Auto insurance (car insurance)

Most people know something about motor insurance. This is because any vehicle driven on public roads must have a certain level of insurance.

This article covers auto insurance or car insurance as it might be known.

The Road Traffic Act ensures that drivers must meet liabilities they incur should they injure other people or cause damage in an accident.

The person who is injured is known as the third party. The first and second parties are the car driver and their insurance company respectively. The third party may be a pedestrian, a passenger in the car driven by the insured person, or the driver or passenger in another vehicle.

The injured third party can claim compensation from the driver of the offending car. The driver then relies on his or her insurers to pay the other person's claim.

Different Types of Motor Policy

The law says that drivers must have insurance against third party injury or damage claims and that the insurer must give to the insured a certificate of motor insurance. However, most motor insurance policies provide far more extensive cover than this. There are four basic types of cover available in Britain:

• Act only - This brings only the minimum required by law - third party liability risks incurred on public roads. Policies of this type are very rarely issued. Few motorists would be content to rely on them unless, because of a poor driving record, they could not obtain any other cover.
• Third party - As well as covering the insured when driving on public roads, this type of policy applies on private property. It covers third party claims and provides protection against other legal liabilities. For example passenger indemnity, covering the possibility that a passenger in the car may cause an accident perhaps by carelessly opening the door and knocking a cyclist over. It also provides cover against certain legal costs.
• Third party fire and theft - In addition to the protection given by third party insurance, this type of policy covers loss or damage to the insurer's own car as a result of fire, theft, or attempted theft.
• Comprehensive - The widest form of cover available, although it cannot protect against every conceivable risk. In addition to the covers described in 1, 2 and 3, comprehensive cover protects in other valuable ways. The most important of these is accidental damage cover -policyholders can have their own damaged vehicle repaired or replaced. Comprehensive policies also include personal accident insurance, providing payments for death and specified serious injuries such as the loss of a limb or sight. Such payments are usually restricted to the policyholder and his or her wife or husband. Other cover with a comprehensive policy can include small amounts of medical expenses cover for anyone in the insured car, who is injured in an accident, and for loss or damage to personal effects in the car.

Different Types of Vehicles

Insurers draw on their statistics and on their experience to issue special policies for various types of vehicle on the roads. There are, for example, private cars, and motorcycles including motor scooters and mopeds. Commercial vehicle insurance covers all vehicles used for transporting goods and passengers for commercial purposes, including hire cars and taxis. The insurance of agricultural and forestry vehicles and special types of vehicle covers a whole range of machines. Then there are vehicles constructed for specific purposes such as mobile cranes, earthmoving equipment and ambulances.

Motor Traders

Motor traders pose a different type of risk and therefore need specialised insurance policies. There are three basic types of motor trader policy.

"Road risks" covers the trader for any vehicles which they own or which are in their custody or control while they are away from the premises of the insured business. "Internal risks" covers them only for liabilities incurred on their own premises. "Combined road and garage" includes both these as well as other risks.

Insurers will only issue motor-trader policies to traders with their own premises. Traders working from home will have difficulty getting cover.

Calculation of Premiums

The cost of claims varies widely, depending on the risk involved. From their claims statistics motor insurers can relate premiums to the degree of risk. This gives fair treatment to all policyholders.

There are four main factors in calculating private car insurance premiums. These are:

• the type of car
• the drivers
• use to which the car will be put
• district in which it is kept

Type of Car

Cars are divided by insurers into 20 groups. The higher the group number, the higher the premium. The groups take account of factors such as the cost of body parts, the ease with which the car can be repaired, its value when new, its top speed, Its acceleration, and the degree to which h resist theft. Sports and high performance cars are more expensive to insure because statistics show that they are involved in more accidents and also that repairs are more costly than with other types of cars. They are therefore given a higher group rating than, for example, a small low-powered saloon.

Drivers

Information about drivers affects the premium significantly. Important factors include drivers' ages and their driving experience. Young drivers - particularly those under 25 - pay a higher premium because statistics show that they are far more often involved in accidents. Young men have more insurance claims than young women. This means that some insurers will charge young women lower premiums than men of the same age.

The premium may also be affected by drivers' occupations. Other factors include the accident record and history of convictions - drivers convicted of drunk-driving will, when they come back to driving, have to pay a very high premium for a policy providing only limited cover

Use

The use to which a car is put also affects the risk. Most insurers recognise three common classes;

• use for social domestic and pleasure purposes and use by the policy holder in person in connection with his business or that of his employer or partner
• use for social, domestic and pleasure purposes and for the business of the policyholder or that of his employer or partner
• all this cover, plus commercial travelling.

All of these types of cover exclude the use of the car for racing, competitions, and rallies or for carrying passengers for hire or reward. However, taking money from passengers in return for a lift (known as "car sharing") is allowed, as long as the lift is not part of a business arrangement.

District

The risk is also influenced by the district in which the car is kept. Areas with a high density of traffic are more risky than a remote country area. Also, some areas have a significantly higher-than-average record of car theft or vandalism. Insurers therefore divide the country up into a number of categories of area according to their experience of the risks involved. Sometimes, theft is not covered where a car is left overnight in the open.

No Claim Discount

Motorists who go for a year or more without making an insurance claim qualify for a no claim discount off the basic premium. Most insurers offer a reduction of around 25% after one claim-free year. This discount rises, year by year, to 60% or 65% after four or five years. If the motorist has to claim off his own policy he may lose some or all of his discount. The discount is allowed for not making a claim and the question of blame for any accident is not relevant. Therefore if motorists make a claim they will lose part of their discount (even if they are not to blame) unless their insurers can recover their claim payment from another motorist who is at fault.

Many insurers issue special policies which allow, say, two claims in three years without the no claim discount being affected. These "protected discount" policies of course cost more to buy.

The Excess

The excess is an arrangement whereby motorists meet the first part of a claim for accidental damage to the car or its theft. The amount of the excess is set out in the policy.

Excesses may be agreed by motorists on a voluntary basis to reduce the level of the premium or they may be imposed by the insurer. Compulsory excesses are often imposed, for example, on learner drivers or those who are young or inexperienced. A motorist with a poor claims record may also have to face a compulsory excess.

These excesses cut down the cost to insurers of small claims and therefore benefit all policyholders.

Motoring Abroad

All private motor policies issued in the UK extend automatically for use in all EU countries, and certain other European countries. The cover, however, is limited to third party liability.

To enjoy the full level of UK cover, such as fire, theft and accidental damage, motorists should tell their insurance company before departure. The company will then arrange to extend cover during the period of the visit.