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Auto Insurance 101

by Kevin Gullbrants on 03/13/19

Minimum Coverages You Must Buy

Part 1: Bodily Injury to Others

This pays for damages (for example, medical expenses or pain and suffering) to anyone injured or killed by your car—but only in accidents that occur in Massachusetts—up to a basic limit of $20,000 per person and $40,000 per accident. Injuries to the driver or passengers in your car are not covered. If you want coverage when you drive outside of Massachusetts or for guests who ride in your car, purchase Optional Bodily Injury to Others (Part 5) coverage.

Part 2: Personal Injury Protection (PIP)

This pays up to $8,000 for medical expenses and 75 percent of lost wages to you or anyone you allow to drive your car, anyone living in your household, passengers, and pedestrians regardless of who causes an accident. PIP coverage pays if they are injured while occupying or struck by a car that does not have Massachusetts Compulsory Insurance.

If you have medical insurance, you can turn to PIP coverage rather than your health plan to cover medical expenses up to $2,000, but if you seek payment from your PIP coverage for medical expenses in excess of $2,000, PIP will pay only after these expenses have been submitted to the health plan and the health plan determines what it will pay. Your PIP coverage will not pay for expenses over $2,000 that your health plan would have paid if you had sought treatment in accordance with the terms of the health plan.

You can lower your premium by accepting a deductible, applicable either to you alone or to you and other members of your household. The policy will pay expenses for you, or you and your household members, only up to the difference between $8,000 and the amount of your deductible.

Taking a deductible is more attractive if you have health insurance and a disability income plan. But even if you have health insurance, it may not cover all accident-related medical expenses—such as cosmetic and dental services, co-payments, and deductibles—so PIP coverage can still be useful. Taking an $8,000 deductible for PIP coverage instead of no deductible usually only saves about three percent off a policy’s total cost.

Part 3: Bodily Injury Caused by an Uninsured Auto

This protects you, anyone you allow to drive your car, household members, and passengers (unless covered by another Massachusetts policy with similar coverage) against losses caused by an uninsured or unidentified (“hit and run”) driver. The required minimum limit is $20,000 per person and $40,000 per accident. This coverage does not pay for property damage or damage to your auto. Many consumers raise their policies’ limits for this coverage to match the optional higher limits they choose for bodily injury to others coverage (described below). Raising this coverage from the minimum limits to typical 100/300 coverage levels typically adds only three percent to a policy’s total annual cost.

Part 4: Damage to Someone Else’s Property

This pays not only for damage to another person’s property but also for costs associated with the loss of use of that property when you, a household member, or another authorized driver of your car causes an accident. A minimum limit of $5,000 is required but you can purchase higher limits to protect yourself in case you become liable for major expenses if you cause one or more other cars to be totaled or seriously damaged. It usually adds only about four percent to total premium costs to increase the minimum $5,000 limit to a $50,000 limit, and going from $50,000 to $100,000 costs most policyholders only a few dollars more per car each year.

Optional Coverages

Part 5: Optional Bodily Injury to Others

This extends your liability protection (the basic 20/40 limits under Compulsory Bodily Injury to Others). This option provides coverage for accidents beyond Massachusetts to anywhere in the U.S. and Canada. This coverage also pays for damages suffered by guests in your auto. And under this option, you can increase the coverage limits from the 20/40 limits for Compulsory Bodily Injury to Others (Part 1).

Because state-mandated minimums won’t protect most drivers’ assets from large claims, most drivers buy liability insurance and insure above the legal minimum. If you possess substantial assets, you have the strongest incentive to purchase substantial liability coverage: You have a lot to lose and are an attractive target for lawsuits.

Although it costs more to buy insurance with higher limits, the cost increases are often modest. As this figure shows, it costs on average only about five percent more per year to move from 50/100/50 limits to 100/300/100 limits; the cost increase is only about eight to 10 percent to move from 100/300/100 limits to 250/500/100 limits. And for most drivers, doubling the limits of property damage coverage from $50,000 to $100,000 costs only a few dollars more per year. Most consumers consider these extra costs a small price to pay for increased peace of mind.

Part 6: Medical Payments

This pays for medical expenses for you, your household members, and passengers over and above amounts covered by Personal Injury Protection no matter who causes the accident. The minimum amount is $5,000. Minimal Medical Payments coverage is relatively inexpensive, but it still may not be a good option if you have a good health plan. Increasing medical payments coverage to a high limit—say, $25,000—is also relatively inexpensive. But your money would likely be better spent on a more comprehensive health insurance policy, since good health insurance coverage would protect you and your family from catastrophic expenses caused by any disease or injury that might befall you, and not merely cover limited amounts of expenses resulting from injuries that involve automobiles.

Parts 7 and 8: Collision

This pays for damage to your car after a collision, less any applicable deductible, no matter who causes the accident. If your car is financed, your lender may require this coverage.

Most policyholders have $500 deductibles, but you can select a different amount. You can lower your premium substantially by choosing a larger deductible. As this figure shows, our illustrative policyholder would usually lower his or her total premium by about 10 percent by increasing collision and comprehensive deductibles from $500 to $1,000.

To determine the amount of deductible that is right for you, decide how much you can afford to pay out of pocket in the event of an accident or loss for which you are at fault, or the other driver is unidentified. It doesn’t make sense to buy insurance of any kind—including comprehensive coverage (described below) and PIP coverage (described above)—for expenses that would not be catastrophic. (Insurance generally costs more than the company’s expected payout for losses because the insurer must charge you not only for the losses but also for sales commissions, administrative expenses, claims-handling expenses, fraud losses, and other costs.)

If your car is old and not worth much, it doesn’t make sense to buy collision (or comprehensive) coverage; you don’t have much to lose.

