Introduction
Whether you sell car insurance or you are thinking of buying a policy, you need to understand the terms commonly used by auto insurance companies. Some are fairly self-explanatory while others are much better understood when you have a definition to go along with it.
Only when you understand what each term means will you be able to help your customers decide on the best policy for their needs. If you are the buyer, it’s vital for you to know what each term means so you won’t be blindsided when you need to file a claim.
Terms
A
Accident
An unanticipated and unintended event that causes damage to at least one vehicle. Vehicle occupants may also suffer injuries.
Accident-Only Policies
Insurance policies that only pay claims after a vehicular accident or accident-related injuries.
Actual Cash Value
This is the fair market value of a vehicle when it is damaged in an accident, destroyed or stolen. When the driver file a claim for the loss, their insurance company sends an adjuster to closely examine the condition of every part of the car. They will inspect the body, tires, interior and equipment.
They will also know about the condition of the car before the accident of theft. Based on all this information, the adjuster will arrive at the actual cash value by looking at similar vehicle models in that location.
Actuary
A mathematical risk specialist in the car insurance industry. Actuaries determine insurance calculations using predictions of accident frequency, life expectancy and loss reserving.
Actuarial Report
Document prepared to formally tell the state regulatory authority and the Board of Directors or equivalent about the actuary’s professional conclusions and recommendations. The report also records and communicates the various methods and procedures to reassure that the individuals receiving the report know of the significance of the actuary’s findings and opinion. This report also documents the analysis used to write the opinion.
Additional Interest Insured
A person or company named as an additional interest insured in a policy. This entity can be held liable for an accident involving an insured person or vehicle. A lien holder can be considered an additional interest insured.
Adjuster
Specialist who helps to settle loss claims presented by policyholders or claimants. They carefully consider and evaluate each claim, then recommend the payment to be made, based on the coverage in the insurance policy contract.
Administrative Expense Charge
Cash amount deducted from an auto policy, usually once per month.
Advance Premiums
After a policy has been processed and approved, the premium is paid before its effective date. These are considered liabilities to the insurance companies and will not be included in written premiums or unearned premium reserves.
Agent
Insurance company representative who sells auto insurance policies to customers.
Aggregate
The maximum amount of coverage payable, either for a single loss or multiple losses in a policy period or on a single project.
Anti-Theft Device
Active or passive devices that help prevent vehicle thefts. A passive device does not require any activation, arming itself when the car is turned off, the key is removed from the ignition or the doors are shut.
An active device does require the driver to carry out an action, such as putting a lock in the car or pushing a lock button down. These have to be reactivated every time the car is turned off or they won’t work. Vehicles with either type of anti-theft device may be eligible for a policy discount.
Application
Form filled out by customers. This form contains information about them, which the insurance company uses in deciding whether the customer is a good risk for insurance.
Appraisal
Written evaluation of the property’s value. Appraisals for damage are filled out by vehicle repair specialists or insurance adjusters.
Assigned Risk Plan
A special type of policy assigned for individuals who can’t buy a conventional liability policy, due to a documented poor driving record. These policies are state-managed.
assigned to write policies for these drivers, at higher prices.
Attach
The insurance company seizes assets or property when a customer has outstanding debts. The customer may also be unable to pay for the debt in cash. They also have assets that cover the value or amount of the debt.
$25/$50/$15
These numbers are available to car owners buying liability coverage. They stand for the thousands of dollars that the liability policy covers under the per-person bodily injury, bodily injury for all persons injured in the same accident and property damage liability. Almost every state mandates a minimum amount, with insurance companies offering an option to purchase additional coverage.
Automobile Liability Insurance
This form of coverage protects drivers against the risk of being held legally responsible for either bodily injury or property losses resulting from a vehicle accident. If the driver is found to have caused an accident resulting in property loss or bodily injury to others.
B
Binder
This is a temporary insurance contract that shows the vehicle is covered by a policy until the permanent policy arrives.
Bodily Injury
Injuries suffered by a person. This can include the person’s death.
Bodily Injury Liability Coverage
A segment of a policy that covers the driver, up to policy limits, for accidents that result in injuries to pedestrians or other drivers for which the driver is legally at fault. This covers medical expenses, lost income, and pain and suffering.
C
Cancellation
To terminate an insurance policy before it renews. The company or insured person can cancel.
Claim
A request from the covered driver to cover an insured loss. These are made by phone call, in writing or online.
Claimant
The person who submits a claim for an insured loss.
