Car insurance is complicated

A few weeks ago Carrie and I had dinner with our friends Phil and Kendal, who are also in the process of selling their home in order to travel the world. In the course of trading tips on the logistics of traveling full time without a home, they enlighten us to a little tidbit regarding car insurance.

It turns out that insurance companies don’t like it when you have a gap in auto coverage. Since you won’t make a claim if you have an accident, they have no way of knowing your driving record during the gap. So when you want to get a new policy after such a gap, your rates are much higher until you establish a decent amount of history with coverage again.

But if you don’t own a car, how can you avoid this?

It turns out that you can buy what’s called a non-owner auto liability policy. And it turns out that for us, even setting aside the issue of avoiding a gap in coverage, this is very useful for us.

You see, car insurance is complicated. You start to understand if you read the declaration of coverage documents for your policy or start thinking about renting a car without buying their overpriced insurance. Since we do plan to return to the US twice a year and will be renting a car, this is an important consideration for us.

You can think of car insurance as being in basically two parts: insuring the car itself and insuring the damage caused to other people and property. The insurance on the car itself (“collision” and “comprehensive”) covers just the car and reimburses you for any damage to the car, regardless of how it happens (less your deductible, of course). Liability insurance is what pays for medical bills for you and anyone else hurt in an accident. It also covers property damage done in an accident.

It gets even more complicated. The coverage on your car applies regardless of who’s driving it. It goes with the car, so to speak. It will usually also cover damage to any car you’re driving, even if it’s not yours. So most people can decline the overpriced “collision damage waiver” offered by rental companies. But do check your policy before relying on this, as they often exclude things like “loss of use” which the rental company will certainly come after you for. Often you can also get additional coverage through the credit card you pay with, but you really do need to read the fine print.

But the liability coverage on your personal policy goes both with you and with the car. That is, if someone else drives your car and has an accident, your liability coverage pays. But if you drive a car that isn’t yours and isn't insured (or has inadequate coverage) your liability coverage kicks in to pay for medical and property damages. This is especially important since most rental cars carry only the state minimum for liability insurance (often just $10,000). If you rent a car and don’t buy their overpriced supplemental liability insurance, your insurance will kick in if your liability exceeds the rental company's own limit. This can be a really big deal. If you cause $100,000 in medical bills in an accident, and the rental company's puny base policy is capped at $10,000, guess who pays the difference? If you don’t have an auto policy with liability coverage, you do.

So how will we ensure we're adequately insured for rental cars without buying their overpriced coverage (which could easily add $25-50 per day to a rental)?

First, we always pay for rental cars with our Chase Sapphire Reserve credit card. This is one of the few cards that provides primary coverage for the car itself. Most credit cards provide secondary coverage, which kicks in after your own policy and rarely covers “loss of use” charges. Our Sapphire card kicks in first (which is good, since we have no collision or comprehensive coverage since we have no car!

Getting the liability coverage was trickier since no credit cards offer this. That’s where the non-owner liability policy kicks in. It provides the same liability coverage you would get with a regular auto policy without actually owning a car. And it ensures we have continuous coverage so when we eventually do buy another car, our rates aren’t artificially inflated.

Non-owner liability coverage can be quite cheap. Carrie and I got a policy through Geico for under $100 per six months. That’s what we’d pay a rental car company for just a few days. But if you find yourself on the market for one of these policies, it pays to shop around. Most agents I spoke to didn’t offer the policy at all and the few who did quoted me over $600 per six months!