Nationally recognized insurance expert and consumer advocate Douglas “Doug” Heller spent two decades working on public policy and regulatory matters related to property-casualty insurance. In other words, he’s a “been there-done that” kind of guy when it comes to automobile insurance.
During his career, Heller has authored op-eds, articles, and reports on auto insurance pricing in the U.S. and provided expertise in insurance-related litigation. For nine years, Heller served as executive director of the national consumer advocacy organization Consumer Watchdog. In addition to conducting research for and providing expertise to consumer rights organizations, Heller is a member of the Federal Advisory Committee on Insurance (FACI).
What follows is Investopedia’s edited conversation with Heller.
The Three Objectives of Auto Insurance
Investopedia: What’s the purpose of automobile insurance?
Heller: There are three objectives of automobile insurance.
Finally, insurance helps you comply with the law. Automobiles are dangerous, heavy, expensive pieces of machinery. Insurance provides protection for drivers, passengers, and others from injury or damage done by someone who would have no way to pay for any damage they do.
As a result, almost every state requires us to buy coverage. Automobile insurance helps us meet our financial responsibility under state law.
Most states (New Hampshire is an exception) require both bodily injury and property damage liability coverage.
Investopedia: Of these main types, which are required? What do you absolutely need to have to drive your car on the street?
Heller: OK. Let’s start with the fact that New Hampshire doesn’t require auto insurance coverage. I think most people in New Hampshire buy auto insurance, but it’s not required by the state government.
Most states require liability coverage, both bodily injury liability and property damage liability. This, recall, is a type of third-party coverage. It’s the coverage we buy to protect other people. Liability means we are responsible for somebody else’s injuries and the damage we do. You often hear numbers like 15/30 or 50/100 coverage. Those two numbers describe the amount of bodily injury coverage you buy. The first number is for one person who gets injured. The second number is the total that will be paid if multiple people are injured.
There is also a third number in that set. For example, 50/100/25. That last number, 25, represents $25,000 in property damage liability. If you damage somebody’s car or a fence on someone’s property when you careen, the insurance company will pay up to $25,000 for property damage. Liability is the key coverage most people are required to buy by the government in every state, except New Hampshire.
Investopedia: How much liability are you required to purchase?
Heller: You are only required to buy the minimum. The minimum varies from state to state. I think the most common mandatory personal liability coverage is probably 25/50. Twenty-five thousand dollars for injury to a single person, fifty thousand total. The most common property damage liability minimum is probably $25,000 per incident.
Some states also require uninsured motorist coverage. This is coverage that protects you if you are hit by an uninsured motorist or somebody else on the road without coverage. A handful of states also require what’s called personal injury protection (PIP). These types of coverage are called first-party coverage, meaning they cover you for any injuries that you sustain, irrespective of who is at fault in the accident. It’s commonly known as no-fault coverage or insurance.
Investopedia: How do you determine what your state requires?
Heller: There are four easy ways to find this information: your state department of insurance, state department of motor vehicles, the National Association of Insurance Commissioners (NAIC), or what I think is the easiest way, just conduct a simple web search. Type in your state and the words “minimum auto insurance.”
There’s one additional type of coverage that is required—not by the government, but by your car lender. It’s called comprehensive and collision coverage. If you don’t own your car outright—say you have a loan, or are leasing your vehicle—the company financing the car, whether it’s a bank, finance company, or lease company, will require comprehensive and collision.
That, again, is first-party coverage since it refers to damage done to your car. The reason these banks and others require you to buy that coverage is they are not worried about what you do to other people. They’re worried about what you do to the car in which they have a financial stake. So, if you don’t own your car outright, you’re going to need comprehensive and collision, which you may want, even if you do own it outright. But you are required to have it, again not by law, but by the financial institution.
Failure to purchase required coverage can result in forced-place insurance at higher cost.
Investopedia: What are the consequences if you somehow manage to not buy that coverage?
