How does car insurance work?

At a basic level, car insurance works by helping manage the cost of accidents. To start, you’ll likely get a policy quote from an insurer based on the coverages and limits you’d like for your vehicle. Once you choose a policy, you pay a rate, called a premium, to your insurance company—often monthly or once every six to twelve months. In exchange, your insurer agrees to help pay for medical and property damage costs if you’re involved in a covered incident.

After a covered accident, you file a claim with your insurance company—that’s how you ask for help. Your insurer will review the details of the accident and your policy to determine how your claim will be resolved, including whether a payment will be made based on your coverage and policy limits. Together, these steps form the basic structure of how car insurance works.

After a car accident, the drivers involved typically file claims with their respective insurance companies. Regardless of who may be at fault in the accident, here are some important steps to take following the accident—once it’s safe to do so:

• Exchange insurance information with any other drivers involved

• Report the car accident to the police

• Take pictures of the accident scene, including any related damage

Once the insurance company receives this information, they’ll review and process the claim. They may contact you or the other driver if they need additional information. Depending on the outcome of the claim, you or the other party could receive payment or reimbursement for damages or other expenses related to the accident.

Fault helps determine which insurance company will ultimately be responsible for paying damages. If you’re found at fault, your insurance company may help pay for damages. If the other driver is at fault, their insurance company may help pay instead.

When you’re at fault for a car accident, several types of insurance coverages apply. Your auto liability coverage can help pay for damage you cause to other vehicles and for other people’s medical expenses. Collision coverage can help cover damage to your own vehicle.

No-fault car insurance—also known as Personal Injury Protection (PIP)—can help cover medical expenses for you and your passengers after an accident, regardless of who was at fault. This coverage may also help reimburse lost wages and other related costs.

Some states require drivers to carry PIP, while others don’t offer it at all. In states where PIP is available, you’ll choose a coverage limit when adding it to a policy. That limit is the maximum amount the insurance company may pay after an accident. If covered expenses exceed that limit, you may need to cover remaining costs.

Various kinds of car insurance coverages help protect against the risks associated with driving a vehicle:

Liability insurance coverages help pay for the damage and injuries you cause to others. Coverage limits typically apply on a per-person and per-accident basis.

The two most common types of auto liability insurance coverages are:

• Bodily injury liability: May help cover the other party's medical costs, lost income, pain and suffering, and other expenses

• Property damage liability: May help pay to repair or replace the other driver's damaged vehicles and/or personal property

Comprehensive insurance is a coverage that can help pay for repairs if you have a damaged vehicle from something unrelated to a collision, such as:

• Theft

• Vandalism

• Animals—for example, hitting a deer

• Weather-related damage

The limit on this coverage usually caps at the actual cash value of your vehicle, and a deductible will likely apply

Uninsured motorist (UM) and underinsured motorist (UIM) coverages may help cover losses from accidents where another driver is at fault and doesn’t have enough liability coverage—or doesn’t have any at all.

Without this coverage, expenses from an accident involving an uninsured or underinsured driver may need to be paid out of pocket. UM and UIM coverage may also provide a more direct way to recover certain losses than pursuing legal claims in court.

There are other coverages that are less common and are often offered as optional additions, depending on the provider, policy, and location.

While there are insurance coverages available to help cover most costs related to incidents while driving, auto insurance policies often don’t cover certain items such as:

• Costs for standard maintenance to your vehicle, like oil changes and new tires

• Damage from normal wear and tear on your vehicle

• Intentional damage you cause

• Theft of personal property in your car (usually homeowner’s or renter’s insurance covers this)

It’s helpful to review the terms of your policy to confirm insurance coverage exclusions.

Once you’ve reviewed the different types of car insurance coverage, the next question is cost.

Car insurance pricing depends on a variety of factors, including:

• Driving history: Insurance providers usually consider prior traffic violations, past accidents, and other insurance claims when setting rates. A cleaner driving history is often associated with more favorable rates.

• Vehicle type: The type of vehicle you drive may affect insurance costs, since more expensive vehicles can cost more to repair or replace. A vehicle’s size and safety features can also influence pricing.

• Location: Populated areas can create a greater risk of accidents and theft, which may impact insurance costs.

• Coverage and limit selection: The types of coverage you select, along with policy limits, deductibles, and optional add-ons, will influence your overall premium.

Together, these factors help determine how much you pay for car insurance. For a more detailed look at pricing, you can explore our guide to car insurance costs.