Auto insurance policies provide coverage for three main categories of people: (1) the policyholder, (2) their spouse; and (3) family members/others permitted to use the car. The assumption made by insurance companies is an accurate one: People living in the same house share cars.
Problems come up when people living in the same house have their own cars and separate policies.
That's because most policies limit coverage for use of a vehicle when it's owned by a family member and not covered under your insurance policy. So while that coverage limitation may not apply to you or your spouse, it applies to any other family member that uses the car and is normally covered by your policy.
This sounds more confusing than it is, but it's important to understand since it's the only way to guarantee no unwelcome surprises down the road. Let's break it down with an example.
First - How Auto Insurance Coverage Looks and Works
Before we get into the example, let's clarify what coverage under an auto insurance policy looks like. Most policies have three liability limits. Here's an example: $25,000/$50,000/$10,000.
Each number means something different:
- Maximum coverage for bodily injury suffered by a third party
- Maximum coverage per accident
- Maximum coverage for property damage
An Example of How Family Member Auto Insurance Coverage Works
Al and Peg have children living at home—a 19-year-old daughter, Kelly, and 17-year-old son, Bud. Kelly has her own car and car insurance with low liability limits for a third party. Here are the policy limits for everyone involved:
- Al and Peg - $100,000/$300,000/$100,000
- Kelly - $25,000/$50,000/$10,000
- Bud - No insurance or vehicle of his own
Here's the scenario: Bud takes Kelly’s car, with her permission, and causes an accident that seriously injures the other driver. Since it was Kelly’s car, her policy limits will apply.
Remember: insurance follows the car.
What If the Damage Exceeds the Coverage of the Car in the Accident? Does Another Family Member's Insurance Kick In?
Now let's assume the cost of the other driver’s injuries exceeds the $25,000 limit on Kelly’s policy. Can Bud look to his parent's insurance to kick in and cover the difference? No, because Kelly’s car is owned by a family member, so the car is not covered by his parent's policy.
If Al or Peg borrowed Kelly’s car, the limitation would not apply. If Bud borrowed the neighbor’s car, the limitation would not apply.
All that matters here is that it was a family member’s car and it was Bud driving, so the limitation applies. Since Bud has no insurance of his own to turn to, the family could be responsible for the remainder of the other driver’s injuries out of pocket.
A Solution for the Family-Owned Vehicle Insurance Problem
There is no easy fix for this limitation. The best method is avoidance, but that's not realistic because family members will drive each other's cars.
The best choice is to purchase auto insurance coverage with higher policy limits. That way your insurance pays if something happens, not your family.
Of course, the best way to find a solution for your family is with the help of a Trusted Choice agent! That way, this problem will never actually be a problem for you. It's a win-win.