Car Insurance Glossary

An auto insurance policy can be a confusing document, especially for first-time buyers. Understanding the terminology and the types of insurance offered can mean the difference between being fully covered for a loss and owing substantial amounts even after the insurance company settles the claim. While every driver hopes to never need to file a claim, should the worst happen, it is important to know what is covered and to what extent. The best time to accumulate this information is before buying the policy rather than after an accident.

Bodily Injury: Bodily injury is a form of liability coverage. Each state establishes the minimum limits of liability insurance a driver must maintain to legally operate or register a vehicle. These limits are normally expressed as three numbers, the first two of which apply to bodily injury, as in “15/25/15.” In this example, the minimum coverage is $15,000 for bodily injuries to one person in an accident or $25,000 for bodily injuries to two or more people injured in the same accident when the policyholder is at fault. The third number involves property damage. These are the minimum amount of coverage the state requires, but the numbers reflect the maximum amounts the insurance company will pay. Since most states have very low minimum requirements, the amounts may be insufficient to cover all damages incurred in an accident. Additional coverage will increase premiums, but might be worth considering, particularly by those with assets to protect, such as savings accounts, since the injured party can sue to recover any losses not addressed by the policy. It should also be noted that liability insurance covers only others, not the medical expenses or repair costs of the insured driver.

Collision: Collision pays for repairs to the covered driver’s car when involved in an accident. While state laws and insurance company policies vary, collision typically covers repairs to the body, drive train and electrical system regardless of which driver caused the accident. Should the other driver be found at fault, the insurance company will then seek to collect from his or her insurance company. Collision coverage is typically subject to a deductible. Most lenders will require this type of coverage until the loan is paid in full, after which it is optional and not legally required.

Comprehensive: Comprehensive reimburses the vehicle owner for damages to his car that are not caused by an accident. Acts of vandalism, hail damage, windshield breakage from flying debris and theft of the vehicle are examples of incidents normally covered by comprehensive. Policyholders should read the clause carefully to determine any types of loss that may be specifically excluded, such as from flooding or other act of nature. Comprehensive may or may not be supplanted by homeowner’s insurance when the loss can be covered by either policy, such as when a home fire destroys a garaged car. Like comprehensive, collision is normally subject to a deductible and is typically required by a lender while there is still a balance owed on the loan. If there is no lien holder, the coverage is optional and not legally mandated.

Covered Driver: When an insurance policy is written, it typically includes all members of the policyholders immediate family who are licensed drivers and who reside in the same household. Some policies also include anyone to whom the policyholder has given permission to drive her vehicle, while others limit coverage of unlisted drivers to those who are acting on her specific request. Because of the wide variance, it is important to read the clause carefully to determine who will be considered a covered driver and for what types of coverage.

Deductible: The deductible is the amount the policyholder must pay out-of-pocket before the insurance company will begin to cover a loss. It most often applies to collision and comprehensive insurance. As an example, if vandals cause $1,000 of damage to a vehicle and the deductible is $500, the policyholder and the insurance company will each pay half. If the damage is $400 and the deductible is $500, the insurance company will pay nothing and the policyholder will be responsible for the repair. Policies with higher deductibles generally have lower premiums. However, if a vehicle has a loan balance, the lender may dictate the amount of the deductible allowed.

Liability Coverage: Each state has established the minimum amounts of liability coverage required to legally register a vehicle, drive it on public roads, and, in some states, park on public streets. Proof of liability must be provided if requested by a law enforcement officer or if the driver is involved in an accident. In most states, proof must also be provided to obtain or renew a vehicle’s registration. Liability consists of bodily injury and property damage, but does not cover the insured driver, only those injured as a result of his or her actions.

Lien Holder: As it pertains to auto insurance, the lien holder is the bank or lending company that has financed the vehicle. Until the note is paid, the lien holder is given a stake in the insurance payments issued for a loss. Settlement checks may be issued jointly to both the policyholder and the lender or strictly to the lender. As an example, if a car is stolen and damaged beyond repair, the check for the value of the vehicle may be issued to the lender. After deducting any outstanding loan balance, any remaining funds are then issued to the policyholder by the finance company. The lien holder can also require borrowers maintain specific coverage types and amounts.

Personal Injury Protection: Personal injury protection will pay the medical expenses incurred by the policyholder or his passengers, regardless of which driver caused the accident. It is optional coverage in some states, but other states require it as a modified “no-fault” bodily injury policy.

Policyholder: The policyholder is the primary person named on the policy along with other members of his household, such as his spouse or children, that he has chosen to include on his insurance. In some states, all licensed drivers residing in the same household and who are members of the immediate family must be included.

Property Damage: Property damage covers the loss or damage of personal property belonging to someone other than the policyholder. It is a type of liability insurance and is required by all states. Types of damage that would be covered include payments to the city for replacing a traffic sign knocked down in an accident, damage to a business caused by the policyholder’s vehicle, or payments for the loss or repair to another’s real or personal property.

Rental Car: If the covered vehicle is stolen or in need of repairs, the insurance company will pay the cost of a rental car. Policies vary a great deal in terms of how much they will pay, for how long, and whether the policyholder must pay and then get reimbursed or if the insurance company will remit payments directly to the rental agency. It is optional coverage, but is typically quite economical.

Replacement Value: In determining the value of a vehicle, insurance companies use its depreciated value. New car replacement policies, however, will use the non-depreciated value. These policies are usually limited to a specific time period, such as the car’s first year of life. For those who may have purchase a new vehicle without a trade-in or down, or who received delayed payment plans, such a policy can prevent the policyholder from owing more to the finance company than the insurance will pay.

Towing: If the covered vehicle is inoperable, towing insurance will pay for having a wrecker service transport the vehicle to a repair facility. Many policies require the vehicle owner to pay the bill and submit it for reimbursement, while some have contracts with companies to provide the service and bill the insurance company. Whether mechanical problems are covered as well as accidents depends on the policy.

Uninsured/Underinsured Motorist: An uninsured motorist is one who does not have liability coverage and is therefore driving illegally. An underinsured motorist has liability insurance, but the limits of his policy may be inadequate to cover the damages caused. Uninsured or underinsured motorist coverage protects the policyholder from losses caused by these two classes of drivers. It is mandatory coverage in some states, while others merely require that insurance companies offer it and maintain a statement in the files showing that the coverage was offered but was declined by the policyholder.