Common Car Insurance Terms

ACTUAL CASH VALUE -- A form of insurance that pays damages equal to the replacement value of damaged property minus depreciation.

AGENT -- Insurance is sold by two types of agents: independent agents, who are self-employed, represent several insurance companies and are paid on commission; and exclusive or captive agents, who represent only one insurance company and are either salaried or work on commission. Insurance companies that use exclusive or captive agents are called direct writers.

APPORTIONMENT -- The dividing of a loss proportionately among two or more insurers that cover the same loss.

APPRAISAL -- A survey to determine a property's insurable value, or the amount of a loss.

ARBITRATION -- Procedure in which an insurance company and the insured or a vendor agree to settle a claim dispute by accepting a decision made by a third party.

ASSIGNED RISK PLANS -- Facilities through which drivers can obtain auto insurance if they are unable to buy it in the regular or voluntary market. These are the most well-known type of residual auto insurance market, which exist in every state. In an assigned risk plan, all insurers selling auto insurance in the state are assigned these drivers to insure, based on the amount of insurance they sell in the regular market.

AUTO INSURANCE POLICY -- There are basically six different types of coverages. Some may be required by law. Others are optional. They are:

1. Bodily injury liability, for injuries the policyholder causes to someone else.

2. Medical payments or Personal Injury Protection (PIP) for treatment of injuries to the driver and passengers of the policyholder's car.

3. Property damage liability, for damage the policyholder causes to someone else's property.

4. Collision, for damage to the policyholder's car from a collision.

5. Comprehensive, for damage to the policyholder's car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, and riots), and theft.

6. Uninsured motorists coverage, for costs resulting from an accident involving a hit-and-run driver or a driver who does not have insurance.

AUTO INSURANCE PREMIUM -- The price an insurance company charges for coverage, based on the frequency and cost of potential accidents, theft and other losses. Prices vary from company to company, as with any product or service.

Premiums also vary depending on the amount and type of coverage purchased; the make and model of the car; and the insured's driving record, years of driving and the number of miles the car is driven per year. Other factors taken into account include the driver's age and gender, where the car is most likely to be driven and the times of day (rush hour in an urban neighborhood or leisure time driving in rural areas, for example). Some insurance companies may also use credit history related information.

BINDER -- Temporary authorization of coverage issued prior to the actual insurance policy.

BODILY INJURY LIABILITY COVERAGE -- Portion of an auto insurance policy that covers injuries the policyholder causes to someone else.

CAPTIVE AGENT -- A person who represents only one insurance company and is restricted by agreement from submitting business to any other company, unless it is first rejected by the agent's captive company.

CAR YEAR -- Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance.

COLLISION INSURANCE -- Portion of an auto insurance policy that covers the damage to the policyholder's car from a collision.

COMMISSION -- Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods.

COMPREHENSIVE INSURANCE -- Portion of an auto insurance policy that covers damage to the policyholder's car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods and riots), and theft.

COMPULSORY AUTO INSURANCE -- The minimum amount of auto liability insurance that meets a state law. Financial responsibility laws in every state require all automobile drivers to show proof, after an accident, of their ability to pay damages up to the state minimum. In compulsory liability states this proof, which is usually in the form of an insurance policy, is required before you can legally drive a car.

CREDIT SCORE -- The number produced by an analysis of an individual's credit history. The use of credit information affects all consumers in many ways, including getting a job, finding a place to live, securing a loan, getting telephone service and buying insurance. Credit history is routinely reviewed by insurers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety, which can lead to more accidents and more claims. Auto and home insurers may use information in a credit history to produce an insurance score. Insurance scores may be used in underwriting and rating insurance policies.

DECLARATION -- Part of a property or liability insurance policy that states the name and address of the policyholder, property insured, its location and description, the policy period, premiums and supplemental information. Referred to as the "dec page."

DEDUCTIBLE -- The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.

DIMINUTION OF VALUE -- The idea that a vehicle loses value after it has been damaged in an accident and repaired.

DIRECT SALES/ DIRECT RESPONSE -- Method of selling insurance directly to the insured through an insurance company's own employees, through the mail, by telephone or via the Internet. This is in lieu of using captive or exclusive agents.

DIRECT WRITERS -- Insurance companies that sell directly to the public using exclusive agents or their own employees, through the mail, by telephone or via the Internet. Large insurers, whether predominately direct writers or agency companies, are increasingly using many different channels to sell insurance. In reinsurance, denotes reinsurers that deal directly with the insurance companies they reinsure without using a broker.

ECONOMIC LOSS -- Total financial loss resulting from the death or disability of a wage earner, or from the destruction of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of restoring or replacing property and legal expenses. It does not include noneconomic losses, such as pain caused by an injury.

ENDORSEMENT -- A written form attached to an insurance policy that alters the policy's coverage, terms, or conditions. Sometimes called a rider.

EXCLUSION -- A provision in an insurance policy that eliminates coverage for certain risks, people, property classes or locations.

