Watch Out for Potholes in Your Car Insurance

Would you be surprised to learn that if your laptop gets stolen during a car break-in, your automobile insurance probably won't reimburse you for the loss? Don't be.

Many people have only a vague idea of things like: what their car insurance does and doesn't cover; how they might accidentally void their coverage; or that even if an accident isn't their fault, their own insurance may not pay for damages if they don't have the right kind of coverage.

Common car insurance exclusions include:

Named driver exclusion. This is an agreement between you and your insurance company to exclude a specific person from coverage for liability or physical damage caused when driving a car you insure. You might choose it if, for example, the insurer is threatening to cancel your policy because a family member has an unsafe driving record or a suspended license -- or you don't want to pay an outrageous premium so your kid can drive your expensive new car.

Such drivers should never be allowed to drive cars from which they've been excluded; it's the same as driving uninsured and you both could be held personally liable for any damages. Once the excluded driver has reestablished a good driving record, you may be able to get him or her reinstated as a covered driver. Ask your carrier for its requirements.

Interestingly, some policies will cover friends and/or family members when they drive your car, provided they don't live in your household. The thinking is that someone you live with who isn't included on your policy will more likely drive your car regularly than an occasional visitor. Coverage levels in such situations may be less, so check your policy carefully for details.

Car rental insurance. Car rental agencies offer their own collision, liability, theft and other insurance coverage. Conventional wisdom says you should avoid buying it if your own insurance -- or benefits available from your credit card -- provide similar coverage for rental cars. However, first contact your insurance company and credit card issuer to make sure you are fully covered.

Reasons your policy might exclude coverage include:
  • Rental duration -- coverage often expires after 30 days or less.
  • Exclusions for sports cars, luxury models, SUVs and trucks.
  • Travel outside specified service areas -- especially crossing foreign borders or driving in rough terrain.
  • If you don't carry comprehensive/collision on your own car, your carrier will probably deny such coverage on a rental. Also, ask whether coverage is limited to the value of your own car.
  • Ask whether "loss of use" fees (for time the damaged car is in the shop) are covered.
  • Rental agreement violations (e.g., driving recklessly or allowing unauthorized drivers)
Replacing stolen items.
Most car insurance policies won't reimburse you for items stolen from your car that are not permanently installed (like built-in sound systems). These might include cellphones, computers, wallets, luggage, etc.

However, homeowners or renters insurance generally covers your personal property, no matter from where it's stolen; just be prepared to pay the deductible and ask whether you have "actual cash value" coverage (which repairs or replaces belongings, minus deductible and depreciation) or "replacement cost" coverage (which replaces items in today's dollars and is more expensive -- but usually worth it).

Also note that if you've added custom parts or equipment to your car, such as custom tire rims or modifications for disabled riders, you may need an ungraded policy to be covered.

Business use restrictions. You must maintain a business car insurance policy if you use your personal vehicle for business purposes, whether you deliver pizzas part-time, participate in a ride-sharing service (like Lyft, Uber or Sidecar), or even run business errands for your boss. Otherwise, you may not be covered in an accident or theft and may even void your coverage.

Ask whether your employer's policy covers you; if not, add business use to your own policy or use a company car for work errands. (Note: Commuting to work and unpaid volunteer driving for charitable institutions do not count.)

Other coverage shortfalls to watch out for:
  • If your car is stolen or damaged, most insurers cap payments for a loaner car at specific daily and total usage rates, so if you want a nicer loaner car or your vehicle needs extensive repairs, you might have to pay out-of-pocket for some expenses.
  • If your car is stolen or totaled, the insurer will reimburse you for what the car is currently worth (e.g., Blue Book value), which, if you're leasing or paying off a loan, may not be enough to cover what you owe. In that case, consider getting gap insurance to cover the difference.
  • Don't skimp on uninsured motorist coverage, which protects you if the other driver is at fault and isn't insured. It's relatively inexpensive compared to the collision coverage you take out in case you're at fault, so why tempt fate?
  • Policies generally won't provide liability coverage for injuries or property damage that were caused intentionally.
  • Many carriers limit or deny coverage for injury or damage caused by catastrophic events, such as nuclear exposure or explosion, biochemical attack, acts of war, etc.
  • Vehicles with fewer than four wheels and those used off-road or in racing competitions are commonly excluded from coverage.

Even if you drive a clunker, it pays to have adequate car insurance. Just make sure you fully understand what is and isn't covered.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.