If you’re in the market for auto insurance, you’re probably asking some basic questions: When do I need full coverage _car insurance, and when do I need _liability insurance? How do they each work, and how are they different?
As we’ll see, full coverage vs. liability insurance can be a useful way of sorting through the many insurance options available - but it’s also a bit misleading. In this piece, we’ll give you some crucial background information about full coverage and liability insurance, so you can find auto insurance that meets your needs.
Liability insurance: What is it & how does it work?
Liability insurance covers other people if you’re involved in an accident. (That’s why it’s sometimes called “third party” insurance.) Most of the time, insurers divide this financial coverage into two broad categories: Bodily Injury (BI) and Property Damage (PD). BI refers to the other driver’s medical bills, and PD refers to the costs of repairing or replacing their vehicle.
Your insurance policy’s BI limit is usually given in two numbers - e.g. $50,000/$100,000. The first number is the maximum your insurer will pay to cover each person’s _medical bills. The second number is the maximum they’ll pay for the _total medical costs of the accident.
Let’s illustrate with an example. Imagine you collide with another vehicle, causing significant injuries. Both the driver and their passenger each require $40,000 in medical assistance. Your $50,000/$100,000 insurance policy safely covers this accident, because $40,000 is less than your $50,000 per-person cap, and the total cost ($80,000) is well under your $100,000 total accident limit.
But now imagine that there was a third person in the car. This additional passenger also incurred $40,000 in medical costs, which is covered by your $50,000 per-person limit. But the _total _BI cost of the accident is now $120,000 - significantly above your $100,000 total limit. Your insurance policy won’t cover those bills, so you’re on the hook for $20,000.
So that’s how BI coverage works. But what about Property Damage? Recall that PD coverage pays for the repair or replacement of the other driver’s vehicle. This is often given as a third figure in one of those number strings - e.g. $50,000/$100,000/$60,000. The first two numbers are your BI limits, as we just discussed. But that final number - $60,000 - is how much your insurance company will pay for the total costs of the other driver’s car. If their vehicle costs less than that to fix or replace, your policy will cover it. Anything over $60,000 is a financial cost you could be on the hook for, legally speaking. (Scary, right? That’s why most people buy insurance policies well above the bare legal minimum.)
Full coverage insurance: What is it & how does it work?
Full coverage insurance is a slightly misleading term. Although it’s commonly used by consumers, it doesn’t have a precise technical meaning and isn’t often used by insurance carriers. But generally speaking, when we talk about “full coverage” insurance, people are referring to Collision Coverage and Comprehensive Insurance. Unlike liability insurance, these policies pay for damages to _your _car after an accident. Let’s break it down a little more.
Collision coverage generally pays for repairs to your car in_ driving-related situations._ For instance, if you collide with a tree or another car, your collision insurance can pay for repairs to your vehicle.
Comprehensive insurance, on the other hand, can cover damage to your car in non-driving situations. Think of it as ‘over and above’ your standard collision insurance. If your car is stolen, vandalized, dented in a hailstorm, or crushed by a falling tree branch, it’s your collision insurance policy that will pick up the damages.
For both collision coverage and comprehensive insurance, payouts are structured differently than they are for liability insurance. Rather than a maximum coverage limit (e.g. $50,000/$100,000/$50,000), collision and comprehensive insurance policies cap out at the Actual Cash Value of your car (ACV) - which is how much the vehicle is worth immediately before the accident.
Let’s illustrate with another example. Say your car is worth $15,000 just before you collide with a tree. You need $5,000 in repairs from an auto body shop to get back on the road, which your collision insurance will cover. But what happens if you need $20,000 worth of repair work? Your insurance company will only pay the ACV of your car - $15,000. You can either come up with the additional $5,000 yourself, or you can consider the car totaled and use $15,000 to buy a new vehicle.
What’s_ not_ covered by liability or full coverage insurance?
So let’s review. Liability insurance covers the other driver’s vehicle and medical expenses. And “full coverage” (i.e. collision coverage and comprehensive insurance) pays for damages to your car. But what about _your _medical bills? For that, you need a separate insurance policy, called Personal Injury Protection (PIP).
Beyond that (potentially enormous) cost, there are a range of other scenarios not covered by liability, collision, or comprehensive insurance:
- Uninsured / underinsured motorist insurance: If you’re involved in an accident with someone who doesn’t have insurance, or whose insurance doesn’t fully cover your expenses
- Rental reimbursement insurance: For damage to rental vehicles that you’re driving
- Roadside assistance insurance: For towing or other emergency services after an accident
Again, these scenarios are not covered by collision or comprehensive insurance. That’s why so-called “full coverage” is a slightly misleading term. Fortunately, you can purchase additional policies to cover all of these situations.
Liability vs. Full Coverage: The Bottom Line
Both liability insurance and “full coverage” (i.e. collision and comprehensive) are important pieces of your insurance picture. Depending on the state in which you live, one or both of these type of insurance might be legally required for you to drive a car. The _size _of the policy required can also vary dramatically from state to state. And some scenarios are not covered by either liability or full coverage insurance.
Which insurance policies you choose to buy is a very complex, personal decision that deserves its own blog post. Stay tuned!