Auto Insurance Glossary

An auto insurance glossary defines common car insurance terms in plain language to help explain complex industry terminologies. Understanding these terms helps drivers make informed decisions when choosing coverage, filing claims or reviewing policies, potentially saving hundreds of dollars while ensuring adequate protection.

An accident is an unexpected event causing damage or injury. In auto insurance, this means a collision or incident involving a vehicle that may trigger coverage and affect your premium for three to five years, depending on severity and fault.

Accident forgiveness is an optional feature some insurers offer that keeps your first at-fault accident from raising your premium. It's usually available to drivers with clean records and may cost extra or be included as a loyalty benefit.

The actual cash value is your car's value at the time of a loss, accounting for depreciation. It represents what your car was worth just before the accident. It's how insurers typically determine payouts for totaled vehicles, often 20% to 30% less than what you paid for the vehicle.

An actuary uses statistics and math to evaluate risk, help insurance companies set rates and predict future claims. These specialists analyze driving patterns, claims history and demographic data to determine pricing models that affect premiums.

An additional insured is someone added to an insurance policy who also receives coverage under that policy. This often includes family members, business partners or lienholders with a financial interest in protecting the insured vehicle.

An adjuster investigates insurance claims to determine how much the insurer should pay. They assess damages, review documents and sometimes negotiate settlements. Adjusters are your main contact during the claims process and influence your compensation amount.

An agent is a licensed professional who sells insurance policies. They can be independent (representing multiple companies) or captive (representing one company) and can help you understand coverage options, apply discounts and file claims efficiently.

An agreed price is the repair cost that the insurer and repair shop settle on after you file a claim. This negotiated amount determines what your insurance company will pay. If you choose a shop outside your insurer's network, you might have to pay any difference out of pocket.

An amendment is a formal change to an existing policy that alters its terms or coverage. These modifications can add protection, change deductibles or update vehicle information. Depending on the change, amendments may increase or decrease your premium.

An application is the form a driver fills out when requesting insurance coverage. It collects information needed to underwrite a policy, including driving history, vehicle details and personal data that directly influences eligibility and rate.

An appraisal evaluates a vehicle's value or damage and is typically used to determine claim payments. This professional assessment helps resolve disputes about a vehicle's worth or repair costs and can be requested by the policyholder or insurer.

Arbitration resolves disputes between a driver and their insurance company without going to court. This legally binding process typically costs less and moves faster than litigation. A neutral third party makes the final decision about claim settlements.

Assigned risk refers to a high-risk driver who can't get coverage through standard insurers and is assigned to an insurer by the state. These policies typically cost 50% to 100% more than standard coverage but ensure drivers with serious violations can maintain legal coverage.

Assured is another term for the insured person or party on an insurance policy. This person receives the policy benefits and must meet the policy's terms and conditions, including paying premiums on time.

At-fault means a driver is legally responsible for causing an accident, which can affect premiums and liability. Being found at fault typically results in a 20% to 40% premium increase for several years. It also makes you financially responsible for damages to others.

Auto damage refers to physical harm to a vehicle from a collision, vandalism or another event. The extent of damage determines whether your vehicle can be repaired or must be declared a total loss, affecting your claim settlement amount.

Auto insurance is a contract between a driver and an insurer that provides financial protection for accidents, theft or other vehicle-related losses. This coverage protects your assets from lawsuits and helps repair or replace damaged vehicles. Policies typically renew every six or 12 months.

The benchmark rate is the base rate that regulators or insurers set to guide premium pricing. Insurers adjust this rate using your personal risk factors, location and vehicle type to calculate your premium. The industry may update these rates yearly based on claims data.

A binder is a temporary insurance contract that proves coverage before your official policy is issued. It protects you during the underwriting process and lasts 30 to 90 days until you receive your formal policy.

Bodily injury liability covers medical expenses and legal fees if you're at fault in an accident injuring someone. This mandatory coverage in most states is typically written as two numbers (e.g., 100/300, meaning $100,000 per person and $300,000 per accident) and protects your assets from costly lawsuits.

