How The Simple Dollar Just Saved Someone $2,850 (And A Personal Finance Tip To Boot)

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Last night, I was contacted on instant messenger by an individual who had an interesting question about his automobile:

My entire engine is going to have to be replaced and the cost of it is more than the remaining monthly payments on my car. Should I try to sell off the car now or should I pay for the repair?

I asked him how much the repair and aftermarket part would be and he reported that the lowest estimate he had received was $3,100, which is certainly a pretty penny.

The first question to ask here is how reliable the car has been otherwise. I found out that there had been two other minor repairs done to it as well, but these were more typical accidental situations, nothing that indicated a severe problem with the car.

However, when I asked about these in detail, I found out that he had paid cash in full for both of the older repairs as well, when something occurred to me: I was assuming that he had collision insurance only on his car, not comprehensive insurance.

For those unaware of how this works (in the United States at least), most insurance carriers carry both collision insurance (which covers accidents – damages due to collision) and comprehensive insurance (which covers almost everything else that could go wrong with your car, like environmental damage and so forth). For some insurers, comprehensive will include collision insurance; for others, you would have to get them both separately.

I was shocked when he went and got his policy, checked it over, and reported that he did in fact have comprehensive insurance. I told him that I thought that the engine repair would likely be covered by the insurance and that he should check his policy. He leafed through it and found a key sentence that confirmed it: the engine repair is completely covered by his insurance. His bill would only be $250, not the $3,100 he was expecting, a savings of $2,850.

His excitement, even through the IM window, was amazing.

The moral of this story is if you’re paying for insurance, know exactly what that insurance will cover. If you’re about to pay out of pocket for something you’re paying to insure, make absolutely sure that your policy doesn’t cover what you’re paying for.

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21 thoughts on “How The Simple Dollar Just Saved Someone $2,850 (And A Personal Finance Tip To Boot)

  1. Okay, I’m confused now. These engine repairs had nothing to do with a collision or wind damage or anything like that? Just normal wear and tear?

    If that stuff is covered, it’s news to me…

  2. Many comprehensive policies cover this. “Comprehensive” does not have a strict definition – you need to read your policy and see clearly what is covered.

  3. After his priemiums go up because of a claim, you probably didn’t save him as much as you think and may have ended up costing him money.

    The real moral of the story: Insurance doesn’t work like a savings account. If you make a claim, your rates will go up.

  4. I’m very skeptical at this point…

    My understanding is that collision insurance means that if you’re in an accident your own car isn’t covered – you eat the repair costs. It only covers the repairs to the car you hit. I have a very old car so I only have collision coverage on it. It also means that if my car is stolen, I get nothing. But since my car is only worth about $700 Bluebook (actually it’s worth more than that to me as reliable transportation, but that’s another matter) I really don’t care.

    However, my understanding of comprehensive insurance is that if your’re in an accident and you are at fault, your insurance co will also cover your car repairs in addition to the repairs for the car (or whatever property) you hit.

    I think you might want to have your instant messanger friend re-read his policy. I’m sure it said that engine repairs needed due to accident or theft damage are covered, but not engine repairs that are not connected to some accident or theft.

  5. I think you are very misinformed. Comprehensive insurance covers damages other than collision, but it doesn’t cover engine failures due to wear and tear. It has to be a result of a covered loss. If a vandal pounded your car with a hammer and damaged the engine, the insurance will cover it. If a rock fell from the hill while your car was parked, the insurance will cover it. If a thief stole your car, comprehensive covers it. If your engine blew while you drove as usual on the freeway, comprehensive insurance won’t cover it.

    What TiP wrote isn’t accurate either. Replace “collision” with “liability” and replace “comprehensive” with “collision” in TiP’s post, then it starts to make some sense.

    Trent, please, do your readers a favor and know what you are talking about before you write misinformation like this. Show us any auto policy that covers engine failure as a result of regular driving. Manufacturer’s warranty or extended warranty covers it. Not auto insurance.

  6. TFB: I think you’re right as far as the word substitutions go. I know you’re right that engine failure due to wear & tear is not covered.

