“Full Coverage” Defined

My lender requires me to have "full coverage" on my car. What exactly is "full coverage," and do I really need it?

”Full coverage” car insurance is a rather nebulous term. On one hand, consumers, lenders, and even some insurers use it regularly, which preserves its place in the industry lexicon. On the other hand, more than likely, “full coverage” means something different to every party who uses the term. The truth is that full coverage car insurance doesn’t really exist. Usually, when people use the term, they are actually referring to the inclusion of physical damage car insurance coverage with liability coverage. We’ll explain more about the implications of full coverage in what follows.

Liability-Only Coverage

A driver who does not have full coverage would typically carry a liability-only policy. A liability-only policy has two components: bodily injury liability and property damage liability. Bodily injury liability would pay for the injuries the driver caused another party. Property damage liability would pay for the damages to the other party’s vehicle, home, or whatever physical object the driver’s vehicle hit. In other words, a liability-only policy would only cover the harm done to others, not to the driver or his vehicle.

Physical Damage Coverage

Commonly called “full coverage,” physical damage coverage pays for damage to the driver’s vehicle resulting from a collision or other covered event. Physical damage coverage has two parts: collision and comprehensive. An explanation of each follows.

1. Collision. Pays to repair or replace the insured’s vehicle after a collision with a vehicle or object.
2. Comprehensive. Pays to repair or replace the insured’s vehicle after it suffers damage from non-collision related events, such as hail damage, theft, vandalism, falling objects, fire, and more.

When Is Full Coverage Required?

Full coverage, or physical damage coverage, is often required by lienholders. Lienholders are lenders who retain the title to the vehicle when you finance or lease a car. Before your loan or lease is approved, you may have to present documentation to show that you carry a full-coverage policy. If you lease your vehicle, lienholders sometimes require higher-than-average levels of liability coverage in addition to physical damage coverage.

Additional Coverage

For drivers who want to take the term “full coverage” to extremes, they can also purchase a bevy of additional protections to supplement the basics of their policies. For example, drivers might purchase personal injury protection (PIP) to pay for their and their passengers’ injuries in the event of a collision. Likewise, some drivers add rental reimbursement coverage to their policies. Rental coverage will pay for the cost of a rental car, up to a certain amount per day, while your vehicle is being repaired or replaced after a covered loss.