Heller: If you don’t buy it, if you let it lapse, your bank (or lender) is going to find out because they have a relationship with the insurer. And then what they’re going to do is they’re going to buy it for you and charge it on your loan as a product called forced-place insurance. And that is not only going to be a surprise on your bill but also much more expensive than the coverage you can get on your own.
Investopedia: Since states don’t require comprehensive and collision, do they have any say in that type of coverage, such as how much insurers charge, what the coverage is, and so forth?
Heller: With respect to comp and collision, states, by virtue of their regulation of auto insurance, may say how much can be charged for it. They may require limits or allow companies to set their prices differently in one state from another based on different regulatory regimes. But when it comes to the requirement to have comp and collision, that is governed by financial institutions. For example, a bank isn’t going to let you buy a comprehensive policy with a $5,000 deductible.
Investopedia: What types of coverage might people want, even though it’s not required?
Heller: One I mentioned that is required in some but not all states is uninsured motorist and underinsured motorist coverages. These coverages pay for your injuries or damage to your vehicle if you are hit by an uninsured or underinsured driver. That driver is not taking financial responsibility for the damage they caused because they don’t have insurance.
Theoretically, you could take them to court and sue them for it. Oftentimes, however, the primary reason uninsured drivers are uninsured is because they can’t afford insurance. Research shows that most people who are driving without insurance aren’t doing it because they want to stick to the man. It’s because they can’t afford coverage. And if they can’t afford auto insurance coverage, it’s unlikely that they will have much in the way of assets to cover your injuries or damage to your car.
This is why, even if your state doesn’t require it, it’s important to consider buying uninsured motorist coverage. By the way, you should really think about buying as much uninsured motorist coverage as you have liability coverage. Otherwise, you’re saying the value of injuries to other people is greater than the value of injury to yourself and your car.
Investopedia: Is there any other type of coverage that is not required but still a good idea to consider?
Heller: Sure. The other thing that people like to think about, and for good reason, is rental car coverage. Rental car coverage answers the question, “What am I going to do for the next seven to 15 days while my car is out of service after an accident?”
Keep in mind if somebody hits you and has insurance, their liability coverage should pay for your rental. If you’re at fault, collision coverage may not pay for a rental car unless you have that rider.
Investopedia: What types of coverage are sold that aren’t helpful?
Heller: One that really frustrates me is guaranteed asset protection or gap insurance. It's one of those things that's sold along with the undercoating when you buy a new car. It's essentially credit coverage that covers the difference between what you owe on the car and what insurance will pay if the car is totaled.
There is sort of a theoretical reason for it. You buy your coverage, the car’s value drops, then the car gets totaled. You still owe $18,000 on the car. But the insurance company is only going to pay $15,000. So, you still have another $3,000 that you’re not covered for, which gap insurance would pay.
The problem is that gap insurance has exceptionally low loss ratios, meaning the amount that the insurance companies pay relative to the premiums they get paid is extremely low because it’s largely not a great product for consumers.
Now, there are certainly people who find value in it, but it’s the rare consumer for whom the product is worth it. I mention that because oftentimes we see it show up and people hear about it in those sales pitches on the car lot. I always guide people to understand that it’s a product that works very well for insurance companies, not so much for the consumers who buy it.
Investopedia: You mentioned being on the lot and having gap insurance come up. Does this even come from your insurance company, or is it a type of insurance provided by someone else?
Heller: Interestingly, the lender to Wells Fargo got in a lot of trouble a few years ago for pushing gap insurance. That was part of their financing deal. I do think there are mainline insurers that offer a gap policy, but often it’s sold as a stand-alone product outside of your insurer.
Some lenders, I think, offer a form of gap insurance at no extra cost as part of the loan. Usually, however, gap insurance is a stand-alone product through a specialty insurer.
Investopedia: We haven’t talked about deductibles. Can you explain what they are and how they work?
Heller: Sure. When we talk about deductibles, we’re generally talking about the comprehensive and collision part of your policy when it’s your fault. This includes damage such as an accident or damage from a shopping cart in a lot. Or even if your car is stolen.
