Common Insurance Misconceptions and How to Avoid Financial Pitfalls
When disaster strikes, most people assume their insurance will provide financial relief. However, as Nichole Richardson discovered, what you think is covered and what’s actually covered can be very different.
After her car was vandalized and personal belongings were stolen, Richardson, whose name has been changed to protect her privacy, found out the hard way that her car insurance didn’t cover the loss. “I was very surprised and shocked,” she says. “I thought full coverage meant… well, full coverage.” Instead, her home insurance was the policy that covered the missing items. “For three months, I’m just tearing my hair out, and I’m having to pay two deductibles for one situation,” Richardson says. “[It] was a huge eye-opener for me.”
Richardson’s experience isn’t unique. A recent study by Trusted Choice revealed that while around 86% of policyholders believe they understand their insurance coverage, many are mistaken when faced with specific questions. For instance, 44% wrongly assume that items stolen from a vehicle are covered by car insurance. In reality, home, renters, and condo policies typically provide this coverage.
Understanding the limits of your insurance policies – both home and auto – can prevent costly surprises. Here are some of the most common misconceptions and how to address them:
You don’t automatically have flood insurance
Myth: Home insurance covers floods. Fact: Standard home insurance policies exclude flood damage. Fix: Purchase a separate flood insurance policy. You can obtain this through the National Flood Insurance Program (NFIP) or a private provider.
Floods are a frequent natural disaster, but your standard homeowner’s policy won’t cover them. Securing a separate flood insurance policy is the only way to have financial protection. The NFIP offers policies with coverage limits of $250,000 for the dwelling and $100,000 for personal property. Expect to pay approximately $800 annually for an NFIP policy. If you require higher coverage limits, you might consider a private provider, though rates are typically higher.
Home insurance doesn’t always cover burst pipes
Myth: If a pipe bursts, my homeowners policy will cover the damage. Fact: Home insurance covers sudden, accidental water damage, but not damage resulting from neglect. Fix: Maintain your pipes. Have them inspected by a plumber if you suspect an issue, and insulate pipes vulnerable to freezing. When away from home during winter, maintain sufficient heat to prevent pipe freezing and bursting.
While home insurance generally covers sudden and accidental water damage, like from burst pipes, it won’t apply if damage is due to homeowner neglect or poor maintenance. For example, if you turn the heat off while away for a weekend ski trip, and a pipe bursts, the claim might be denied.
Auto insurance generally follows the car — no matter the driver
Myth: When you borrow someone else’s car, your car insurance policy covers you. Fact: When you borrow a car, the owner’s policy typically provides primary coverage, not your own. Fix: Inquire about the car owner’s insurance details before driving.
Car insurance usually follows the vehicle, not the driver. If you borrow a friend’s car and are involved in an accident, their policy will cover the initial damages. If the damage exceeds their policy limits, your policy may provide additional coverage. Notably, if your friend’s policy covers the entire cost of the accident, their insurance company could potentially seek reimbursement from yours. As a result, your friend’s premiums could increase upon renewal, and you, as the at-fault driver, would likely face more significant surcharges and higher insurance costs.
You are covered in a rental car
Myth: When I drive a rental car, I need to purchase insurance from the rental company. Fact: Your personal car insurance usually covers you in a rental car. Fix: Review your policy. If you have lower liability limits and lack comprehensive and collision coverage, adding coverage through the rental company may be wise.
Standard personal auto insurance policies generally extend coverage to rental cars for personal use; however, if you rent a car for work or international travel, your existing policy may not apply. If you have full coverage (comprehensive and collision), you likely don’t need to purchase additional coverage from the rental company. A collision damage waiver can waive your responsibility for accident-related repairs, excluding the deductible. Because the collision damage waiver deductible is often around $500, while your personal policy deductible could be much higher, adding a collision damage waiver could help lower costs.
Not all car insurance policies cover theft
Myth: If I have car insurance, I’m covered if my vehicle is stolen. Fact: Liability-only car insurance does not cover theft. Fix: Comprehensive coverage is needed to protect against theft.
Comprehensive coverage provides protection, included in full coverage policies, if your vehicle is stolen or vandalized. It is not required by law in any state; yet, without it, you are unprotected if your vehicle is stolen. If you are financing your car, your lender will likely require this coverage.
Your car insurance policy excludes business use
Myth: If I use my vehicle for a business purpose and I get into an accident, I’m covered under my personal auto policy. Fact: When you use your vehicle for business purposes, such as transporting clients, your personal auto policy may not provide coverage. Fix: Check if your insurer offers a business use endorsement, or ask your employer about their commercial auto policy.
Commuting to an office is covered by your personal policy. However, if you are running business errands, such as meeting clients or vendors, your personal policy may not extend coverage. Real estate agents, contractors, and other professionals who use their personal vehicles for business should consider a business use endorsement or commercial auto policy to avoid out-of-pocket expenses. If you use your car in a rideshare service, there are special considerations for those situations as well.
You’re covered by Uber or Lyft
Myth: When I drive for Uber, Lyft, or another rideshare company, I’m completely covered by that company’s insurance policy. Fact: During Phase 1 (app on, seeking a passenger) and Phase 2 (en route to pick up passenger), you are not covered by either your personal policy or the company’s commercial policy. Fix: Adding a rideshare endorsement can bridge the coverage gap.
Rideshare driving has three distinct phases. During Phase 3 (passenger in car), you are covered by the rideshare company’s commercial policy. However, when you are on the clock, but without a passenger (Phase 1), and en route to pick up a passenger (Phase 2), coverage is less clear, and neither policy may apply. A rideshare endorsement can increase your costs, but provide added financial protection.
Understanding the limitations of your home and auto insurance policies is critical in avoiding unexpected costs. Review your policies thoroughly and consult your insurance provider to clarify coverage and make any necessary adjustments to ensure you are adequately protected.
