The simple guide to insurance terms
Insurance, by definition, is a contract that transfers the risk of financial loss from an individual or business to an insurance company. Insurance is designed to cover only losses that involve risk (the possibility that a loss will occur). There is always a risk that an accident may occur and you will suffer a loss. Since there is no way to predict such an event, individuals transfer this risk to insurance companies via an agreed-upon contract.
Accident: An incident in which your vehicle is damaged by another vehicle, a fixed object or structure, or by leaving the roadway when no other vehicles are involved.
Actual Cash Value (ACV): This is the cost to replace your vehicle minus depreciation. Mileage, age, and vehicle condition are the three biggest drivers of depreciation, causing the ACV of your car to diminish over time. Insurance companies use this valuation process to determine how much should be paid for your vehicle at the time of a loss.
Agent: A licensed person who helps you find the absolute best rate on your car insurance. Agents can be self-employed, work directly for one insurance company, or be licensed to sell policies from many insurance companies, ensuring you save the most on your coverage.
At-fault: You crashed into someone or something and were deemed at fault for the incident.
Automobile insurance: You pay an insurance company a set monthly amount. In return, the company promises to pay for possible future damage, injury, or loss. In other words, because you know that statistics say you will have an accident at some point, you pay to protect against future damages, instead of paying for the whole thing after the fact.
Binder: This is another term for the Declarations Page normally used by a car dealer. This is what your salesperson will need to see to verify that you have the right insurance before you drive off the lot.
Bodily injury: Any physical injury suffered by a person, whether that’s you or the other driver. So this isn’t about your auto’s ‘body’ but your own body.
Carrier: Another word for an insurance company.
Claim: This is what you file with the insurance company after an accident or incident.
CLUE Report: An official document containing claims information from past insurance providers. CLUE is short for Comprehensive Loss Underwriting Exchange and is generally used in conjunction with an MVR to verify the accuracy of the driving history information that you provided. These two reports are normally run prior to the company taking payment and starting a policy.
Collision insurance: Collision coverage protects against damage to a vehicle in the event of an incident. It’s the sister of comprehensive coverage (see below); they’re almost always sold together.
Comprehensive insurance (other than collision coverage): Comprehensive insurance covers damage to your vehicle in the event of all kinds of unexpected, non-accident-with-another-car types of blunders, including but not limited to weather damage, theft, and fire. You may also see this written as "other than collision" coverage.
Covered loss: This means that the damage caused to your vehicle is covered and will get repaired. (Also called covered peril.)
Declarations page: Often referred to as a "Dec Page" or "Binder," this document will break down the coverage on your policy, how much each individual line of coverage costs, and total premium. This will also include your policy term length, vehicles covered on the policy, drivers covered on the policy, and a lienholder (Bank) if you are financing your vehicle. If you are buying a vehicle, this is the document that your salesperson will need to have faxed or emailed to the dealership before you can drive the car off the lot. Homeowners policies also have a similar declaration page that lays out coverage types and limits.
Deductible: The amount you have to pay before your insurance benefits start kicking in. You’ll agree on this amount when you first buy your policy. For example, a $500 deductible means that that hefty door ding that will cost $350 to repair at the shop is all on your dime, but anything above $500 is covered by the insurance company.
Dwelling Policy: Different than a homeowners policy, a dwelling policy is a type of insurance that covers a secondary home or vacation dwelling. Examples of this include hunting cabins, dwellings currently under construction, vacation homes, and other dwellings that go unoccupied for long stretches.
Exclusions: Things an insurance policy will not cover, which will be listed explicitly. For example, if you live somewhere that rarely experiences earthquakes, earthquakes might be excluded from your policy.
FR-44: Often referred to as a financial responsibility filing, this is a certification that is attached to your insurance policy and filed with the state. An FR-44 may be required if you commit a major driving infraction like a DUI/DWI. Stipulations may require higher limits of liability coverage to obtain an FR-44. You will be notified by the court or the DMV if you are required to obtain an FR-44.
Full coverage: This term is used by auto loan lenders and dealerships to refer to Comprehensive and Collision coverages on your auto policy — it may be required when financing or leasing a vehicle. Since the bank owns your car until you have paid off the balance of your loan, they want to make sure they are "fully covered" if something happens to the vehicle. This doesn't mean that you are fully covered as a driver, just that the actual cash value of the car will be paid if it is totaled due to a covered loss. This does not necessarily include optional coverages like medical, roadside, or rental car reimbursement.
