What is Collision Insurance?

Collision insurance is a type of automobile insurance that provides the insured with compensation to repair or replace his or her car if it is damaged or destroyed in a car crash or other driving accident. It is distinct from liability insurance, which covers damages suffered by others in the event of an accident caused by the insured. Unlike liability insurance, which is legally mandatory for drivers in many jurisdictions, collision insurance is generally optional. Collision insurance does not encompass vehicle damage caused by other sources, such as theft or natural disasters. Coverage for these sources of damage is called comprehensive insurance. Though not required by law, people who lease a car or take out an automobile loan are often required to buy collision insurance as a condition of the lease or loan.

As with other forms of insurance, collision insurance is a way to decrease risk and uncertainty. The insured protects himself or herself from the risk of a relatively improbable but sudden and potentially catastrophic financial loss due to a collision by regularly paying the insurer a comparatively small amount of money, called a premium. In the event of a collision, the insurance company pays the cost of repairing or replacing the vehicle, minus a fixed fee called the deductible or excess paid by the insured. The size of the deductible is variable, according to the risk the insurer believes the insured poses. Different collision insurance plans offer different tradeoffs between cost and risk, with some plans charging lower regular premiums in return for a higher deductible if damage occurs.

The cost of collision insurance also varies according to a number of factors about the person buying insurance and the vehicle. The financial risks posed by customers are calculated by actuaries, financial professionals who specialize in evaluating uncertainty and risk. Insurance customers are classified by traits such as age, sex, and marital status and may pay higher or lower rates if they are members of a high-risk group. The driving record of the person being insured is also taken into account, and rates tend to be higher for people who have caused past collisions or have a record of fines or criminal charges for traffic violations. The amount of the distance the driver drives and the conditions under which he or she does so can also affect the cost.

Vehicles with good records for safety and durability cost less to insure, as they are less likely to be badly damaged. Types of vehicles commonly associated with risky behavior, such as high-powered sports cars and motorcycles, tend to be more costly to insure. In some jurisdictions, insurance rates are regulated or fixed by law, though this is more common for liability insurance than for collision insurance.