Cancellation is when an insurance policy ends before its scheduled date, either by the insurer or the policyholder. If you cancel early, you may receive a partial premium refund. Insurers typically cancel policies because of missed payments or fraud.

A carrier is an insurance company that provides coverage and underwrites policies. These financial institutions assess risk, process claims and manage reserves to ensure they can pay out claims. Their financial strength ratings indicate their ability to meet long-term obligations.

A catastrophe is a major disaster, such as a hurricane or earthquake, that causes extensive damage and leads to many insurance claims. These events may trigger special claim handling procedures and sometimes come with specific deductibles of 1% to 5% of the car's value for certain types of coverage.

This document proves a driver has the required insurance to drive legally, often through SR-22 filings. It's usually required after serious violations like DUIs. Drivers typically must maintain these certificates for three to five years, which may increase premiums by 30% or more.

A certificate of satisfaction confirms that the policyholder agrees with the insurer's repair or claim settlement. This document releases the insurer from further obligations related to the claim and helps prevent future disputes about the quality or completeness of repairs.

A claim is a formal request to your insurance company for payment after a covered loss. This process includes assessing damage, determining coverage and making payment. How quickly you receive payment and how much you get depends on your policy terms and how complex your claim is.

A claim examiner reviews insurance claims for accuracy and eligibility before processing. They verify coverage, investigate circumstances and ensure claims follow policy terms. Their work directly affects whether your claim is approved and how much money you receive.

Claim history is the record of insurance claims you've filed. Insurers use this information to assess your risk level and set your rates. Drivers who file frequent or high-value claims may pay more for insurance.

A claimant is the person making a claim against an insurance policy, either the insured or a third party. They must document damage, provide statements and sometimes negotiate settlements to receive fair compensation for their losses.

Collision coverage pays for damage to your vehicle from a crash with another car or object, regardless of who's at fault. This optional protection typically includes a deductible of $500 to $1,000. It's required for newer vehicles or those with outstanding loans.

Comparative negligence assigns a percentage of fault to each driver in an accident, which affects claim payouts. In states following this rule, your compensation may be reduced by your percentage of fault. This makes accident documentation and witness statements important for protecting your interests.

Comprehensive coverage pays for noncollision damage to your car, such as theft, fire or natural disasters. Sometimes called "other than collision," it covers events beyond your control and typically costs 15% to 30% less than collision coverage for the same vehicle.

A condition is a requirement in your insurance policy that must be met for coverage to apply. These obligations include reporting accidents promptly, cooperating during investigations and allowing inspections. If you fail to meet these conditions, your claims might be denied.

A contract or an insurance policy is a legally binding agreement between the insurer and policyholder that outlines coverage terms. It specifies what's covered, excluded and required of both parties. The declarations page, coverage forms and endorsements make up the complete contract.

Contributory negligence means you may not recover damages if you're found even slightly at fault in an accident. This strict standard, used in only a few states, makes defensive driving and comprehensive coverage especially important. Even minor faults can eliminate your ability to collect from other parties.

Coverage means the specific protections your insurance policy provides. These protections are grouped by type (liability, collision, comprehensive) and include defined limits and exclusions. These details determine what situations and amounts will be paid for covered losses.

Damages are the monetary value of physical injury or property loss caused by an accident. These costs include vehicle repairs, medical expenses, lost wages and sometimes pain and suffering. The calculation method varies based on injury severity and state laws.

The declarations page outlines the main details of your policy, including coverage limits, deductibles and the insured vehicle. This key document serves as a quick reference for your coverage. Review it carefully at each renewal to ensure it reflects your current needs and situation.

A deductible is the amount you pay out of pocket before insurance covers a claim. Selecting a higher deductible, usually between $500 and $2,000, reduces your premium but increases your out-of-pocket costs during a claim. It helps balance monthly expenses with potential emergency costs.

Depreciation is how much a vehicle loses in value over time due to use, age and miles driven. This decline averages 15% to 25% in the first year and 15% to 18% each year after. Depreciation directly affects claim payouts for total losses since insurance typically covers actual cash value, not replacement cost.