Gap insurance: Gap insurance pays any additional amount that you owe on a car loan if the vehicle is totaled and the payout from the insurance company is less than what you still owe the bank. If your vehicle is valued at $20,000 but your auto loan totals $25,000 then you have a $5,000 gap that would be owed to your finance company if the car were totaled. This type of coverage normally doesn't have a cap so it offers more protection than Loan/Lease Payoff coverage offered through your insurance company but it's normally also quite a bit more expensive. See Loan/Lease Payoff Coverage below.
Grace period: If you are currently insured, this is the amount of time you have to add a new car to your policy. It is a common misunderstanding that drivers with no policy have a grace period after purchasing a car. This is not the case, however, as you must always carry car insurance, even right after your purchase.
Homeowners insurance: This is a type of insurance policy that covers your dwelling and personal belongings. It also provides a certain amount of liability coverage to cover you in case you are held liable for damages or injury to another person. Commonly referred to as "HO" policies, property owners can often choose from the following policy types:
- HO-1: The most basic policy type. Provides no protection for liability or personal property
- HO-2: Broad form policy. Fairly basic, but provides more coverage than HO-1
- HO-3: Special form policy. The most common policy type.
- HO-4: Renters insurance policies are also known by this name.
- HO-5: Comprehensive form policy. This is the most extensive homeowners policy.
- HO-6: Condo insurance policies are also known by this name.
- HO-7: Mobile— or manufactured — home policies are also known by this name.
- HO-8: Modified coverage form. A policy type used for older and hard-to-replace homes.
ID card: This is your proof of insurance and is usually printed on a piece of paper (or more likely a document saved to your smartphone which is perfectly legal in lots of states) to show proof that you have at least the minimum legally required coverage for your particular state. It will normally include the name of the insurance company, the name of the primary driver, the Vehicle Identification Number (VIN), and the start and expiration date of your policy.
Independent agent: A person on a mission to help you find the best car insurance policy and price, no matter which company is offering it. (The Zebra agents are independent agents whose only interest is getting you the best rate and coverage for your needs.)
Insured: This term refers to someone covered on an auto insurance policy as a driver, so that means you! Once you use The Zebra, that is.
Insurer: Your insurance company, i.e., the company backing you up so you don’t have to pay for damages out-of-pocket.
Letter of experience: This document states the length of time you were with a particular insurance company. Most insurance companies offer a discount for being previously insured before starting a new policy and they will request a letter of experience from your old company to verify how long you were actually insured as a condition of keeping the discount.
Liability insurance: In both auto and home insurance policies, liability is what protects you and your assets in the event that you cause an accident or someone is injured on your property. Liability never pays you — it only ever covers those who suffer injury or a loss in which you are personally held liable.
Lienholder: The bank or dealership to whom you make monthly car payments. The lienholder is listed on your declarations page. If your vehicle is totaled, you will receive payment after the bank has been paid if your car is worth more than what you still owe.
Loan/lease payoff coverage: Loan/lease payoff coverage is normally available through an auto insurance company, which will require comprehensive and collision coverage in order to add this option. The coverage varies by company, but it normally only covers an additional 25% of your vehicle's value if the car is totaled and you owe more than the car is worth. Gap insurance will generally cover any remaining amount so that offers much more coverage than what you get through your insurance company with Loan/Lease Payoff. Reference GAP insurance above to understand the difference.
Loss: The unintended damage caused by a peril. This can also describe the amount paid by an insurance company due to a claim.
Loss of use: This is known as coverage D in a homeowners policy, but also applies to auto policies. For homeowners coverage, this covers temporary living arrangements, while auto coverage provides funds for a rental car while your vehicle is being repaired.
Medical payments to others (Med Pay): This is an insurance coverage offered in both homeowners and auto coverage. For auto insurance, Med Pay is similar to personal injury protection in that it covers injuries for those inside your vehicle at the time of an accident. In homeowners insurance, this coverage is referred to as Coverage F, and it provides a small amount of money (usually $1,000 - $5,000) in the event that a guest injures themselves on your property.
