "Sometimes people are thrilled to save a few dollars in auto insurance premiums. That's great—as long as you don't have a serious accident. But if you do, having inadequate coverage could ruin your life."

Researching auto insurance: Let your mouse do the driving

The Internet offers plenty of information on this subject. One particularly good site is insurance.about.com/industry/insurance/msubauto.htm, where you'll find helpful topics such as "divorce and insurance" and "insuring rental cars"), plus links to insurers' home pages. Also worth a stop is www.insure.com/auto, where you'll find, among other material, easily accessible pages organized by state. Each has a summary of that state's car insurance laws, plus links to various related sites.

You can buy insurance online, too. But it would probably be unwise to take that step without talking to an adviser, given the complexities covered in the accompanying story. "Physicians probably wouldn't buy malpractice coverage without speaking with an expert," notes insurance consultant William Wilson of Hendersonville, TN. "Auto claims can be in the millions, too—especially when a doctor is involved. In fact, most physicians should probably discuss any kind of insurance with an adviser before they buy it."

 

. 8 myths about car insurance. Medical Economics 2000;9:94.