Collision Coverage
This is an optional coverage for damages resulting from colliding with a fixed object, such as a wall. It also covers damages from rollover accidents. Severe damage from a pothole can also be covered. It only applies to the car covered under the policy—it will not pay for damages suffered by whatever the car hit. Property damage liability covers this.
Combined Single Limit
This policy type contains a single amount for both liability payment limits for bodily injury and property damage. It differs from a split limit policy that shows separate limits for bodily injury (per person), bodily injury per accident and property damage per accident.
Comprehensive Coverage (for physical damage other than collision)
This pays for damages or losses of your vehicle from damage causes other than an accident. Causes covered include hail, tornadoes, flood, fire, vandalism, falling objects, earthquake and theft.
Continuously Insured
A customer is covered, either by one insurer or when the customer moves to a second insurance provider. There is no break in coverage.
Contract
The insurance policy. Insurance policies are contracts between customers and insurance companies.
D
Declarations Page
Known as the “dec page,” this shows the name, location and description of the insured item; the names and address(es) of the policyholders, the time period the policy is in effect; premiums payable and the amount of coverage.
Deductible
How much the insured person has to pay after a loss before the insurance company makes its payment.
Dollar Threshold
In states with no-fault auto coverage, this threshold keeps people from suing for pain and suffering. To qualify for the right to sue, their medical expenses must rise over a specified dollar amount, which is called the “threshold.”
Driver Education Credit
A discount on auto insurance policies for younger drivers. These drivers are eligible for this discount once they complete their driver education course. This is only available in some states.
Driver Improvement Course
Drivers over the age of 55 can participate in a voluntary course to improve and refresh their driving skills. This course may help drivers to qualify for a discount on their policies if they meet certain eligibility requirements.
Driver Status
Other drivers can be added to policies. Each status describes the driving privileges for each person.
Rated: may actively drive a vehicle listed on the policy
Excluded: Person is not allowed to drive any vehicles on the policy. Not covered under the policy
Limited: Residents of a household who don’t drive the vehicles on the policy. This may include roommates.
E
Effective Date
The date the policy takes effect.
Endorsement
Written agreement attached to a policy. This agreement either adds or subtracts coverage. Once an endorsement has been attached, it will be considered first over the original policy terms.
Exclusions
Actions that will not be covered under an insurance policy. These include normal wear and tear, intentional acts and drag racing.
Extended Coverage
This is an endorsement added to a policy. It can be a clause within the policy to add more coverage for risks other than ones covered under basic policy provisions.
F
Fair Market Value
The price where a vehicle will change hands between willing buyers and sellers. Both parties have to have knowledge of the relevant facts. Buyer and seller aren’t being forced to sell the car.
Financial Responsibility Law
This law requires every driver to hold auto insurance. Some states allow a cash deposit as evidence of the owner’s ability to pay for negligence that cause losses to other people. The losses are caused during the operation of the vehicle. This is legal in 47 states and the District of Columbia. It is not legal in any state to drive a vehicle without first having proof of insurance.
Free Look Period
The time period under which an insurer can cancel a car insurance policy for any reason during this period. It is usually the first 30 days of the policy, but this varies by state.
Full Coverage
This term refers to how much insurance coverage a driver has. Even though there is no provision for full coverage, this term usually means the person has comprehensive coverage as well as liability coverage.
G
Gap Insurance
An insurance coverage that pays for the difference between the actual cash value of a vehicle and the amount still remaining to be paid on the loan.
Garaging Location
Where a vehicle is parked when not in use. This is usually the vehicle owner’s home.
Grace Period
The period between the actual due date of a policy and when it will expire. This is generally 31 days. The policy is still in force while the premium payment is due, but has not been paid.
I
Indemnity
This is the premise upon which every auto insurance policy is based. The objective of “insurance” is to help restore the insured person to the same financial position after a loss that they were in before the loss (the “make you whole” premise).
Independent Agent
An insurance agent who represents several insurance companies. This agent is not an employee of any of these companies. However, they do earn commissions from policies sold through each company.
L
Lapse
The expiration of a policy when one party doesn’t live up to their obligations during the time frame allowed. If an auto policy lapses, the driver may pay higher premiums under a new policy because insurance companies have decided that drivers who allow their policies to lapse are higher risks than those who don’t allow their policies to lapse.
Liability Coverage
This covers injuries to the other driver. It also covers damages to the other driver’s vehicle in an accident caused by another driver. This also covers those people driving the vehicle with the insured driver’s permission.