The deductible is the amount you pay before the insurance company pays. Think of it this way: If you have a five-hundred-dollar deductible and a thousand dollars in damage to your car, you will pay $500, and the insurance company will pay $500. The part you pay is the deductible. In this scenario, if the damage is $499, you pay the full amount, and the insurance company pays zero. You can get a lower deductible, but your premium will be higher. And, of course, you can increase your deductible and pay a lower premium.
Investopedia: How do people decide which deductible is best for them, assuming they have a choice?
Heller: People should always test the value of the premium benefit they get. They should compare how much they’re going to save on the front end if they increase the deductible a couple of hundred dollars. Test it at several different deductibles. Generally speaking, the lower you can keep your deductible, the better if the premium doesn’t get too high.
Another thing to watch is the fact that your vehicle goes down in value over time. As the value of the car goes down, your comprehensive coverage becomes less valuable. Your premium will go down as well, but at a certain point, having coverage on a car that’s only worth a small amount of money may not make sense. Consumer Reports says you should consider dropping this kind of coverage when the annual premiums exceed 10% of your car’s value.
Keeping Maintenance Records
Investopedia: What if you disagree with the amount the insurance company wants to pay? What if you think your car was worth more than the insurance company says?
Heller: As a rule, it is good to keep your maintenance receipts. In the same way you may take an annual video update of everything in your house, do the same with your car. Keep an accurate, up-to-date record of your car’s condition. What’s the mileage? What maintenance has been performed? The more you can demonstrate the state of the car before the accident, the stronger your argument will be to get full value for it.
Investopedia: Do manufacturers or dealers keep records of maintenance and upkeep, especially on newer cars with the ability to transmit data?
Heller: Yes, absolutely. Most provide a website with a readout on all the maintenance, all the work, everything that’s been done, the total mileage it transmits to the central computer.
There’s a way I like to think about it, just to sort of explain the theory of the case here. Think of a person with a 1992 Mazda Miata who has a true love affair with their vehicle. They maintain it in pristine condition. Another person also happens to have a 1992 Miata because they got it cheap. They go to the junkyard for parts and just basically keep it running.
Both cars are 1992 Miatas, but they’re not the same vehicle. And so, obviously, the person who really loves it and maintains it is probably going to get more for that because it’s worth more and they have the documentation. So, I like to think of it as you do your part and keep your car [in] really tip-top shape, it’s going to be worth more than if you let it fall apart slowly.
“In the same way you may take an annual video update of everything in your house, do the same with your car.”
Reevaluate Both Coverage and Insurance Provider
Investopedia: You touched on the notion of reevaluating coverage. How often and when should you do this reevaluation?
Heller: I think there are two types of reevaluation. One is the coverage on your car. The other is the insurer you use. The auto insurance market is a strange one. It competes through advertising rather than through price. So, we see Geico and Progressive and State Farm and all these companies duking it out with funny characters and athletes, telling us how great they are. Their prices are wildly different, depending on the market and depending on you and the ZIP code you live in. I’d say, every two or three years shop your insurance policy.
When you shop for a company, you also need to reevaluate your coverage. It’s not just whether your car’s value has declined and you no longer need collision coverage. Your own personal financial situation may have changed, and you may want to expand or decrease your liability coverage. Simply put, if you lost your job, lost [your] assets, and have spent down your savings, you don’t have that much in assets to protect and reducing liability coverage to save money.
Similarly, if your assets have increased, you may want to expand your liability coverage. Ask yourself if the coverage you have is enough now that you have more wealth to protect.
Discounts and Devices
Investopedia: Let’s explore discounts and also insurance company-provided devices to monitor mileage and driving habits because the two go together. First, please talk about discounts.
Heller: Sure. So, there are a couple of different types of discounts. Some are sensible, such as giving people credit for demonstrated safe driving and not having accidents. Some companies will give you a discount for sticking with them for a long time. They call it a loyalty discount. Another is a multi-vehicle discount, which makes sense because most people aren’t going to insure one car with one company and a second car with another.