Motor Vehicle Report (MVR): An official document that has tons of info about your driving record—crashes, moving and non-moving violations, and your license history from the DMV. This is normally used in addition to your CLUE Report to verify whether you provided accurate information about your driving history. These two reports are normally run prior to the company taking payment to start your policy.
Multi-policy discount: This is a discount offered by most insurance companies for "bundling" or carrying multiple policies with the same company. An example would be insuring your auto and home with the same insurance provider.
No-fault: This term refers to an insurance policy where you are covered for any losses by your own insurance company, regardless of who is at fault in an accident. So if you are in a "No-Fault" state, that means even if the other driver is at fault and you suffer injury, your insurance company pays for your injuries instead of the other driver's insurance.
Non-owners' auto insurance: This is a type of policy that offers minimum state-required auto insurance coverage for people who do not own a vehicle but still need to be insured. If you drive on occasion or your state is requiring that you have an SR22 and you don't own a vehicle then anon-ownerpolicy is right for you.
Personal Injury Protection (PIP) coverage: Required auto coverage in some states, PIP insurance covers the cost of medical bills for you and your passengers in the event of an accident and normally covers work loss of varying percentages or amounts also.
Personal liability coverage:A standard part of most homeowners insurance policies, this coverage protects you and members of your household against damages other than bodily injury or property damage. In most cases, you can increase the limits of your personal liability protection for an added premium.
Physical damage coverage: This term defines the combination of comprehensive and collision coverage and is more accurate than using "full coverage".
Policy: This is what you purchase from an insurance company: the specific agreement you and the company come to, including how much you’ll pay, what is covered, and the length of your policy term.
Policy term: The length of coverage provided on a policy. Policy terms are generally annual (12-month) or bi-annual (6-month) and at the expiration of the of the term the insured has the option to renew the policy, switch to a different company, or let the insurance lapse (the last one is not recommended if you like your rates to be as low as possible).
Premium: What you pay to the insurance company each month, i.e., your bill.
Prior insurance: If you have at least six months of prior insurance coverage without a lapse, you may qualify for a discount. The longer you maintain auto insurance coverage, the better the discount will be when you shop for a new policy. And to prove your length of prior insurance, your new provider will ask for a Letter of Experience to keep the discount applied.
Quote: The insurance company’s price offer for a selected policy.
Renewal: This term refers to the period of time when your current policy is expiring and your new policy term is set to begin normally every six or twelve months. This is generally when your insurance company will reevaluate your policy risk so you may see your rate increase, decrease, or stay the same.
Renters insurance: Also known as an HO-4 policy, this is insurance that covers renters for their home contents and general liability.
Replacement Cost Value: A coverage option that replaces your home, car, or other personal property without factoring in depreciation, meaning that the insurance company will pay out enough to fully replace your property.
SR-22: Also called a financial responsibility filing, an SR-22 is not insurance but a document that is attached to your auto insurance policy that gets filed with your state's DMV. An SR-22 is normally required by your state to reinstate your license but may not be required in every suspension situation. You would be notified at court or via snail mail if you were required to carry this filing on your insurance.
SR-50: Only applies to the state of Indiana. This is basically a form that your insurance provider fills out and sends to the state to verify your insurance start and end date. If you are being told you need one, call your insurance company. Your insurer should be able to file the form within a few minutes.
State minimum: This describes the minimum insurance coverage required to drive legally in a state. Some states require only liability insurance as their minimum, while others require additional coverage like Uninsured Motorist or PIP coverage. Ask for "state minimum" coverage to ensure your agent sets you up with the correct policy.
Umbrella insurance: This additional liability coverage applies when you exceed the liability portion of your home insurance or auto insurance. This coverage helps to protect you in the event of a lawsuit or a major insurance claim filed against you.
Underwriting: The process of evaluating the potential risk of offering insurance to a driver.
Uninsured/underinsured motorist coverage: These policy options protect you from the damage done to yourself or your car by people who do not have insurance (uninsured) or do not have enough insurance (underinsured).
Vehicle Identification Number (VIN): This is your car’s serial number. The number can usually be found where the dashboard meets the front window, on the inside of the driver’s side door, or on a previous insurance policy document.
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