Liability limits
This is the maximum amount that a policy will pay. It must pay at least $25,000 for each injured party. The total amount of coverage allowed is $50,000. A basic policy provides “$25/$50/$25” coverage, with each amount specifying the thousands of dollars that may be paid.
Loan/Lease Payoff Coverage
This is sometimes referred to as “gap” coverage as the insurance company pays off the difference between what the insured owns on their vehicle and what the insurance company will pay if the vehicle is stolen or declared totaled. The payment made is less the comprehensive or collision deductible.
Loss
The amount an insurance company pays out on one claim.
Loss History
The total number of insurance claims filed by a policyholder. Insurance companies take loss history into consideration as they decide whether to underwrite a new policy or renew an existing one. This is also used as insurance companies think about the likelihood that a policyholder will file a claim in the future.
M
McCarran-Ferguson
This law, enacted in 1945, gives authority to states to tax and regulate the insurance profession.
Medical Payments Coverage
This is one part of an auto insurance policy. It provides for coverage of medical expenses and funeral payments incurred by the driver and their passengers in an accident. This coverage is made regardless of who is at fault.
Medical Payments and Personal Injury Protection (PIP)
This pays for limited medical and funeral expenses if the driver, a family member or passenger is injured or killed in a collision. PIP also covers lost income benefits.
N
Named Driver Exclusion
An endorsement meant to exclude accidents involving a person who has been excluded from the insurance policy.
Named Driver Policy
This policy does not provide coverage for someone living in the residence of a named insured person. This includes an auto insurance policy that has been endorsed to give coverage only to those drivers who have been named in the policy.
Named Insured
The first person on the policy in whose name the policy has been issued.
No-Fault Insurance
In some states, auto insurance laws require insurance companies to cover those losses regardless of who caused the accident. Personal Injury Protection is the most basic coverage that covers the driver’s medical, hospital and funeral expenses. The expenses of pedestrians and passengers are also covered. Lost wages and other expenses related to the accident may also be paid for.
Non-Economic Benefits
These are benefits paid out for intangible losses, such as emotional stress, pain and suffering, inconvenience, impairment of quality of life and loss of consortium.
Non-Owners Policy
Provides coverage that offers liability, medical payments and uninsured motorist to a named person who does not own the vehicle.
Non-Renewal
Insurance company decides not to renew a customer’s policy.
O
Occasional Driver
Someone who is not the primary driver of the insured vehicle.
P
Payee
The insured individual or beneficiary who is paid a loss payment from an insurance company. For an insurance policy, the loss payee is the banking institution that financed either the loan or lease of the vehicle. If the vehicle is a complete loss, the insurance company pays the loss payee first.
Personal Injury Protection (PIP)
First-party benefits package giving medical benefits for your lost wages, medical costs, and any loss of essential services provided by the policy holder. This also pays for funeral costs and is associated with no-fault vehicle insurance.
Policy Period
Also called “policy term.” This is the time period in which your policy is active.
Premium
The insurance payment that the insured person makes to their insurance company to maintain or get a vehicle insurance policy.
Primary Residence
The place where the policy holder lives for a majority of the time that their policy is in effect.
Primary Use
The main use of the policy holder’s vehicle: personal, pleasure, to and from work, or farm use.
Principal Driver
The person who uses the vehicle most often is known as the principal driver.
Property Damage Liability Coverage
This is the section of a standard vehicle insurance plan that covers the policy holder, up to the limit of the policy, for any losses resulting from damage or destruction of someone else’s personal property. This coverage is mandatory in most of the country.
Proximate Cause
Repair or replacement cost of lost or damaged property. This does not account for depreciation or current market value. Some vehicle insurance companies do offer a Guaranteed Replacement Cost for new cars—if the vehicle loss takes place within the first 12 months or 12,000 miles put on the vehicle.
R
Rate
Cost of one unit of insurance coverage. This amount is placed at about $1,000 worth. Insurance coverage is based on the customer’s history of loss experience for similar risks. A vehicle insurance company charges its customers based on their past experience with that company. The customer is categorized on factors such as age, gender, driving record, marital status and the make and model of the vehicle being insured.
Refund
The amount of money paid back to a customer after overpaying their insurance premiums.
Reinstatement
When a vehicle insurance policy is placed back in force after it has lapsed for nonpayment of the premium.
Renewal
Keeping a policy in force after its expiration date. The customer receives notice that the policy will expire in x weeks, allowing them to make a payment to continue the coverage.
Rental Reimbursement Coverage
A part of vehicle insurance that pays so much per day for a rental car so the policy holder can have their car repaired after an accident.
