Surcharged is a money term you need to understand. Here’s what it means.

What is a surcharge?

A surcharge is fee added to a person’s car insurance premium after a traffic violation or an accident in which that driver was at fault. In most cases, a surcharge could be interchangeable with the word “penalty.”

Deeper definition

A surcharge is an amount that insurance companies typically add to a person’s insurance premium, which is the amount he or she pays for insurance, due to some event or occurrence.

Typically, the person can expect a surcharge on the car insurance premium if he or she gets a ticket or citation or is at fault for an accident.

In the U.S., a surcharge also can refer to a state-mandated fee, depending on which state a person lives in. A state fee is not within the person’s control. No-fault states sometimes pay additional fees for medical coverage, which may be referred to as a surcharge.

Insurance companies apply a surcharge because they assume that a ticket for a moving violation, such as reckless driving or speeding, makes it more likely that a person is going to be involved in an accident and injure someone.

This increases an insurance company’s risk of paying a claim under the person’s policy. If a claim is made, a company must compensate claims under the policy, whether it is to cover damages or injuries suffered by the insured motorist, passengers, someone in the other vehicle or anyone else involved in the accident. The company recoups those payments through the surcharge.

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Surcharge example

A person may have a surcharge applied even if that person is not at fault for an accident. For instance, in some states, he or she might need to have underinsured or uninsured motorist protection, which covers damages if the person is involved in an accident with another driver who doesn’t have insurance or doesn’t have adequate insurance to cover the damages.

In this case, if the insured driver’s insurance company has to pay, it’s possible that he will get an increase in his premium.

However, in some states, insurance laws prohibit insurance companies from increasing premiums when the insured driver is involved in an accident with an uninsured motorist or when the insured driver was not at fault in his first accident. If that person is involved in an accident for a second time, the insurance company may increase the rate.

Motorists can expect surcharges on their policies for about three years. The amount of surcharge may stay the same or be reduced over time. For instance, an insurance company may charge a 60 percent surcharge for a major violation in the first year, 30 percent the following year, and 15 percent for the third year. Another insurance provider may charge a 40 percent surcharge for all three years.

Every insurance company is required to file its rates with the state where it sells policies, typically with the insurance department. The filing typically includes how the company calculates its surcharges.

There are a few ways to avoid a surcharge. In some states, particularly in those that adopt the department of motor vehicles point system (a system used to track reckless or unsafe drivers and revoke or suspend their licenses), an individual might be able to pay for and take a “defensive driving” or “safe driver” course to avoid the ticket. The points will not be added to his driving record, and he can avoid a surcharge.

Getting a traffic ticket is never a good idea. Find out which traffic violation can cause your auto insurance rates to increase.

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