Diminished value is the drop in a vehicle's market value after it's been damaged and repaired. Even when repairs fully restore the car's function, its accident history can lower its resale value. Some policies cover this loss, but many don't.

Discounts lower your premium based on good driving, bundling or vehicle safety features. These savings range from 5% to 25%, including multi-policy, good student, safe driver or anti-theft discounts. It's worth asking your agent about all available discounts.

Some insurers set up drive-in locations where drivers can bring their cars for damage inspections after an accident. These facilities streamline the claims process by providing quick, standardized assessments and can often issue claim payments on the spot for minor damage.

Earned premium is the portion of your premium the insurer has "earned" based on how long your policy has been in effect. If you cancel midterm, it determines your refund amount, with the unearned portion (minus any cancellation fees) returned to you.

The effective date is the day your auto insurance coverage begins. This date matters when you switch policies or buy a car to avoid gaps in coverage.

This coverage helps with roadside assistance services such as towing, flat tire repair or jump-starts. It typically costs $5 to $15 per six-month period. This affordable add-on can save you $50 to $100 per service call and prevent you from being stranded in unsafe situations.

An endorsement, also called a rider, is an optional add-on that changes or extends your coverage. These policy changes can protect custom equipment, pay for rental cars or cover the gap between what you owe and your car is worth. They tailor your policy to your needs beyond standard protections.

An estimate is a written assessment of the cost to repair vehicle damage. It includes parts, labor and materials needed for repairs. Insurers typically require one or more estimates before approving claim payments for vehicle damage.

An exclusion is a specific situation or item not covered by your insurance policy. Common exclusions include intentional damage, mechanical breakdowns and racing activities. These limitations are clearly stated in your policy to prevent misunderstandings during claims.

The expiration date is when your current policy ends unless renewed. Policies often renew automatically if you’ve arranged continuous coverage. Missing payments near this date can lead to a lapse in coverage and higher rates.

The first party is the policyholder or insured person under the contract. This person has direct rights under the policy, including filing claims, receiving payments and making coverage changes. Their responsibilities include paying premiums and reporting accurate information.

Gap insurance covers the difference between what you owe on your car loan or lease and the car's actual cash value if it's totaled. This protection costs about $20 to $40 yearly. It's especially valuable for new vehicles, which lose 20% to 30% of their value in the first year while loan balances decrease more slowly.

Hazards like icy roads and poor lighting increase the likelihood of a loss. Insurers assess these risk factors when determining rates and coverage eligibility. Some hazards, such as regular mountain driving or street parking in high-theft areas, may increase your premiums.

Indemnity means the insurance company compensates you to restore your financial situation to what it was before the accident or damage. It covers repairs or replacements at their current value but doesn’t pay extra for upgrades or improvements

Insurable interest means you'd suffer a financial loss if the insured car were damaged or lost. This legal requirement for valid insurance prevents people from profiting from insurance on property they don't own. You typically have insurable interest if you own, lease or have a loan on a vehicle.

Insurance fraud involves false claims or misrepresentations made to gain benefits from a policy. This criminal offense ranges from exaggerating damage to staging accidents. It costs the industry $40 billion yearly and leads to higher premiums for all drivers.

An insurance ID card proves you have the required coverage and is usually needed for driving or registering a car. This document shows your policy number, effective dates and covered vehicles. Keep it in your vehicle to show during traffic stops or accidents.

Insurance scores are credit-based numbers insurers use to determine your premium. This rating measures how likely you are to file claims based on your financial behaviors and can influence rates by 20% to 50%. Better credit typically results in lower premiums in most states.

The insured is the person or entity covered under the auto insurance policy. This individual or organization receives the protection and benefits outlined in the policy and must follow policy terms to maintain coverage.

The insurer is the company that provides your coverage. This regulated financial institution collects premiums, assesses risks, processes claims and maintains financial reserves to meet its obligations to policyholders during catastrophic events.

A lapse is a break in auto insurance coverage, usually caused by missed payments or nonrenewal. This gap can lead to legal penalties, suspended vehicle registration and 10% to 30% higher rates when you get insurance again. Maintaining continuous coverage is crucial to avoid these issues.

