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Traffic Accident Law Center - How Does Collision Insurance Coverage Provide Protection?

Traffic Accident Law Center - How Does Collision Insurance Coverage Provide Protection?

In a prior blog, I wrote about liability insurance sometimes being insufficient using the example where the at-fault driver’s coverage is only $25,000 but the traffic accident resulted in your $40,000 car being totaled. Collision coverage can protect against this risk

Collision coverage is an optional coverage on car insurance policies. It costs extra but it protects against physical damage to your car (and is typically subject to you paying a deductible). In almost every case, it is not based on liability or who is at-fault for the traffic accident. While terms of each policy are worded differently, in summary, if the vehicle is damaged, then after applying the deductible insurance pays to repair it unless it’s deemed a total loss.

If the vehicle is determined to be a total loss, then the insurance coverage will only pay up to the vehicle’s “actual cash value" (“ACV") which is the current price of the vehicle in its pre-accident condition. Since used vehicles are usually worth less than their price when new, a vehicle’s ACV is similar to its used price. ACV is often determined by ways comparable to how used vehicles are valued, for example the higher the millage or age, then the lower the ACV. Since collision coverage protects not only damage repair costs but also the entire used value of the vehicle, the vehicle’s value is determinative of the cost of the collision coverage insurance (in other words insurance companies charge more for collision coverage on a $40,000 car than on a $4,000 car).

How does it work? If the vehicle is damaged in a traffic accident, the vehicle’s owner can call their insurance to make a claim for the repairs. The insurance company can evaluate the damage and provide an estimate of the repair costs. When the repair costs are not so high as to make the vehicle a total loss, the owner can have the vehicle repaired at a body shop or garage and get it back after paying the deductible (insurance pays the rest). If the estimate is insufficient for all of the repairs needed, the repair facility can contact the insurance company to have the other necessary repairs approved. The goal is to return the vehicle in the condition it was in before it was damaged in the traffic accident.

What if the vehicle is a total loss? When it’s better to replace the vehicle than to repair it or when the repair costs exceed the ACV of the vehicle, the insurance company may deem the vehicle to be totaled. When that is done, the insurer will propose an ACV settlement to their insured. If this proposal is not accepted automatically by the insured, the claim can be resolved by negotiation or arbitration.

Collision coverage can provide substantial relief where there is a dispute over fault for the traffic accident. Since collision coverage is not based on who is at-fault for the accident, repairs to the car can be done quickly while the dispute over the traffic accident may take months or even years to resolve. Often people do not want to make a claim against their own insurance when they feel that the accident was not their fault. The person responsible for causing the accident should be held responsible for paying the damages. While that sentiment is very understandable in some cases it is impractical.

Collision coverage is very beneficial but it does not necessarily mean that there is no risk. Sometimes the ACV of the vehicle is not enough to pay off the loans or obligations owed for the car. If the car’s sales tax is rolled into the loan for the purchase of the vehicle and the vehicle depreciates as soon as it ‘rolls off the lot,’ then there will be a gap between what is owed on the car and it’s ACV. If the car is leased, the ACV may not be enough to pay the lease’s pay-off amount. Many auto dealerships provide separate insurance plans for these particular risks however their rules can be very, very specific and should be followed meticulously.

The information above is to prompt thought and discussion. It is not to be construed as legal advice. Each individual’s insurance needs must be individually reviewed and difficult decisions need to be determined between what insurance coverage is appropriate and how much the individual can afford to pay for insurance coverage.

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