FINANCIAL RESPONSIBILITY LAW -- A state law requiring that all automobile drivers show proof that they can pay damages up to a minimum amount if involved in an auto accident. Varies from state to state but can be met by carrying a minimum amount of auto liability insurance.

FIRST-PARTY COVERAGE -- Coverage for the policyholder's own property or person. In no-fault auto insurance it pays for the cost of injuries. In no-fault states with the broadest coverage, the personal injury protection (PIP) part of the policy pays for medical care, lost income, funeral expenses and, where the injured person is not able to provide services such as child care, for substitute services.

GAP INSURANCE -- An automobile insurance option, available in some states, that covers the difference between a car's actual cash value when it is stolen or wrecked and the amount the consumer owes the leasing or finance company. Mainly used for leased cars.

GENERIC AUTO PARTS -- Auto crash parts produced by firms that are not associated with car manufacturers. Insurers consider these parts, when certified, at least as good as those that come from the original equipment manufacturer (OEM). They are often cheaper than the identical part produced by the OEM.

GLASS INSURANCE -- Coverage for glass breakage caused by all risks; fire and war are sometimes excluded. Insurance can be bought for windows, structural glass, leaded glass and mirrors. Available with or without a deductible.

GRADUATED DRIVER'S LICENSE -- License for younger drivers that allows them to improve their skills. Regulations vary by state, but often restrict nighttime driving. Young drivers receive a learner's permit, followed by a provisional license, before they can receive a standard driver's license.

INDEPENDENT AGENT -- Agent who is self-employed, is paid on commission, and represents several insurance companies.

INSURANCE SCORE -- Insurance scores are confidential rankings based on credit information. This includes whether the consumer has made timely payments on loans, the number of open credit card accounts and whether a bankruptcy filing has been made. An insurance score is a measure of how well consumers manage their financial affairs, not of their financial assets. It does not include information about income or race.

Studies have shown that people who manage their money well tend also to manage their most important asset, their home, well. People who manage their money responsibly also tend to handle driving a car responsibly. Some insurance companies use insurance scores as an insurance underwriting and rating tool.

LIABILITY INSURANCE -- Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.

MEDICAL PAYMENTS INSURANCE -- A coverage in which the insurer agrees to reimburse the insured and others up to a certain limit for medical or funeral expenses as a result of bodily injury or death by accident. Payments are without regard to fault.

NO-FAULT -- Auto insurance coverage that pays for each driver's own injuries, regardless of who caused the accident. No-fault varies from state to state. It also refers to an auto liability insurance system that restricts lawsuits to serious cases. Such policies are designed to promote faster reimbursement and to reduce litigation.

NO-PAY, NO-PLAY -- The idea that people who don't buy coverage should not receive benefits. Prohibits uninsured drivers from collecting damages from insured drivers. In most states with this law, uninsured drivers may not sue for noneconomic damages such as pain and suffering. In other states, uninsured drivers are required to pay the equivalent of a large deductible ($10,000) before they can sue for property damages and another large deductible before they can sue for bodily harm.

NOTICE OF LOSS -- A written notice required by insurance companies immediately after an accident or other loss. Part of the standard provisions defining a policyholder's responsibilities after a loss.

ORIGINAL EQUIPMENT MANUFACTURER PARTS/OEM -- Sheet metal auto parts made by the manufacturer of the vehicle.

PERSONAL INJURY PROTECTION COVERAGE/PIP -- Portion of an auto insurance policy that covers the treatment of injuries to the driver and passengers of the policyholder's car.

RESIDUAL MARKET -- Facilities, such as assigned risk plans and FAIR Plans, that exist to provide coverage for those who cannot get it in the regular market. Insurers doing business in a given state generally must participate in these pools. For this reason the residual market is also known as the shared market.

RIDER -- An attachment to an insurance policy that alters the policy's coverage or terms.

SALVAGE -- Damaged property an insurer takes over to reduce its loss after paying a claim. Insurers receive salvage rights over property on which they have paid claims, such as badly damaged cars. Insurers that paid claims on cargoes lost at sea now have the right to recover sunken treasures. Salvage charges are the costs associated with recovering that property.

STACKING -- Practice that increases the money available to pay auto liability claims. In states where this practice is permitted by law, courts may allow policyholders who have several cars insured under a single policy, or multiple vehicles insured under different policies, to add up the limit of liability available for each vehicle.

SUBROGATION -- The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is legally liable for it.

TERRITORIAL RATING -- A method of classifying risks by geographic location to set a fair price for coverage. The location of the insured may have a considerable impact on the cost of losses. The chance of an accident or theft is much higher in an urban area than in a rural one, for example.

TOTAL LOSS -- The condition of an automobile or other property when damage is so extensive that repair costs would exceed the value of the vehicle or property.

UMBRELLA POLICY -- Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.

UNDERINSURANCE -- The result of the policyholder's failure to buy sufficient insurance. An underinsured policyholder may only receive part of the cost of replacing or repairing damaged items covered in the policy.

UNINSURED MOTORISTS COVERAGE -- Portion of an auto insurance policy that protects a policyholder from uninsured and hit-and-run drivers.

[Source: Insurance Information Institute]