How Does Car Insurance Work

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It wasn’t long after the invention of the car that its potential for causing damage was apparent. Governments recognized the need for liability funding and that first took the form of guarantees and bonds. Today in Canada, car insurance must cover a vehicle to operate on any public road. While car insurance is administered provincially, all provinces agree on mandatory coverage. In Ontario, car insurance is overseen by the Financial Services Commission of Ontario. The car insurance market is private, competitive and highly regulated. It’s also the most expensive in Canada, though both the government and insurance industry pursue rate and settlement reductions to improve affordability.

Legal Requirements

Stated simply, car insurance is the law. Without valid insurance, drivers face fines of $5, 000 to $50, 000. Vehicle impounding and license suspension can follow. A motorist driving without insurance may be classed as a high-risk driver. Insurers may refuse to sell insurance coverage due to high risk, and the driver may be forced to use the Facility Association to obtain coverage at much higher cost. In addition, an uninsured driver involved in an accident gives up certain rights and protections. If the accident was not that driver’s fault, they will not be able to sue for damages. Ontario requires a minimum of $200,000 in third party liability coverage plus accident benefits coverage meeting statutory requirements. This coverage must be in place before a vehicle can be registered for ownership or licensed with plates.

Buying Insurance

signing bought car insurance

One of the keys to how car insurance works is how premiums get calculated. A driver approaches an insurance agent or broker, who collects personal information about the driver; where they live, what kind of car they own and how they drive it and details about their driving history. From that information, insurance underwriters calculate the statistical risk that driver presents. Those more likely to make a claim against their car insurance policy will have higher premiums than a driver deemed lower risk. Factors such as the area in which the driver lives, the risk associated with their demographic group and accident claims history for the vehicle make and model are all factors that are out of the driver’s control, but which affect car insurance costs.

How Car Insurance Works: Options

Minimum mandatory coverage doesn’t provide a driver with protection against loss or damage to the vehicle. This is provided through sections of a policy called collision and comprehensive insurance. While these sections are optional, if a driver has borrowed money to buy their car, the lending agency may insist on these to protect the mutual investment.

Collision and comprehensive coverage are subject to deductibles. This is the amount the driver pays before the insurance company contributes after a claim incident. A low deductible means that a driver pays very little for loss or repairs, but in turn, monthly premiums are higher. High deductibles transfer more of the financial load to the driver after an accident, in return for lower car insurance costs.

As well, many other endorsements, often called riders, may be added to customize a policy. For example, travelers can add a section that covers non-owned cars, such as rentals, to avoid paying high-cost collision damage waivers from car rental agencies.

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