Legal liability means you're legally responsible for harming others or their property. This can result in lawsuits and financial penalties, so most states require liability insurance. This coverage protects drivers from claims that could cause financial hardship.

A liability examiner reviews claims to decide who is at fault and financially responsible. These specialists study police reports, statements and evidence to determine who caused an accident. Their decision affects whose insurance will pay and whether your rates will increase.

Liability coverage pays for injuries and damage you cause to others in an accident. This required protection shields your assets from lawsuits and typically includes separate limits for bodily injury and property damage.

A lien is a legal claim on a vehicle, typically held by a lender until you pay off your loan. The lienholder may require comprehensive and collision coverage and must be listed as a loss payee on claims checks.

A lienholder is the lender or financial institution with a financial interest in your vehicle. This entity must be listed on your policy and notified of coverage changes. Claims payments for major damage often require its endorsement to protect its investment.

A loss is a damage or injury that leads to an insurance claim. To qualify for payment, the event must fall under covered perils. The frequency and severity of past losses can directly affect your future premiums.

Loss of use coverage pays for rental cars, rideshares or public transportation while your vehicle is being repaired after a covered loss. It helps you stay mobile during the claims process.

Material damage refers to physical harm to a vehicle or property. Adjusters evaluate this damage, from minor scratches to major structural issues, to estimate repair costs and determine if the vehicle can be safely restored to its pre-accident condition.

This insurance covers repairs for mechanical failures not caused by accidents. Like an extended warranty, it is optional and covers gaps left by standard policies, which usually exclude wear and tear or mechanical issues. It can save you thousands on major repairs.

A medical claim examiner reviews injury-related medical expenses and documents. These specialists check if treatments are necessary, reasonably priced and related to the accident. Their assessment determines how much of your medical bills will be covered.

This coverage pays you and your passengers for medical expenses after an accident, regardless of who caused it. This optional protection, typically available in amounts from $1,000 to $25,000, supplements health insurance by covering deductibles and copays without determining fault.

Misrepresentation means providing false or misleading information when applying for insurance. This serious issue can void your coverage, whether you did it intentionally or by accident. It can lead to denied claims and canceled policies, so it's essential to accurately share your driving history and how you use your vehicle.

Motorcycle insurance covers liability and physical damage for motorcycles and similar vehicles. This specialized policy addresses the unique risks of two-wheeled vehicles, with rates reflecting riders' higher injury potential and seasonal use patterns.

The named insured is the primary person on an insurance policy. They can make changes, file claims and receive notifications. Other household members are often covered but typically have limited policy management rights.

Negligence is the failure to exercise reasonable care, leading to damage or injury. It's a key factor in determining fault in most accidents, as drivers are expected to follow traffic laws and operate vehicles safely to avoid liability.

No-fault insurance pays your medical expenses and lost wages after an accident, regardless of who caused it. This system, used in about a dozen states, speeds up injury payments by removing the need to prove fault for basic medical claims. However, it may limit your right to sue except for serious injuries.

A non-owner policy gives liability coverage to drivers who don't own cars but sometimes drive others' vehicles. This affordable option ($200 to $500 yearly) protects against liability claims when borrowing or renting cars and helps maintain continuous insurance history.

Nonrenewal means your insurance company decides not to continue your policy when it expires. The company must give you advance notice (typically 30 to 60 days). This may happen because of your claims history, driving violations or company policy changes. You'll need to find new coverage before your protection ends.

An occurrence is a single event that results in a claim. Insurance policies define what counts as a separate occurrence, which affects deductible application and policy limits. Multiple damages from the same cause are typically treated as one occurrence.

Overseas insurance covers vehicles while traveling or stationed outside the U.S. This specialized protection addresses the unique risks of international driving, including different liability standards and repair costs in foreign countries.

Paperless billing sends your bills and policy documents electronically instead of by mail. This environmentally friendly option often includes a small discount (1% to 3%) and provides faster document delivery while reducing paper clutter.

