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UPDATED: Jul 24, 2018
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Car insurance terms can certainly be confusing when you’re sitting down to compare quotes from different companies.
For some people, not understanding the insurance industry vocabulary is enough to make them throw their hands up in frustration.
So to help you get a better handle on searching for your car insurance, we’ve put together a list of common car insurance terms along with their meanings.
To make looking for car insurance terms on this page as easy as possible, we categorized them under various headings.
Keep in mind that these terms and definitions are not intended to be a substitute for advice you would receive from an insurance company representative.
They are intended merely to help consumers learn a little bit more about the car insurance industry and make better sense of their quotes and eventual policy documents.
Your search for auto insurance quotes has not begun until you enter your ZIP code into our FREE search tool on this page!
Different Types of Insurance
With the exception of Iowa, every state union requires drivers to obtain proof of financial responsibility prior to registering and driving a vehicle. Most of us fulfill the financial responsibility required by purchasing liability insurance.
– Liability Insurance
Liability insurance is based on the term “liable,” which is defined by Merriam Webster’s Online Dictionary as a state of being responsible as a matter of law or obligation.
In other words, liability insurance pays for injuries and damage you are responsible for after an accident you cause. The liability payments only apply to your victims, not yourself, or your own vehicle.
Collision and comprehensive insurance usually go hand-in-hand. As the Texas Department of Insurance explains, both of these pay to repair or replace your vehicle regardless of how the damage occurred.
Collision insurance covers damage incurred during traffic accidents on public roads while comprehensive covers damage from animals, weather, and theft.
This insurance is meant to cover the difference between what a driver owes on his vehicle and what the vehicle is worth on the open market.
This type of insurance is beneficial within the first couple of years of a new car loan because new cars lose about 20 percent of their value within the first year of ownership.
Without gap insurance, a driver whose vehicle was totaled would be required to pay the difference between what he owed and what the insurance company pays out.
Also known simply as UM, this insurance covers you in the event you are hit by someone who has little or no liability insurance. Some states require drivers to carry this insurance as part of their standard liability policies.
– Personal Injury Protection (PIP)
Personal injury protection is optional in most states, mandatory in a handful of others. This type of insurance pays for your medical bills in the event someone without liability insurance causes an accident in which you are injured.
Usually, PIP only kicks in after your own health insurance reaches its limits.
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– Declaration Pages
Insurance companies in the United States are required by law to spell out exactly what kind of insurance coverage they are providing along with all of its limits, deductibles, and consumer responsibilities.
Because car insurance is considered a legal contract between carrier and subscriber, these declaration pages serve as the written proof of that contract.
A deductible is a certain amount of money the consumer agrees to pay toward any insurance claims he makes.
For example, a $500 deductible on collision insurance means the customer would pay the first $500 of a $5,000 bill, while the insurance company would pay the other $4,500.
– Coverage Limit
A coverage limit is simply a cap on the total amount an insurance company will pay.
A good example would be a $10,000 property damage limit on your liability policy. If you had an accident that caused $15,000 property damage your insurance company would only pay $10,000. You would be responsible for the remainder.
A rider is a written addition included in an insurance policy to either expand or reduce coverage; it’s also known as an endorsement. One example would be expanded coverage that includes full replacement of auto glass under any circumstances.
– Replacement Value
This is a term used to describe how much your insurance company will pay after a collision or comprehensive claim.
Replacement value states that the insurance company will pay to repair or replace your vehicle with one of similar make, model, and year.
Replacement value diminishes as our car ages because that car is worth less over time. Most insurance companies determine the replacement value based on numbers from the NADA or Kelly Blue Book.
– Actual Cash Value
This is a term not typically used in auto insurance because drivers can accomplish the same thing simply by adding the appropriate riders their policy.
Nonetheless, when the term is used it implies an insurance company will pay to repair or replace a vehicle based on its real cash value.
To make it easier to understand think of it in terms of a classic muscle car that has been restored and customized. Replacement value would not be high to replace the car because it’s so old.
But actual cash value takes into consideration all of the money and labor invested in the car’s restoration.
The premium is the amount of money a customer pays to the insurance company in order to purchase an insurance policy. The easiest way to remember a premium is to think of it in terms of a bill for services rendered.
A surcharge is an extra fee added to your normal premium payments. Surcharges are sometimes added for administrative purposes or to indirectly increase your premiums after you have an accident you’re at fault for.
– Policy Period
The policy period, sometimes known as the policy term, is simply the length of time your current car insurance policy is in force.
The policy period begins on the date your insurance was first put in force and expires usually six or twelve months later.
Accident and Claim Terms
– At Fault Accident
In states without no-fault laws, a court must assign blame for an accident if the insurance companies involved cannot work it out among themselves.
An at fault accident is one you are involved in, and which more than 50 percent of the fault is placed on you.
Some states, like New York, operate under a system of no-fault insurance.
This means that each party involved in the accident, with the exception of liability issues or personal injury claims exceeding a certain dollar amount, is covered by his own insurance policies regardless of who is responsible for it.
No fault insurance laws were put in place to reduce the number of personal injury lawsuits winding up in the courts.
– Claim Form
The claim form is simply the paperwork a driver fills out when filing a claim of any sort. It can be as simple as a single page a more complicated, multi-page document.
– Accident Report
The accident report should not be confused with the claim form. An accident report is a document completed by a police officer or insurance investigator who compiles evidence and speaks to witnesses after a crash.
– Personal Injury Lawsuit
A personal injury lawsuit is a civil suit filed by the victim of an accident against those responsible. It usually consists of a combination of punitive and compensatory damages.
– Compensatory Damages
Also known as “pain and suffering,” compensatory damages are meant to pay for things like medical bills, lost wages, and other consequences that might arise as a result of a victim’s injuries.
Some states limit compensatory damages to prevent excessive jury awards.
– Punitive Damages
Punitive damages are the amount of money that must be paid as punishment for negligence or criminal action; they are awarded above and beyond pain and suffering. Most states do not cap punitive damages.
– Insurance ID Card
In some states car insurance companies issue a small card which can be carried in the driver’s glove compartment or submitted to the DMV where required.
These cards are known as insurance ID cards; they usually qualify as proof of financial responsibility.
The SR-22 is an affidavit of sorts filed on behalf of a driver to prove he has liability insurance.
Not all states have SR-22 Laws in place, but among those that do the requirement for filing, the SR-22 is usually the result of multiple insurance lapses, DWI/DUI convictions, and other serious offenses.
Virginia and Florida have an additional affidavit known as the FR-44. If a driver in one of these states is forced to file the SR-22 because of a drug or alcohol-related driving offense he must also file the FR-44.
This additional form is further proof that the driver is carrying adequate liability insurance and has the financial means to keep it in place throughout the term of the affidavit (normally three years).
Now that you’re familiar with common car insurance terms enter your ZIP code into the FREE search tool to begin your hunt for the best auto insurance policy you can find!