In a Car Accident? Here's Why Insurance Might Not Pay Out

We purchase insurance to protect us from financial hardship, but insurance does not always pay out.

Once we pass our driver's test, one of the most important things we can do is purchase auto insurance. A solid insurance policy may be the only thing that stands between us and financial hardship following an accident. While auto insurance rules may vary by state, the overarching reason for carrying insurance is financial protection.

Purchasing insurance is all about planning for events that "might" happen. In the spirit of planning ahead, let's look at four basic reasons your insurance may not pay out following an accident and what you can do to prevent that from happening.

1. Lapsed coverage

Let's get this one out of the way first, because allowing your auto insurance to lapse is the easiest way to have a subsequent claim rejected. Your insurance company will only approve a claim when the claim is valid and your insurance policy is paid and up-to-date.

The answer: If your budgeting method is a little messy, pay your insurance premiums in monthly installments. Set those installments up on autopay through your bank so you never have to worry about a late or missed payment.

2. Driver exclusions

This one is a bit trickier but easily manageable. It's fairly common for insurers to include "driver exclusion" clauses in an insurance policy. Let's say you purchase a new insurance policy. It's easy to sign on the dotted line without reading the details of the policy. For example, your policy may say that your policy is in effect if you or a member of your immediate family is driving at the time of an accident.

Now, imagine that you go out with friends one night, have a little too much to drink, and allow a friend to drive home in your car. On the way home, your friend nearly falls asleep and clips another car. Since your friend is not a member of your immediate family, the claim is denied.

The answer: Check driver exclusions before buying a policy and never allow anyone but a covered driver behind the wheel.

3. Damages and injuries excluded

Once there's an accident that results in injuries, your insurance company will attempt to determine what caused those injuries. Insurance policies contain a list of policy exclusions -- circumstances under which it will not cover damage or injuries. For example, a policy may exclude intentional acts of vandalism. Let's say you're at a professional football game, words are exchanged with a fan from the opposing team, and that person follows you to your car and kicks the door in, denting it badly. As you check the damage to the car, the person injures you. Because vandalism is excluded, neither of those issues would be addressed by your insurance company.

The answer: As with driver exclusions, make sure you fully understand any damage or injury exclusions. Say a company excludes storm damage and you live in an area of the country where storms are a norm. Before committing to a policy, make sure you have the type of coverage you're likely to need. (Also, you may want to watch what you say to opposing fans at sporting events.)

4. Unclear who's at fault

Once a claim has been made, your insurance company will begin to investigate who's at fault. If you're in an accident with another vehicle, it'll want to know which driver caused the accident. For example, if you're hit due to the negligence of another driver, that driver's insurance company should -- in theory -- be the one to cover damages. However, if the insurer cannot establish that their policyholder did anything wrong, it is likely to refuse the claim.

The answer: There are three things you should do in the event of an accident.

1. Call the police. If you can safely move the vehicle, pull off to a safe spot. No matter how much the other party begs you not to call law enforcement, make that call anyway. An impartial police report is one of the best ways to make your case.
2. Take photos. Pull out your phone and take photos of the scene and vehicles from every direction possible. If, for example, your back bumper is crushed, it's going to be tough for the other driver to say you hit them.
3. Trade insurance information with the other driver. If they hand you an insurance card, you may want to take a quick peek to make sure their coverage is still in effect. In any case, be as civil as possible and let the police do their job. 

The bottom line with all auto insurance is to fully understand what you're committing to. Some policies are better than others and some insurance companies are more pleasant to work with than others. Even if it takes a bit longer to land a policy you're comfortable with, take the time to read policies and look into the insurer's customer satisfaction ratings.