Payment plans let you break your premium into monthly or quarterly installments. These options typically include a small service fee ($3 to $10 per payment) but make coverage more affordable by spreading costs over time instead of requiring one large payment.

Payment recovery happens when your insurer seeks money from another party responsible for your loss. This behind-the-scenes process, also called subrogation, can result in your deductible being refunded if your insurer successfully collects from the at-fault party.

The per-claim limit is the maximum amount your insurer will pay for a single covered incident. This differs from aggregate limits, which cap the total amount payable over the policy term. Understanding this limit is crucial when choosing your coverage levels.

A peril is the specific cause of a loss, like theft or fire. Insurance policies may cover all perils except those excluded (comprehensive coverage) or only those listed as named perils. Knowing these terms helps you understand what events are covered.

Personal injury protection covers medical expenses, lost income and other costs after an accident, regardless of fault. Mandatory in no-fault states and optional elsewhere, it provides fast payments for injuries and may cover services not included in health insurance.

Personal property includes items inside your vehicle that aren’t part of the car itself. Standard policies typically cover these belongings up to $200 to $500, while higher-value items like electronics are often better covered by homeowners or renters insurance.

Physical damage refers to harm to your vehicle’s body, engine or systems. It includes collision and comprehensive claims, with coverage depending on the cause of damage and the deductible.

A policy is a contract outlining your auto insurance coverage. This legal document includes declarations, coverages, exclusions and conditions that together define your protection and obligations. When all forms are included, it typically runs 20 to 50 pages.

A policy change modifies your coverage terms, limits or listed drivers. These adjustments can be made midterm and may increase or decrease your premium depending on whether they add risk (e.g., adding a teen driver) or reduce it (e.g., increasing deductibles).

The policy period is the timeframe when your insurance is active. It typically runs for six or twelve months and offers guaranteed rates. However, rates may change at renewal based on claims, violations or industry-wide rate changes.

The policyholder owns and manages the insurance policy. They're responsible for paying premiums, receiving notifications and making coverage changes or cancellations.

A policy limit is the maximum amount an insurer will pay for a covered loss. Limits apply separately to different coverage types, including per-person, per-accident or total aggregate caps on financial protection.

Pre-accident condition refers to the state of your vehicle before damage occurred. Insurers are required to restore the vehicle to this condition, excluding any pre-existing damage or wear not caused by the covered incident.

A premium is the amount you pay for insurance coverage. It’s based on factors like driving history, vehicle type and location. You can pay it in full or through installments, and it reflects the risk you pose to the insurer.

Primary insurance pays first when you have multiple policies. It covers claims before any secondary or excess policies, with rules to prevent double recovery and ensure efficient claims handling.

Proof of loss is documentation submitted to support a claim showing what was lost or damaged. It may include photos, repair estimates and purchase receipts and helps establish the claim’s value. Proof of loss must typically be provided within specified timeframes.

Property damage liability pays for repairs to others' property you damage in an accident. This required coverage protects you when you damage another vehicle, building or fixed object. State minimums typically range from $5,000 to $25,000, but these amounts may not cover costly claims.

Proximate cause is the event directly responsible for a loss or injury. It helps determine coverage by establishing whether the damage resulted from a covered peril or an excluded cause, which can affect whether your claim is paid.

A quote is an estimate of your insurance premium based on your information. This personalized calculation reflects your risk profile and coverage selections, with final rates sometimes changing if verification reveals different information than initially provided.

A rate is the pricing factor used to determine your insurance premium. It combines base rates with individual risk factors and is filed with state regulators to ensure it’s fair and actuarially sound.

Insurers use a rating plan to set premiums based on risk factors. This system considers factors like driving history, vehicle type and location to generate personalized pricing, with each company emphasizing different elements in its calculations.

Reinspection is a follow-up check of a vehicle's damage or repairs. This quality control step makes sure repairs are done correctly and match the approved estimate. It protects you and the insurer from poor workmanship.

Reinstatement is the process of restoring a canceled policy. It may require payment of past-due premiums and fees, allowing coverage to continue without a new application. However, it may not cover losses that occurred during the lapsed period.