Then there’s a multiline discount that a lot of companies offer. This is an interesting one. As a consumer advocate, it bothers me a little because if you own a home and bundle that with your car insurance, you’re going to get a discount. This means that someone who doesn’t own a home pays more for car insurance and essentially pays for your discount. Still, it makes sense to ask about multi-vehicle and bundling. Especially if you are someone who is thinking about buying life insurance or other insurance.
There’s also something that you hear from me and my colleagues in the consumer advocacy world a lot, which is insurance companies giving discounted rates to people based on things that have nothing to do with their driving. Insurance companies, for example, sometimes give discounts to people who are architects, engineers, doctors, or lawyers. And they can make people who are cashiers and janitors and healthcare workers pay more.
Getting a discount if [you] have a college degree is also a way of saying they’re going to have surcharges on people with a high school diploma. Another is the credit score. If you have a high credit score, most companies are going to charge you less than if you have a fair or poor credit score.
There are others that are less known. Some companies give a discount if you are married. Those same companies charge more if your spouse dies—that is, a widow penalty. There’s a good-student discount, which can be helpful if you have young drivers in the family, since they are more expensive to insure. There’s also a “student away from home” discount. If your child is living 100 miles away at college and not accessing your car, you may be able to get a discount off your policy, since they’re not like a regular driver, as if they were living at home and driving the car.
Investopedia: OK. Now, what about insurer-provided devices that monitor your driving habits?
Heller: This issue of telematic devices is a fluid situation for consumers. Telematics is premised on the idea that technology allows insurance companies to evaluate your driving and the riskiness of your driving. This includes things like how many miles you drive, these types of things. These are all well-documented reasons accidents can happen.
The theory of the case is we can watch your driving and give you a better rate if you demonstrate your safety on the road. In other words, because we’re riding shotgun with you. Some people don’t like the idea that insurance companies are literally monitoring their every turn. They don’t like that the insurance company knows where they go, what time of day they drive.
As a result, these types of devices have not saturated the market. A minority of customers use them. That’s because they are not totally proven yet. It’s also because insurance companies have been less than transparent about what they’re collecting and how it relates to the rates they charge.
There’s also the issue of personal privacy and what companies do with the data they collect. Do they sell it so a local market knows we drive past there four times a week? People want to trust the data is only used to evaluate riskiness.
This is sort of sitting at a kind of fork in the road. Will the insurance companies and the regulators in our states make sure that this is a product that not only incentivizes safe driving but also protects consumers from corporate abuses? Or is it going to be just another way in which companies dig into our lives and extract more data that they can monetize?
We’re hoping that regulators and lawmakers make sure that we end up with a good version of these potentially valuable products and the discounts that come along with them.
Investopedia: Finally, there’s the issue of consumer protection when it comes to auto insurance. What are your options if you’re upset because you think the insurance company got it wrong when you filed a claim?
Heller: If you’re involved in a claim that’s not right, there are options. Obviously, you can go to the company and plead your case. Ultimately, of course, you can go to the civil courts.
In between, state departments of insurance have consumer complaint mechanisms, offering varying degrees of relief. Some states, like California, have a whole customer complaint team, with people who really know what’s going on. Even that will only get you so far.
Regulators, in my view, could really step up their game. By that, I mean I don’t think consumers should have to wait until something goes wrong. Auto insurance is really the only product in America that government compels us to buy. Most people can’t get to work without a car. We don’t have the infrastructure to support a population that has access to good jobs and doesn’t need a car.
It’s essentially a mandatory purchase. We’re all compelled by the government to purchase this private-sector product, which is unique. As a result, I believe there’s a special obligation on the part of lawmakers and regulators to make sure that the supply side, the insurance companies, are acting appropriately. I think a lot more work needs to be done on the front end. So, as consumers, we do have a place to turn.