6 car insurance potholes

By Barbara Marquand on October 2nd, 2012

Some car insurance is marketed as if it provides the same coverage as other policies, but at a lower price. In reality, car insurance coverage varies according to the fine print in the policies.

That's why it's important to review the policy language before you buy. It's better to understand the exclusions and limitations now than after you've had an accident.

Here are 6 examples of how coverage can be limited in some policies and in some states.

1. Plummeting liability coverage

Some states let insurers include "step-down provisions" for liability insurance when you let someone who's not on the policy use your car. Under a step-down provision, your liability limits would drop to the same level as the state's minimum required liability limits, if the borrower caused an accident while driving your vehicle. State requirements for liability coverage vary, but generally those limits are very low.

2. Less underinsured motorist coverage than you think

Underinsured motorist (UIM) coverage comes into play when an at-fault driver doesn't have enough liability insurance to pay all your medical bills after an accident. Uninsured motorist (UM) coverage pays your medical bills when the at-fault driver has no insurance.

The tricky part is how UIM is calculated. Generally the payment from the at-fault driver's liability coverage is subtracted from the amount you can claim on your UIM coverage.

Imagine, for instance, your medical bills totaled $75,000 after an accident; the other driver had $50,000 in bodily injury liability coverage, and you had $50,000 in UIM coverage. The payment from the other driver's liability insurance -- $50,000 -- would be deducted from what you could claim on your $50,000 of UIM coverage, leaving you short by $25,000.

To pay out, UIM typically must total more than the other driver's liability coverage. Ask your agent whether you should increase your UIM coverage or if an option is available to "stack" coverage to get more protection. In Connecticut, for instance, a feature known as underinsured motorist conversion coverage is available. With conversion coverage, reimbursement from UIM is not reduced by payments from any other source.

3. Alcohol exclusions

Alcohol exclusion laws let insurers deny medical coverage for injuries due to intoxication. According to the Governors Highway Safety Association, 37 states have some form of an alcohol exclusion law. In those states, your car insurance company could deny medical treatment claims if you were injured while driving under the influence of drugs or alcohol.

4. No coverage for unlicensed drivers

Under some policies, there is no coverage for unlicensed drivers. Make sure anyone who drives your car has a driver's license.

5. Taking care of business

Coverage might be excluded for business use of your own car or for when you borrow other vehicles for business. Ask your insurance agent whether you need additional coverage if you use your car for any type of business purpose or you rent vehicles for business use.

6. Limited coverage for custom equipment

Some policies don't cover custom or upgraded equipment -- a problem if you've done a lot of work on your car.

These are just several of many ways policies may limit coverage. After getting insurance quotes, work with an agent to compare car insurance policies and find coverage that fits your needs.

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