Final answer:
Medical payments coverage under a personal auto policy generally covers medical expenses incurred for up to 3 years after an accident. The coverage is part of a risk-sharing agreement among policyholders, as illustrated by the simplified example of 100 drivers sharing the cost of damages through their premiums.
Step-by-step explanation:
Medical payments coverage under a personal auto policy typically provides coverage for medical expenses incurred by the policyholder or passengers in their car due to a car accident. This coverage is in effect for a specified period of time after the incident. Although the exact duration can vary by policy, it is common for medical payments coverage to apply for medical bills incurred up to 3 years after an accident. This means that if the policyholder or covered passengers have an accident and incur medical expenses, they can submit these bills to their insurance company for payment within this time frame.
An example to understand how insurance pools work is by considering a simplified scenario with 100 drivers. In this example, we have varying degrees of damages ranging from minor dings that cost $100, to accidents with $1,000 in damages, and severe accidents costing $15,000. With no prior indication of risk levels among drivers, the collective pool of drivers contributes to the coverage of the total incurred damages through their premiums, highlighting the principle of shared risk in automobile insurance. If each driver pays a premium of $1,860 annually, the insurance company collects enough to cover the $186,000 in total damages from accidents within that year.