Auto Insurance: Terminology You Should Know

What does the average consumer know about car insurance? Well, they know they need it. In 48 states (excluding Virginia and New Hampshire), it’s mandatory by law when owning or leasing a vehicle. 

Beyond that, there’s probably a lot regarding auto insurance missing from the average American’s lexicon. Since auto insurance is unique from other forms of insurance, in that you have to worry about liability for total strangers, their vehicles, and other property, it’s beneficial to possess a comprehensive understanding of all the industry terminology. 

Of course, understanding auto insurance terms is especially important when picking out a policy, as there are a wide variety of options for coverage based on different scenarios and geographical factors. 

Here’s a list of key terms and definitions you should know: 

AUTO INSURANCE POLICY

The policy is a contract between the insured (policyholder) and the insurance carrier, which states all of the coverage details as well as legal terms and conditions. 

A quote is the estimated cost for an auto insurance policy, specifically the monthly premium paid to the insurance carrier. The quote is based on several factors including, but not limited to, the type of policy/coverage, the applicant’s credit and driving history, the type of vehicle being insured, and more. 

The process of determining an insured’s final rate/premium, based on all of the contributing factors listed above, performed by an underwriter on behalf of the insurance carrier. 

As credit score/history is an important factor in an underwriter’s process, a credit-based insurance score is assigned to an applicant, with a higher score helping the applicant receive a better rate on their policy. 

Habits/practices that can reduce a driver’s chances of getting into an accident, to avoid filing claims/increasing your premium. Defensive driving examples include: not speeding, maintaining a safe distance between vehicles, and keeping both hands on the steering wheel. Drivers can also take defensive driving courses to help lower their rate/receive a discount.  

A formal request by the insured to their insurance carrier to cover damages caused by an accident, whether it’s vehicle repairs, injury treatment, or other associated costs. 

An employee from the insurance carrier responsible for settling claims brought on by a claimant/insured (i.e., reviews the claim and determines whether or not it will be paid based on the accident and policy terms.) 

As with other forms of insurance, a deductible must be paid out of pocket by the insured before the insurance carrier will cover costs in a claim. Typically, a policy with a higher deductible will have a lower monthly premium, and vice versa.

The maximum amount an insurer will pay out on a claim/accident, which varies from policy to policy.

Included in the policy terms, exclusions are events/types of damage that an insurance carrier will not cover when claimed. An example can include general wear and tear of a vehicle, or theft if it was not agreed upon in the contract. 

Typically the spouse or family member of a policyholder who is also covered under the policy when using the insured vehicle. 

In tort states, drivers who are deemed “at-fault” for an accident are responsible for covering the damages, although fault is not always fully imposed on one driver (e.g., if a driver is found 60% at fault, they are responsible for 60% of the costs). The majority of states use some form of tort law. 

On the other hand, no-fault states allow policyholders to file claims no matter who is at fault for an accident. No-fault insurance is an umbrella term for insurance coverage that will pay for some or all of your costs sustained from an accident. 

In tort states, liability coverage is typically the minimum requirement for an insurance policy, to cover the costs of another driver if you are found at-fault for the accident. Liability insurance can cover another driver’s (or their passengers’) bodily injuries or property damage to their vehicle. 

Beyond the minimum requirement of liability insurance, a driver can also obtain collision coverage for damage to their vehicle, whether it’s caused by another car, a single vehicle crash, etc. Collision coverage is typically limited to the car’s estimated (i.e., blue book) value. 

With comprehensive coverage, a driver is covered for multiple scenarios other than a collision, which can include: vehicle theft, vandalism, fire, and damage caused by natural disasters.

In the event you are involved with an uninsured or underinsured driver in a tort state, UM/UIM coverage is available to pay for your bodily injury or property damage claims. 

In no-fault states, medical payments coverage is required for claims involving your own bodily injuries or those caused to passengers in your vehicle, up to the policy limit. 

A more comprehensive version of MP coverage that, in addition to covering bodily injury, can also cover claims for lost wages, physical therapy, etc. 

For cars that are leased or bought with a loan (not yet paid in full), gap coverage pays for the difference between the value of a car and what is still owed, if it is either totaled in an accident or stolen/not found.

As you can see, there is a lot to know when it comes to auto insurance. Since every driver is different, as far as the amount of coverage they need, who they need to cover, the rules of their state, and so on, it’s important to know all of these terms when deciding which policy is right for you. Luckily, Fiona, in partnership with Jerry, makes it easy for users to compare offers for car insurance based on their specific needs, and receive competitive quotes from top carriers.