A release is a legal document that waives further claims once a settlement is accepted. Typically required before receiving a claim payment for a total loss or injury, it prevents you from seeking additional compensation for the same incident later.

The renewal date marks when your current insurance policy ends, and a new term can begin. It prompts a review of your risk profile and premium. Make policy changes and shop for better rates a few weeks before renewal to avoid gaps in coverage.

This coverage pays for a rental car while your vehicle is being repaired after a covered loss. Typically costing $2 to $5 monthly with limits like $30 per day for up to 30 days, this affordable add-on prevents out-of-pocket transportation costs during lengthy repairs.

The retained limit is the amount you pay before umbrella insurance starts. It usually matches your regular policy limits and helps connect your primary and extra coverage for big liability claims.

Insurers often guarantee repairs when you use their approved shops. This means they stand behind the work for as long as you own the car, protecting you from poor repairs.

Risk is the chance of loss or damage that insurers measure to set prices. They use statistics and past data to figure out these chances. Your personal risk factors determine your rate.

Salvage is what's left of a totaled vehicle that can be auctioned. This leftover value, usually 20% to 40% of the car's worth before the accident, gets subtracted from your payment when the insurer takes ownership of your totaled car.

An SR-22 is a form some drivers must file to prove they have minimum insurance after a serious driving offense. This certificate is required for violations like DUIs or driving without insurance. It typically must be kept for three to five years and tells insurers the driver is high-risk.

Subrogation happens when your insurer seeks payment from the at-fault party's insurer after paying your claim. This behind-the-scenes process can refund your deductible and protect your premium from increases when someone else causes the accident.

A surcharge is an extra charge added to your premium, usually after an accident or traffic violation. This penalty typically adds 20% to 40% to your base rate and remains in effect for three to five years, gradually decreasing in impact over time.

Surplus lines are insurance policies sold by non-state-licensed insurers for high-risk or unusual coverage needs. These special markets serve drivers who can't get coverage from regular insurance companies because of extreme risk factors. Unlike standard insurance, these policies aren't protected by state guarantee funds.

Theft is the unauthorized taking of your vehicle or personal property. For a comprehensive coverage claim, you'll need a police report and proof of ownership. The settlement is based on the vehicle's actual cash value or the cost of replacing stolen items.

A third party is someone other than the insured or insurer who can file a claim under the policy. Typically, these are drivers or property owners you've damaged in an accident. They have rights under your liability coverage, even though they aren't part of your insurance contract.

A tort is a harmful action that legally holds someone responsible for causing injury or property damage. This concept is the basis for claims when someone is harmed. The law determines who's at fault and how much money the injured person should receive after an accident.

A total loss occurs when repair costs exceed your vehicle's actual cash value. Insurers declare total loss when repairs reach 70% to 80% of pre-accident value. Instead of paying for repairs, the insurer offers a market value settlement and typically takes ownership of the damaged vehicle.

This coverage pays for towing and roadside services when your car breaks down. It costs about $5 to $15 for six months and saves you money on emergency service calls for problems like lockouts, dead batteries or mechanical failures.

Umbrella insurance adds extra liability protection beyond your regular policy limits. This added coverage, usually sold in $1 million increments for $150 to $300 per year, helps protect your assets from major lawsuits.

Underwriting is how insurance companies assess risk and set your rates. They review your application, driving record, credit history and vehicle details to decide your price and coverage options.

This coverage pays for injuries or property damage when an at-fault driver has no or too little insurance. Though optional in most states, this protection is highly recommended. It helps when the responsible driver can't pay, shielding you from others' financial irresponsibility.

The Vehicle Identification Number (VIN) is a unique 17-digit code that identifies your car. This ID shows your vehicle's maker, features and history. It helps insurers correctly rate your vehicle and process claims for the right model.

Understanding auto insurance terms helps drivers manage coverage and communicate with their insurer more effectively. Knowing these definitions makes reviewing your policy or filing a claim easier and can help you save money by making informed decisions about coverage and claims.

These frequently asked questions clarify common car insurance terms to help you better understand your policy and coverage options.