Part 9: Comprehensive

This pays for damage to, or loss of, your car, less any applicable deductible, that results from perils such as fire, theft, vandalism, and striking an animal—but not collisions. Personal property is not covered unless it is permanently installed in your car. If your car is financed, your lender may require this coverage.

You may be denied comprehensive coverage or required to pay a higher extra-risk rate if you own a high-theft vehicle that does not have a qualifying anti-theft or recovery device. Coverage may also be denied or priced higher under certain other conditions.

As with collision and PIP coverage, a relatively high deductible for comprehensive coverage reduces premiums.

Part 10: Substitute Transportation

For an additional premium, most insurers will broaden your collision or comprehensive coverage so that it pays for a rental car while your own car is being repaired.

Although most insurers push this add-on, the problem is that even a modest level of coverage—typically $30 per day with a limit of $600 per claim—usually costs $30 to $60 per year. Since the additional premium over time is likely to greatly exceed any benefits you can collect, our advice is to decline it.

Part 11: Towing and Labor

This pays up to $50 for towing and labor charges each time your car stops running, whether or not due to an accident. You are covered only for on-site labor costs at the breakdown site (not parts) to tow your car or get it running again. This coverage usually costs $10 to $20 per year, and some insurers offer this coverage at no additional cost. Coverage of up to $100 per disablement is available usually for double the cost of standard coverage.

If you belong to AAA, you don’t need this coverage since its benefits include towing and labor.

Part 12: Bodily Injury Caused by an Underinsured Auto

This pays for bodily injury damages to you, household members, and passengers unless they have a policy of their own or are covered by a Massachusetts auto policy of another household member with similar coverage. The accident must be caused by a driver who doesn’t carry enough bodily injury coverage to pay for your loss. This coverage pays you up to the difference between the total amount collected from the bodily injury liability insurance covering the owner and driver of the other car and the limits you purchased for this coverage.

Massachusetts has relatively few uninsured drivers compared to many states, but many Massachusetts drivers buy only minimum required amounts for Bodily Injury to Others.

You may purchase both Uninsured Auto coverage and Underinsured Auto for coverage up to, but no more than, the limits of the Bodily Injury to Others coverage you carry. In general, it makes sense to purchase as much Un/Under coverage—which protects you—as you purchase of coverage that protects others.

Your Un/Underinsured coverages will not pay for damage to property.

What Can An Independant Insurance Agent Do For Me?

by Kevin Gullbrants on 10/06/16

An independent agent can do important things for you:

  • Agents have at their disposal the ability to quickly check prices and coverages with dozens - if not hundreds - of different insurance companies.  Since rates vary widely an independent agent can very likely get you a better deal than you can get for yourself. They can even get you insurance from a 'direct writer' like you could get for yourself.
  • Independent agents are a one-stop-shop for all of your insurance needs. An agent typically doesn't sell just auto insurance. They also sell homeowners, renters, health and life insurance, business insurance etc. Use them - at no cost to yourself - to handle all of your insurance in one place.
  • Insurance is a complicated subject.  Its an agent's business to understand it, and communicate it to you so you understand it as well.  In almost all cases an ordinary consumer will benefit from having someone who deals with this subject for a living advise them on a 50+ page contract.  If there are any hidden surprises, a licensed agent is the one equipped to know where they are.  Even if you understand insurance thoroughly you can get tripped up:  The industry is regulated on a state-by-state basis.  Move from one state to another and you'll find that the coverages may look the same at first glance, but on closer examination things work a bit differently (very differently, in some states).
  • Coverages don't just vary from state to state ... they vary from company to company within the same state.  Many companies use what are known as 'manuscript' policy forms (form = contract in insurance jargon).  These forms don't necessarily use industry-standard wording and may contain altered provisions that materially affect you in some way... some unknown way if you don't have an expert advisor who is already familiar with a particular policy's quirks.

The above is the good news with regard to what an agent can do for you.  What about the bad news?  Even the bad news has some good news inside of it for the consumer:   If an agent makes a mistake (such as selling you an insurance policy that is supposed to meet your needs but doesn't), that agent may well be liable to you for malpractice; something known in the industry as Errors & Omissions.  Your insurance agent has an Errors & Omissions insurance policy, just like a surgeon has a malpractice insurance policy.  Your lawyer can file suit against the agent - and their malpractice insurance - to recover damages you suffer as a result of a failure to act properly in your interests.  Its no fun to think about for the agent or the consumer, but as unpleasant as it is for all concerned, this is a layer of protection that a consumer enjoys when working with an agent.

Which brings us to another problem that you create when you go direct.  You have no licensed, regulated insured agent acting on your behalf.  You are now taking full responsibility for your coverage decisions, and for any mistakes you may make.  No more safety net.

Don't get us wrong... There is nothing wrong with direct-writer insurance companies.  However, if you deal with an agent, there are certain services and protections you are going to get that a direct-writer insurance company simply cannot provide.

What is the difference between replacement cost and actual cash value?

by Kevin Gullbrants on 05/05/16

Replacement cost is a method for valuing the reimbursement of property on an insurance policy.

The most important concept to understand in regards to replacement cost is “new for old, like kind and quality.” The insurance company is going to give you the amount of money (up to your policy limit) that it takes for the materials and labor to replace your home. In most cases, this is the preferred property valuation method.

Actual Cash Value is a method for valuing property after an insurance loss.

What many people do not realize about actual cash value is that depreciation is taken out of the payment from the insurance company. If you have a kitchen fire and the cabinets in your kitchen are twenty years old. The company is going to pay you for twenty year cabinets. Not what it will cost to replace those cabinets today.

Most property owners prefer to insure their property at replacement cost instead of actual cash value.