In the last installment we discussed the basics of vehicle insurance – what it is and the various types of coverage that is typically found and/or required in most states and with most vehicle insurance policies. This article will cover both optional vehicle insurance coverage and the fallacy of what is called “Full Coverage”.
What is “Full Coverage”? Full coverage is the term commonly used to refer to the combination of comprehensive and collision coverage (liability is generally also implied). The term is actually a misnomer because, even within traditional full coverage insurance, there are many different types of coverage, and many optional amounts of each. “Full coverage” is a layman’s misnomer that often results in drivers and vehicle owners being woefully underinsured. Most responsible insurance agents or brokers do not use this term when working with their clients.
One common misconception in the United States is that vehicles that are financed on credit through a bank or credit union are required to have “full” coverage in order for the financial institution to cover their losses in case of an accident. While most states do require additional coverage to be purchased, others only require Comprehensive and Collision to be purchased in addition to liability and not “full” coverage.
Vehicles purchased with cash or paid off by the owner are generally required to only carry liability. In some cases, vehicles financed through a “buy-here-pay-here” car dealership — in which the consumer (generally those with poor credit) finances a car and pays the dealer directly without a bank — also generally require only liability coverage.
Optional coverage – While there are many different types and variations of optional vehicle coverage (usually in addition to typical collision, comprehensive and liability coverage afforded by most vehicle insurance policies), I am going to concentrate on the most common optional coverage types.
Towing coverage is also known as roadside assistance coverage. Traditionally, automobile insurance companies have agreed to only pay for the cost of a tow that is related to an accident that is covered under the automobile policy of insurance. This had left a gap in coverage for tows that are related to mechanical breakdowns, flat tires and gas outages. To fill that void, insurance companies started to offer the car towing coverage, which pays for non-accident related tows.
In recent years, automobile manufacturers have provided “Roadside Assistance” coverage at no extra charge when a new vehicle is purchased. This coverage often runs for a set period and sometimes exceeds the term of the basic vehicle warranty. With the rise of “Certified Used Vehicle” programs that are also backed by most new vehicle manufacturers, this coverage is often included in their programs as well.
Loss of use – Also known as rental coverage, provides reimbursement for rental expenses associated with having an insured vehicle repaired due to a covered loss.
GAP coverage – Also known as GAP insurance, GAP was established in the early 1980s to provide protection to consumers based upon buying and market trends. Due to the sharp decline in value immediately following purchase, there is generally a period in which the amount owed on the car loan exceeds the value of the vehicle, which is called “upside-down” or negative equity. Thus, if the vehicle is damaged beyond economical repair at this point, the owner will still owe potentially thousands of dollars on the loan.
The escalating price of cars, longer-term auto loans, and the increasing popularity of leasing gave birth to GAP protection. GAP waivers provide protection for consumers when a “gap” exists between the actual value of their vehicle and the amount of money owed to the bank or leasing company. In many instances, this insurance will also pay the deductible on the primary insurance policy. These policies are often offered at auto dealerships as a comparatively low cost add-on to the car loan that provides coverage for the duration of the loan.
Consumers should note that GAP Insurance does not always pay off the full loan value however. These cases include but are not limited to: unpaid delinquent payments due at the time of loss; payment deferrals or extensions; refinancing of the vehicle loan after the policy was purchased; and late fees or other administrative fees assessed after loan commencement.
Total Loss Coverage – This is similar to ordinary GAP insurance but differs in that instead of paying off the negative equity on a vehicle that is a total loss, the policy provides a certain amount, usually up to $5,000, toward the purchase or lease of a new vehicle. Thus, to some extent the distinction makes no difference, i.e., in either case the owner receives a certain sum of money. However, in choosing which type of policy to purchase, the owner should consider whether, in case of a total loss, it is more advantageous for him or her to have the policy pay off the negative equity or provide a down payment on a new vehicle.
NEXT TIME: The factors that insurance companies use in figuring your monthly premium.