Should Your Car Insurance Depend on What Your Neighbor Drives?

When deciding how much Private Car Insurance coverage to purchase, most people simply look in their own driveways. However, car insurance shoppers should consider the totality of their assets as well as take a stroll down the block to check out what kinds of wheels their neighbors drive.

Why? Well, if your normal driving area is littered with luxury cars and you happen to cause an accident with one, your property damage liability coverage likely won’t cover the full cost of the repairs. As a result, if the other party does not have enough underinsured motorist coverage, either they or their insurance company could very well sue you for the remaining balance. And that, of course, would put assets such as your home at risk. Even if the other driver has sufficient coverage, his or her insurer – faced with a payout through a UIM policy – may seek to claw that money back through a process known as subrogation.

That is why Robert Hoyt, the Dudley L. Moore Jr. chair of Insurance at the University of Georgia, recommends that drivers consider buying higher liability limits than state minimum requirements. “Bare bones insurance can put their assets at risk when they cause an accident,” he says. "[Consider] being on the hook financially for thousands of dollars in medical and car repair bills with not enough insurance to help pay for them.”

Now, you might not consider this to be unfair – having to pay extra just because one of your neighbors decides to get an especially fancy automobile. If you were to rear-end someone’s diamond-encrusted car, would you really have to pay to support their lavish and clearly risky decision to take such a vehicle to the road?

“This is a really interesting social problem that's been with us ever since the introduction of the private passenger auto,” says John Cross, a professor of insurance at California State University–Fullerton. "Conceptually, why should people be allowed to drive when they don't have the ability to pay for the damage they cause? Yet pragmatically, a car is practically a necessity and people will find a way to drive, whatever the law does or does not require in regard do insurance. So society can say and do whatever it wants, motorists will still drive – and many times will be uninsured or inadequately insured.“

As a result, drivers should take steps to recognize and account for the risks associated with our current environment. That means taking a fresh look at your insurance policy, especially if you haven’t paid attention to your coverage in a long time.

If you only have the minimum coverage required by law, your insurance policy might not cover the costs of a minor accident, leaving you to cover the rest out of pocket. For the majority of Americans who drive small cars, being adequately covered means purchasing the maximum amount of property liability damage coverage that they can afford. People with substantial savings or a lot of home equity may even wish to take out an umbrella liability policy in order to get an extra $1 million in coverage for roughly $150 to $300 per year.

On the flip side, people with luxury vehicles need to make sure they have the proper amount of uninsured or underinsured motorist coverage. That is especially important in states with high rates of uninsured motorists – such as Florida, Michigan, New Mexico, Mississippi and Oklahoma – where over 20 percent of drivers aren’t covered, according to Wallet Hub’s 2015 report on the Riskiest States for Drivers’ Wallets. Protecting yourself from uninsured motorists isn’t as big of a deal in states like Massachusetts, where as much as 96 percent of the driving population has insurance.

Ultimately, though this may be a tough pill to swallow, properly insuring your assets against plausible harm is an essential component of wallet wellness – much like building an emergency fund. Not doing so is akin to playing with fire.

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