What happens when an uninsured driver hits you?

You may be satisfied with your auto insurance policy, but if it does not include uninsured and underinsured motorists (UM/UIM) coverage, you are taking a serious risk every time you get behind the wheel.

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In times of high unemployment, drivers often drop their car insurance coverage, even though state laws require minimum levels of auto insurance. If you are hit by an uninsured driver and your own policy does not cover the damage, you could be on the hook for thousands of dollars. If you are injured, you may never be compensated for your medical bills or pain and suffering.

The Insurance Research Council has found that a single percentage point increase in the unemployment rate can lead to more than three-quarters of a percentage point rise in the rate of uninsured motorists. The Insurance Information Institute projected that the percentage of uninsured motorists reached 18 percent during 2010.

"The big picture is that driving is the most dangerous thing a person does during the day," said David Snyder, vice president and associate general counsel for the American Insurance Association trade organization. "Driving carries the greatest potential for death and serious injury for the typical person. A motor vehicle accident can wipe out a lifetime of savings in an instant. Unless you want to be exposed to catastrophic loss without compensation, uninsured motorist coverage is essential."

Dropping car insurance to save money

When the economy turns sour, many people have problems paying their bills. Unfortunately, after they compare auto insurance quotes, many decide that a good place to cut back is their level of coverage. They may reduce their liability levels and drop comprehensive and collision coverage or ignore allow their policy to lapse by ignoring their bill. Depending on other drivers to do the right thing is not a good financial plan. Motorists can meet state thresholds for insurance coverage and still have inadequate policies, said Pete Moraga, spokesperson for the Insurance Information Network of California.

Insurance requirements vary by state. If you have a UM policy, generally it will cover the cost of injuries to you and your passengers and property damage. It applies when an uninsured or a hit-and-run driver is legally responsible for the damage.

The uninsured motorist problem varies around the country. According to a 2009 study by the Insurance Research Council, New Mexico had the highest uninsured motorist ratio (29 percent) and Massachusetts had the lowest (1 percent). The study found evidence that the recession led several hundred thousand drivers to drop their auto insurance in 2008.

Driving under the auto insurance radar

The District of Columbia and 21 states have mandatory requirements for uninsured or underinsured motorist coverage. Several states have begun developing online auto insurance verification systems to identify uninsured motorists. Getting an exact count for these drivers is tough, since such motorists tend to "fly under the radar," said Moraga. In some urban areas of California, for example, police departments estimate the level of uninsured motorists at close to 40 percent of drivers.

Adding uninsured and underinsured motorist coverage is relatively inexpensive, said Jeffrey A. Rudman, a personal injury attorney in Los Angeles. Unfortunately, many of the people he represents did not have UM coverage when they were involved in car accidents.

"There have been many times when I have a client who has been severely injured and the party who caused the injury does not have insurance or does not have sufficient insurance," he said. "If the person causing the injury does not have significant assets, that can be very bad for the client. They never are able to recover enough money."

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Comparison shopping for the right policy is important. Many consumers check car insurance quotes online. If your car is damaged by an uninsured motorist and you have high limits of UM coverage, "then you are in a good place," said Moraga. However, if you are hit by an uninsured driver and you have a low level of UM coverage, you may be forced to go to court to recover damages or reach into your own pocket to cover your expenses. Even if your lawsuit is successful, there is no guarantee that you ever will be paid, he stressed. Uninsured motorists are not likely to have the funds to pay a court settlement.

If you are involved in an accident with an uninsured driver and you have no UM coverage, the prospects can be grim.

"You are talking about added expense because you have to pay court fees, and you are not sure what the outcome will be," Moraga said. "Even if you get a judgment, the person may be homeless or may not have money, so how would you collect?"