  7. TFB: I think you’re right as far as the word substitutions go. I know you’re right that engine failure due to wear & tear is not covered.

    Actually, what is the difference between collision and comprehensive then?

  8. Here are some defs I found at :http://www.carinsurance.com/CoverageDefinitions.aspx

    Collision Coverage:

    Covers damage to your car when your car hits, or is hit by, another vehicle, or other object. Pays to fix your vehicle less the deductible you choose. To keep your premiums low, select as large a deductible as you feel comfortable paying out of pocket. For older cars, consider dropping this coverage, since coverage is normally limited to the cash value of your car. Coverage is limited to the terms and conditions contained in the policy. This is not required by a state, but if you have a loan or a lease then the lien holder will require it.

    Comprehensive Coverage (Other Than Collision or OTC):

    Covers your vehicle, and sometimes other vehicles you may be driving for losses resulting from incidents other than collision. For example, comprehensive insurance covers damage to your car if it is stolen; or damaged by flood, fire, or animals. Pays to fix your vehicle less the deductible you choose. To keep your premiums low, select as high a deductible as you feel comfortable paying out of pocket. Coverage is limited to the terms and conditions contained in the policy. This is not required by a state, but if you have a loan or a lease then the lien holder will require it.

  9. I don’t want to use Trent’s blog as my own Q&A space, but the short answer is that Liability covers loss you caused to others, Collision cover loss to your own car by a collision (duh!) and Comprehensive covers loss to your own car by other forces — theft, vandalism, road debris, fire, lightening (?), … EXCEPT driving usual.

  10. You can debate the definition of “comprehensive” over and over again, but it varies from insurance policy to insurance policy. The only advice I gave to the person, and the only advice I’m giving you, is knowing exactly what your policy covers. The person I talked to had no idea what his policy covered, and by me encouraging him to read his policy, he discovered that his problem was indeed covered. I have at no point claimed that comprehensive means that everything is covered, I’m just saying that you should look at your policy if you’re having some kind of car trouble and actually understand what is covered.

  11. I do not believe that insurance companies would do this as every car has wear and tear after a while and this increases the company’s risks. If this person’s insurance company covered this, then I’d love to know the name of the company. I might have to give my insurance a call today.

  12. Hmmm, you did say: “…I told him that I thought that the engine repair would likely be covered by the insurance…” So, you are contradicting yourself.

    I know you’re trying to write a dozen posts a day, but don’t sacrifice quality over quantity….

  13. Look, I was attempting to suggest solutions and be helpful – and checking your policy is a worthwhile solution. That’s all there is really to say here.

  14. I think that we all understand that we should be checking our policies in the event we need to. However, I think the larger issue that should be covered here is the fact that he has full comprehensive on a vehicle that is worth far less than 3100 dollars. He’d be better off switching to liability and having a couple grand to go buy another junker when something like this happens. You never put a substantial amount of money into something that you can’t get that money back out of it later. Anyone agree?

  15. One other thing: this person did not give me any indication as to why he was having these problems. Most of you are assuming that the engine failure was the result of “wear and tear,” but I didn’t make that assumption when talking to him because he didn’t tell me anything about what caused it.

  16. it doesn’t matter how anyone defines liability, comprehensive, collision, et.al.

    Bottom line: if the insurance company will pay for it, good for him. Read those policies’ fine print people.

    Also, did the person have gap insurance as part of his coverage?

  17. Wow. Just wow. I’m the so-called “Instant messager friend” that Trent wrote about in this post. So here’s the scoop. I called my agent’s office to find out for sure. I’m awaiting a call back from my agent this week because the guy that answered the phone was confused by the wording in my policy. Trent’s advice to me was not misleading. I checked into my policy, if it turns out they can’t help, at least I know how they define their policy. But if they can help as the policy seems to suggest, then great. Either way I was encouraged to look into something that I had no idea about.

  18. It’s worth remembering that when you’re making payments, almost always collision and comprehensive is REQUIRED. They want their interest protected,the same way the bank wants your house insured as part of the mortgage deal.

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