The world of car insurance policies is filled with terms that most of us don’t use on an everyday basis. But in order to get the best insurance policy for yourself, you need to understand what the policy is saying. That is why many people find shopping for car insurance so frustrating – it is difficult to get the best coverage when you aren’t totally sure how one term differs from another. Here at Freedom National, we always work to make our policies simple and straightforward, so you never waste a moment or a dime. This guide will help explain common car insurance terms that you may see on a policy that are the most frequently misunderstood.
Accident Forgiveness: This is a clause in an auto insurance policy that says that your policy rate will not be increased after an accident that you cause.
Accidental Death Benefit or ADB: A life insurance policy that helps cover funeral costs or other costs associated with the death of the person who is insured due to a car accident.
Act of God: Something that happens that is beyond human control, such as a flood or earthquake. These are usually covered by comprehensive, or other than collision, coverage.
Actual Cash Value: The fair market value of property, which is usually the maximum the insurance policy will pay if it is damaged beyond repair. Unless the policy specifically includes replacement cost coverage, it will only pay what the property was worth, not what it would cost to replace it.
Actuary: A person who determines how high your premium will be by assessing all the risks involved for the insurance company. This person looks at your driving history and other factors to determine this.
Aftermarket Parts: Parts installed on a vehicle that were not original to the vehicle when it came out of the factory. These parts may not be covered by an auto insurance policy. A good example might be stereo speakers added by the driver.
Arbitration: The process through which an insurance dispute is settled, as opposed to litigation in a courtroom. This involves the insurance company and the insured each presenting their arguments and documentation to a neutral, third party arbitrator.
Blue Book: A national publication that is used to determine actual cash value for vehicles.
Certificate of Financial Responsibility: A form that shows that the insurance is meeting all legal requirements for coverage. This may also be called an SR-22 and is often only required by drivers who have had traffic violations or have allowed their insurance to lapse previously.
Claim: A request submitted by the driver to the insurance company to pay for anything covered under the policy.
Claimant: A person presenting a claim. This term is often used by an insurance company for the other parties other than their insured who have a claim for damages.
Combined Single Limit/CSL: The coverage for bodily injury and property damage insurance is combined into a single amount per occurrence, unlike split limits, which have separate coverage limits for each person and for each occurrence.
Deductible: An amount that must be paid by the driver or vehicle owner before the auto insurance provider is required to begin paying.
Depreciation: As time goes on, regular wear and tear on a vehicle cause it to lose value. This loss in value is called depreciation, and it determines the actual cash value that will be paid out in the event of a total loss.
Endorsement: An amendment to the original auto insurance policy that changes it in some way. This can be a change in policy terms, coverage, vehicles, drivers, or any other policy characteristics that affect coverage.
Exposure: A term that means “possibility of loss.” Insurance company’s rates are based on the likelihood of having to pay out a lot of money, or exposure.
First Party: The person in the car who is on the insurance policy.
Garaging Location: The zip code of the place where your car is normally parked when not in use. This is usually a person’s home address.
Included Driver: A driver who is specifically listed on the policy and is covered to drive the insured vehicles.
Indemnification: This occurs when the insurance company pays to restore damaged property to the exact same state it was in before the damage. Indemnity is the financial condition a thing was in before being damaged.
Insurance Fraud: Any action taken or statement made with the intent to defraud an insurance company or gain insurance benefits that one is not entitled to. This is a serious crime that is punishable by fines and jail time.
Lapse in Coverage: Anytime your insurance policy is not active, whether through canceling, failure to pay the premium or any other situation that would cause the policy to not be in force.
Liability: The legal obligation that a party has to pay for damages or injuries that they cause to another person or their property.
Lien/Lien Holder: Any time a claim is put on property in exchange for payment of debt. In auto insurance, a lien holder is the bank or financial institution that actually owns the vehicle.
Named Driver Exclusion/Excluded Driver: A person who is specifically excluded from coverage under the policy. Most insurance companies will require you to include or exclude all members of the household who are of driving age, and anyone else who has regular access to the vehicles.
Named Non-Owner Policy: A policy that provides auto insurance for someone who does not own or have regular access to a vehicle. These policies are useful for people who need an SR-22, but do not own a vehicle so they cannot get a traditional insurance policy.
OEM, or Original Equipment Manufacturer Parts: Parts on a vehicle that were installed or obtained by the original manufacturer or the brand supplier.
Passive Restraint System: Part of the vehicle that automatically protects passengers in an accident, such as an air-bag.
Policy Limit: The maximum amount of money that will be paid by the insurance company. This could mean overall throughout the policy’s lifetime, or per instance.
Policy Term: How long the policy is in effect, such as one year.
Premium: The amount that the policy holder must pay for the insurance policy. This may be a monthly payment, or it may be paid in other installments, such as annually.
Principal Driver: The person most frequently driving the car.
Rescission: The retroactive cancellation of an insurance policy all the way back to inception, as if coverage was never in force. Insurance companies are allowed to take this action in certain states if an insured fraudulently misrepresented or concealed facts when they applied for the insurance policy.
Salvage Title: A title on a car that was once totaled, but has since been repaired to a legally safe state.
Split Limit: An auto insurance policy with a split limit has different maximums for different types of coverage. For example, a liability policy with 25/50/25 split limits will cover $25,000 in bodily injury per person max, $50,000 in bodily injury per accident max, and $25,000 in property damage per accident max.
SR-22: This is a legal document that is sometimes required by the state that proves that a person is carrying the required amount of insurance to drive within that state. This is often required of those who have previously had traffic violations or a DUI, or have let their insurance policy lapse.
Subrogation: The process through which your insurance company asks another driver’s insurance company to pay for damage or injury if the other driver was at fault.
Tort: Harm committed against another, which results in legal liability. An automobile accident in which your actions harm another is a tort.
Underwriting: The process through which an insurance company determines if it will provide insurance to a driver.
Void: A policy that is void is no longer in effect, and insurance coverage will not be provided until the policy is in effect again.
