Underinsured Motorist Coverage
What it is:
Underinsured motorist coverage protects drivers from other drivers who do not carry any or enough auto insurance.
How it works/Example:
Let's say you're driving your car and are hit by another driver. The other driver causes $10,000 of damage to your car. The other driver is underinsured, meaning that he has car insurance, but only the legal minimum, which doesn't cover the amount of damage to your car.
Because you have underinsured motorist coverage, your insurance company will pay for the difference in damage costs. So, for example, if the other driver's insurance will only pay for $5,000 of damage, your insurance policy will pay the other $5,000.
Note that in this example, nobody was hurt. As is often the case, auto accidents cause more than just car damage of $10,000. They might cause medical bills, lost wages, and pain and suffering.
Why it matters:
Some states require the purchase of underinsured or uninsured motorist coverage. It is important to note that underinsured coverage and uninsured coverage are separate, though in many states you can buy them together.