Auto insurance is insurance against financial loss if you are in a car accident. Auto insurance is a contract between you and the insurance company in which you agree to pay a monthly premium and the insurance company agrees to pay a specified amount for any losses defined in your policy. Losses that exceed your policy’s limit are your liabilities, so it is important that you have adequate coverage.

To legally drive your car, you are required by law to carry a minimum level of auto insurance. However, most experts agree that the minimum coverage required by law is insufficient. There are four basic parts of automobile coverage:

• Part A: Liability coverage
• Part B: Medical payment
• Part C: Uninsured/underinsured motorist coverage
• Part D: Comprehensive physical damage coverage

Part A: Liability coverage: Liability coverage pays for losses related to bodily injury, property damage, lawsuits, and defense costs. Bodily injury coverage protects against expenses related to deaths or injuries resulting from an accident. Property damage coverage protects against costs for damage to the car or cars involved in an accident, as well as damages to other property (such as lampposts or fire hydrants). Lawsuit coverage covers losses related to any lawsuit resulting from an accident; in addition to the maximum amount of expenses your policy covers for a lawsuit, your policy may also cover your defense costs if the case goes to trial.

Liability coverage may be listed on your policy as a combined limit or as a split limit, depending on the type of insurance you have. Combined-limit insurance lists one maximum amount that the insurance company will pay to cover all types of liabilities. Split-limit insurance lists the maximum amount that the insurance company will pay for each of the specific types of liability. For example, if you have a 100/300/50 split-limit insurance policy, it means your limits are $100,000 per person for bodily injury liability coverage, $300,000 per accident for bodily injury liability coverage, and $50,000 per accident for property damage coverage. These dollar amounts are the maximum amounts your insurance company will pay per person or per accident. Should the costs of the accident exceed these limits, you will be responsible for paying the difference. The recommended split limit minimum liability coverage limits are 100,000 per person and 300,000 per accident with 50,000 for property damage.   The combined-limit recommend liability coverage limits are 300,000 per accident with 50,000 property damage.

Part B: Medical payment coverage: Medical payment coverage pays for all accident-related medical costs and funeral expenses incurred by you or your family members within three years of an accident. It also includes coverage for the insured while walking, even though you are not in a vehicle. The recommended minimum medical payment coverage is $50,000.

Medical payment coverage does not cover all medical expenses, however. For example, it does not cover your medical expenses if you are injured by a vehicle that is not designed for public streets, such as an unlicensed three- or four-wheel all-terrain vehicle. Be sure you know what types of injuries are excluded from your policy.

Part C: Uninsured or underinsured motorist coverage: Uninsured or underinsured motorist coverage covers your costs if you are injured by an uninsured motorist or if you are injured in a hit-and-run accident. It also covers your costs if the other driver’s insurance is insufficient to pay for your expenses (in other words, if the other driver is underinsured). The other driver must be at fault for you to collect on this coverage. I recommend that you keep your uninsured/underinsured insurance coverage the same as your liability coverage.

Part D: Comprehensive physical damage coverage: Comprehensive physical damage coverage (also called collision coverage) pays for damage resulting from any collision, regardless of who is at fault. If the other driver is at fault and has liability insurance, your insurance company should be able to recover losses from the other driver’s insurance company. If the accident does not involve a collision with another car, comprehensive physical damage coverage pays for physical damage to your vehicle.