Replacement Cost
Another part of the vehicle’s insurance that the dollar amount necessary to replace damaged personal property. This does not deduct the cost of depreciation. However, it is limited by the maximum dollar amount of the policy.
Rescission
Cancelation of an insurance policy by the insurance company when a material misrepresentation (lie) comes to light.
Rider
A written attachment to a policy that either expands or limits the benefits that will be paid under the policy. This is also called an endorsement.
Roadside Assistance Coverage
This provides for services such as tire change, towing, locksmith services and battery jumping. Available to customers for an additional premium, if this isn’t already a part of their policy.
Rule of 78
This calculates the remaining amount of premium, taking into account that more insurance coverage is needed at the outset of a loan. Because the loan payoff is higher, the premium is also higher. When the loan is paid off, the vehicle needs less coverage. The refund percentage will decrease.
Rule of Anticipation
A similar practice to the Rule of 78. A newer vehicle requires a higher amount of insurance coverage because the total payoff is higher. After the loan has been paid off, the amount of coverage needed will fall, meaning the refund percentage also goes down.
S
Salvage Titles
This is determined state by state. In some states, salvage titles are based on the extent of damage a vehicle has suffered. Other states require that the vehicle will be declared a total loss. These titles specify whether the vehicle can be rebuilt or whether it can only be used for parts.
In other states, the title is rotated once the damage estimate reaches a percentage of the vehicle’s retail value (75 percent is one estimate in New York). Even if the vehicle isn’t a total loss and can be rebuilt, this law holds.
Second Named Insured
The insurance broker may require a vehicle policy to name another person on a vehicle policy to be named as the “second named insured.” Their coverage is identical to that as the named insured driver.
Split Limit
These policies have three different amounts for liability payment limits. One amount is for bodily injury per person; the second, for bodily injury per accident and the third for property damage per accident. The policy will express these limits in this order. It may be shown as $100/$300/$100 (for thousands of dollars).
SR-22
This document may be required by a court to show proof of the financial responsibility of persons who have been convicted of some types of traffic violations.
Surcharge
An additional charge tacked onto a customer’s premium. This generally happens if the insured has a record of at-fault accidents.
T
Third Party
A third party is someone other than the policy holder or family members directly covered under a vehicle insurance policy. The insurance company is considered to be the second party.
Threshold
The point where an injured person can file a lawsuit for recovery related to bodily injury and pain and suffering. The person sued will be the one who caused the vehicle accident.
Tort
An act that results in injuries for a person or damages to property. This will be what civil action (lawsuit) is often based. Does not cover breach of contract.
Towing and Labor Coverage
This coverage says for towing charges once a vehicle is not drivable. This also covers labor charges for tasks such as changing a flat where the vehicle broke down.
U
Underwriter
The individual who looks over insurance applications and determines whether the applicant is a suitable risk. They also determine the premium the customer will pay.
Underwriting
The process of deciding if someone’s application for coverage will be accepted or turned down.
Uninsured and Underinsured Motorist Coverage
One part of a vehicle insurance policy. It covers coverage for injuries to the customer and others who are involved in an accident with an uninsured driver or one who doesn’t hold enough coverage. UM/UIM isn’t mandatory in all 50 states, but it is an excellent idea to hold this coverage.
Uninsured Motorist Coverage (UM)
A part of an insurance policy that covers the vehicle driver, relatives and passengers who are involved in an accident with an uninsured driver. Customer and passengers will be able to use UM coverage for injuries, including death. Exclusions may apply.
Underinsured Motorist Coverage (UIM)
If a driver who doesn’t hold enough insurance coverage is involved in an accident with someone who holds UIM coverage, this will allow the customer with this coverage to have their injuries, including death, to be paid for. It also applies to passengers and resident relatives. Customers can select the coverage limits they want. Exclusions may apply, so they should carefully read their policies.
Uninsured/Underinsured Motorist Property Damage Coverage
Like its bodily injury cousin, this part of a policy covers property damages caused by a driver who isn’t insured or who holds too little coverage. It also applies for those injured by a hit-and-run driver who cannot be identified. In some states, this type of coverage is required. Again, exclusions may apply.
V
Vehicle Identification Number (VIN)
This number is unique to the vehicle to which it has been attached. Can be located on the driver’s side of the dashboard, driver’s side door, vehicle registration or on the title. It consists of 17 letters and numbers that identify the make, model and year of the vehicle.
Verbal (or Descriptive) Threshold
This describes the type of serious injuries that someone must suffer before they are allowed to file a bodily injuries or damages lawsuit against the driver who caused the accident.