A lot of people are wondering what an auto insurance policy is. Actually, an auto insurance policy is a legally binding agreement between an insurance company and the customer who buys the auto insurance policy. The customer is usually called the "insured" or the "policyholder." In consideration for the payment of a specified sum of money, called the "premium," the insurance company agrees to give protection to the policyholder against certain types of loss or damage as specified by the auto insurance policy. The workings of an auto insurance policy are not that different from those of card games. The basic law of statistics and probabilities still apply to the auto insurance policy. When a loss on the side of the policyholder happens which meets all of the requirements described by the terms of the auto insurance policy, the loss is said to be "covered" by that policy.

An auto insurance policy offers protection against economic loss, which is loss or damage which can be numerically measured in purely financial terms and paid for by money. This is an effort to put the policyholder in the same financial position as if the loss had not occurred. For example, an auto insurance policy can pay for the cost to repair or replace a damaged car due to a car accident. The auto insurance policy wishes to compensate the policyholder for all the loss covered by the auto insurance policy converted to financial terms.

It should be noted, however, that an auto insurance policy can only pay for financial loss. Insurance cannot pay for many types of losses which can not be compensated by money. For example, an auto insurance policy can not cover a loss of life or cover the emotional injury or grief which often comes with an accident or serious illness. An auto insurance policy can only cover the economic value of the car, not the sentimental value.

The car is an expensive and valuable asset which could be very economically difficult to repair or replace on your on if it is damaged. Part the design of what an auto insurance policy covers is payment for the repair or replacement of a car which is damaged as a result of your driving. Other causes not related to driving, such as theft or storm damage, are also covered by an auto insurance policy. The insurance company, in essence, gives you the assurance of peace of mind you need just in case something bad happens to your car. Without an auto insurance policy to cover them, many people would find it hard if not impossible to replace vehicles that are stolen or become severely damaged.