Car insurance: everything you need to know

Car Insurance – are you sat comfy in the driving seat?

Insurance in general can seem very convoluted, mind-numbing and difficult to understand! However, the fundamental principles are straightforward.

Insurance companies assess the risk of any eventuality and the possible consequence linked with it.  Then, based on past experience and their own knowledge, insurance companies calculate the 'premium' that a consumer needs to pay to provide 'cover' against damage or loss.  When the insured incident happens, the company pays out the approved level of 'claim'.

We will briefly look at the history of UK car insurance; motoring; show you how to get the best deal; and explain insurance jargon.

Motoring insurance overview

The UK insurance industry is the largest in Europe and second largest on the planet. In 2007, the UK insurance industry paid out £59 million per day in general insurance claims (motor, home, commercial etc), over 17 million was in private motor car claims and more than 1 in 6 private car drivers make a claim each year according to the Association of British Insurers (ABI).

The Motor Insurers' Information Centre (MIIC) state that the UK has one the most shocking records in Western Europe for uninsured driving, it is estimated that 1 in 20 cars on the road being driven are uninsured. This results in every honest motorist in the UK paying about £30 to compensate the innocent injured parties.

After your home, your car is probably the most likely expensive purchase you make. As a motorist there are some duties and regulations you must adhere to before driving or keeping a vehicle on the road.

To drive or ride a vehicle you must:

• hold a correct driving licence for the vehicle you want to use
• meet the legal age requirements
• meet the minimum eyesight standards

Before you decide to take a vehicle on to a road you must:

• register the car with the Driver and Vehicle Licensing Agency (DVLA) or DVLNI (Northern Ireland)
• have a valid tax disc
• hold a current test certificate (if this is required)

You must also:

• have the minimum of third party insurance

The Road Traffic Act requires all motorists to be insured against their liability for injuries to others (including passengers) and for damage to other people's property resulting from use of a vehicle on a road or other public place.

It is a serious offence to drive your car, or allow others to drive it, without insurance; the police may seize your car and destroy it and leave you on the roadside. If you are convicted, you could even face between six and eight points on your licence, a maximum fine of £5,000 and you could be banned from driving.

From 2009, keeping a vehicle without insurance will be a criminal offence. If you are the registered keeper of a vehicle, you will be obliged to make sure that the vehicle has insurance or is declared as Statutory Off Road Notification (SORN) with the DVLA.

The Financial Services Authority (FSA) regulates most sales of general insurance.

Shopping Around

It is good logic to shop around to get the best deal. The cost of car insurance is the fourth-biggest cost of motor ownership.

There are hundreds of companies that offer car insurance in the UK. Just because a company is specialised in women's insurance does not necessarily mean it is the cheapest – you could save a significant amount by shopping about.

Paying in one lump sum can often be cheaper than paying monthly, and you can even save more money by opting to increase your voluntary excess (the amount you pay in the event of a claim).

Depending on your age, circumstances and driving history, you can reduce your insurance premium by limiting the amount of named drivers on the insurance. For example, if you are the only driver on the insurance and you add your spouse or partner to the insurance policy, it can reduce your premium as insurers may class this as shared driving and research has suggested that you are less likely to make a claim if it's just you and your spouse or partner on the policy.

Buying your policy online can save you even more money. Most large insurers allow you to buy your policy online rather than over the phone and offer a discount for doing so.

Using price comparison websites is not necessarily the cheapest way to buy insurance, they act as middle men a bit like a broker and charge for their services. It may be cheaper to buy direct from the insurance company.

You may also get a discount if you undertake additional driving tests or training such as a Pass Plus. The level of discounts varies between insurers. When shopping around you should ask yourself the question, 'what is it that I am shopping around for?' - Is it price, benefits, claims service etc? Just remember that the cheapest price is not necessarily the best price.

Types of cover

There are three main types of cover available:

• Third Party Only (TPO) – this is the minimum level of cover required by law. It will cover you if you kill or injure someone, or damage their property.
• Third Party Fire & Theft (TPFT) – in addition to the above, this pays for loss if your car is lost damaged as a result of theft, attempted theft, fire or explosions.
• Comprehensive – this includes the same cover as TPFT, but also covers your vehicle against accidental damage and also covers your glass. Most comprehensive policies usually cover personal belongings left in your car, medical expenses and may cover personal accident benefits.

Optional benefits

Don't just assume that you will get a courtesy car in the event of a claim. It is your responsibility to check what the policy covers. If in doubt, ask the insurance company or broker.

No claims discount, legal expenses insurance and breakdown cover are all really useful benefits but come at a price. Do you really need all those optional extras? Being frugal with your extras can save you loads on your premiums.

Driving other cars (DOC)

Most policies cover you to drive another person's vehicle with their permission. The cover may be restricted to TPO and for emergencies only. You usually need to be over the age of twenty five, again do not just assume you have this cover; always check with the insurance company.

Foreign use & green cards

All UK policies provide the minimum cover required by law in other European Union (EU) countries or the minimum cover required by UK law if that is greater. If you want to have the same cover as you have in the UK i.e. TPFT or Comprehensive, check with your insurance company before travelling. You may have to pay an additional premium to upgrade your cover.

The Green Card is a document that is acknowledged in over 40 countries, it is a system to ease the movement of vehicles crossing borders. You do not need a Green Card by law to cross borders in the EU and your insurance company is not obligated to issue a Green Card. However, it's advisable to carry one in case of an accident.

Insurance Jargon

The Insurance industry uses various technical terms, usually for reasons of specific meaning, which are not always easy to understand by your average Joe.

Concealment – a deliberate containment by a proposer for insurance of a material fact relating to the risk, usually making the contract null and void.

Cover Note – a document for the insured person confirming details of the insurance cover placed.

Excess – the first part of a claim which is endured by the insured. An excess can by voluntary or compulsory depending on the underwriting terms.

Fronting – this is when young drivers (usually under 25) are named on an insurance policy as a named driver, when in fact they are the main driver or the policy is taken out in the parents name. This is done to pay less and avoid paying the correct premium for the risk. Technically this is fraud and insurers are cracking down on this practice.

Insurable Interest – for the contract to be valid the policyholder must have an interest in the insured item (car) that is recognised at law whereby the policyholder benefits from its safety, wellbeing or freedom from liability and would suffer a loss by its damage or its liability. This is what is known as the insurable interest and must be present at the time of inception and at the time of loss.

Insurance Premium Tax – a government tax for general insurance risks, set at 5 per cent and was introduced by the Finance Act 1994.

Material Fact – any detail which would influence the insurer in accepting the risk or in fixing the premium or terms and conditions of the contract is material and must be disclosed by a proposer (you), or by the insurer to the insured.

Non-Disclosure – a failure by the insured to disclose a material fact or circumstance to the insurance company before accepting the risk.

No Claims Bonus/Discount (NCB/D) – for every year you do not make a claim, you will get a discount. However, if you make a claim you could loose all or some of your discount. Over a period of years in which the discount is earned (usually 5), it can lead to a bonus as much as 75 per cent reduction in your premium.

Utmost Good Faith – insurance contracts are contracts of utmost good faith (uberrima fides), which basically means that both parties to the contract have a duty to disclose, clearly and truthfully, all material facts relating to the proposed insurance.