Every car that is driven on the roads is required to have proper liability coverage as mandated by the state government. Not only is it illegal to drive a car without liability insurance, but it is dangerous and foolish as well. But many people prefer to take the road to risk, and sometimes skip renewing their policy. So what happens if you do not renew your policy for whatever reason?
Not just liability coverage, but what about other auto insurance policies such as collision coverage or comprehensive coverage? Since these policies are optional coverage, not renewing them for a few months won’t cause much damage, right? Any period in which you have a car registered to your name but with no active auto insurance policy is called a gap in your coverage, and this gap can be very costly.
What is Insurance Coverage Gap
It is ironic that not paying to renew your auto insurance policy can and will result in you paying more for the same policy. Auto insurance companies do not take insurance gaps lightly, and you can be heavily penalized for missing out on your premium payments.
No matter what the reason may have been, not renewing your policy or having a car with no active liability/optional auto insurance coverage, insurance companies take it as a high-risk factor and will increase the rates of auto insurance and premiums when you buy a new coverage policy.
Coverage Gaps and Risk Management
Auto insurance companies, and every other insurance company for that matter are risk management companies. When you buy a policy, you are making the insurance company take your share of the risk. So in the case of a car accident, the auto insurance company is liable to pay for the cost of repairs and medical treatments (minus the deductibles).
The auto insurance company charges you some money (upfront cost and premiums) to take your share of the risk. But different people carry different risks. A teenager who just got his/her first car is more likely to overspeed and crash than a 50-year-old with 30 years of driving experience. Auto insurance companies understand this and charge different people differently.
People: whom the insurance companies consider high-risk individuals include people with bad driving records, previous accidents, speeding tickets, history of premium payment failure, past insurance claims, and gaps in auto insurance coverage. Whoever the insurance company deems to be more likely to be in a road accident and make an insurance claim.
To offset this risk and the possibility of an expensive insurance claim, auto insurance companies charge these people more. So, where does the insurance gap come in?
Why do Insurance Gaps Increase Costs?
If you have a period when your car was not covered by an auto insurance policy, your insurance rates will be inflated. This is because insurance companies consider that there must have been an accident, a failure to pay premiums, a case of driving under the influence, etc. Whatever the reason, either you could not continue your policy or were dropped by your insurance company for some reason.
This gap in coverage makes you a high-risk individual. Since they do not know what happened during that period when your vehicle was not covered, the insurance companies offset the risks by increasing the cost of insurance policies. Which policies are affected by insurance gaps?
Having a coverage gap in liability coverage could be one of the most dangerous and damaging things you can do to yourself financially and legally. Liability coverage is an auto insurance policy that covers the cost of repairs and medical treatments of the other driver who got in an accident caused by you. A liability policy is mandatory in every state except Virginia and New Hampshire.
Liability coverage is one of the most expensive auto insurance policies. Since it is already so expensive, a coverage gap would further increase the rates, making it almost impossible for you to find the cheapest car insurance prices. And if you think you can skip getting liability coverage altogether, then you’d be in deep trouble.
The cost of repairs and medical treatments in a car accident can reach as high as $500,000 to even a million dollars. The other driver can and will sue you if you fail to pay the amount. So why do you want to get into such big financial trouble that will make you end up in jail as well?
Collision and Comprehensive Coverage
The two most popular optional auto insurance coverage policies are collision and comprehensive auto insurance coverage. Just because they are optional does not mean they are not necessary. Collision and comprehensive insurance policies are necessary if your car is below 8 years of age.
Collision coverage covers all the cost of repairs needed when you get in a car accident, irrespective of whose fault the accident was. So even if the accident was not your fault and the other driver’s liability coverage is not enough to cover the cost of repairs, you can use your collision coverage.
Just like liability coverage, collision coverage is very expensive, and any coverage gap increases the costs by a huge margin. The same is true for comprehensive coverage. While this policy is not as expensive as collision coverage, you’d still need it to cover your car against damages from natural calamities like floods, fires, earthquakes, hailstorms, theft, riot, vandalism, etc.
Coverage gaps can and will increase your auto insurance rates. The best way to avoid it is by preventing your auto insurance from expiring and in case it does expire, contact your auto insurance company and try to undo the damage.
Also read: How Long Do Home Insurance Claims Take?