Published: February 2, 2022Updated: August 15, 2022

Common Auto Insurance Terms’ Definitions

A list of the most commonly used terms in auto insurance and their definitions

Shopping for auto insurance, selecting coverage options, or reviewing a new insurance policy can be a daunting task if you don’t have the proper tools. We’d like to make the process easier. Here’s a list of common auto insurance terms that you can refer to throughout the process of speaking with an insurance agent or broker.

Key Auto Insurance Terms

Here are the terms you might come across during the auto insurance shopping process.

  • Actual cash value (ACV): Actual cash value is the vehicle’s replacement cost minus depreciation. If the insurer uses ACV as a calculation in the contract, this is the amount insurers will pay the insurance policyholder if the car is totaled.
  • Additional insured: An additional insured is an additional person or entity listed on the car insurance policy who has a vested interest in the vehicle. The leasing company or lender is often listed as an additional insured on a car insurance policy for a financed or leased vehicle.
  • Agent: An agent is a licensed professional who works on behalf of an insurance company to sell car insurance policies to customers.
  • Agreed price: An agreed price means the insurer (insurance company) and insured (policyholder) agree on the value of the car at the time of signing the policy. This can include improvements made to the car but doesn’t include depreciation, unlike ACV. A policy with an agreed price usually has a higher auto insurance premium, since the agreed price can be higher than the current market value of the motor vehicle.
  • Amendment: An amendment is an insurer-initiated revision to the original auto insurance policy that changes the coverage and possibly the premium costs.
  • Arbitration: An arbitration is a legally binding agreement between two parties to settle a dispute, facilitated by a neutral third party known as an arbiter. Many no-fault accident states require arbitration for claim disputes.

Accident Assessment

  • At fault: The at-fault driver is the one responsible for an accident. In at-fault states that do not require personal injury protection (PIP) insurance, the at-fault person in an auto accident is generally responsible for filing an insurance claim to pay the accident-related costs. This is different from a no-fault state that requires PIP or medical payments coverage.
  • Binder: A binder is temporary proof of insurance pending the insurer’s approval. The insurance company issues this prior to the official policy delivery. A binder often contains the name(s) of the insured, vehicles to be insured, policy coverage details, effective dates, and premium cost.
  • Bodily injury liability: Required in all states except Florida, New Jersey, Virginia, and New Hampshire, bodily injury liability insurance covers the at-fault driver’s costs associated with bodily injuries to the other driver, passengers, or pedestrians. This often covers medical costs for both emergency and acute care, rehabilitation, legal costs associated with the accident, funeral costs, and loss of income due to injuries.
  • Broker: A broker is an independent professional who is licensed to sell insurance products from various companies to customers. Most consumer-oriented brokers are retail brokers who sell insurance to customers. However, there are also wholesale commercial brokers who sell specialized, high-limit commercial vehicle policies, and surplus-line brokers who work with surplus-line insurers to obtain policies for risky businesses and/or operations.
  • Certificate of financial responsibility: This add-on certificate to car insurance, also called an SR-22, is required for high-risk insured drivers who have had their licenses revoked or suspended for violations such as DUIs. It certifies that the driver has enough insurance in the event of another accident. This can also be an FR-44 in some cases, mainly in Florida and Virginia. While an SR-22 proves the driver has minimum coverage, an FR-44 proves they have more coverage than the minimum.
  • Certificate of satisfaction: The vehicle’s owner signs a certificate of satisfaction document to attest that a mechanic’s repairs on a damaged vehicle are satisfactory. The policy owner will submit this document as part of the insurance claims process.
  • Claim: A claim is an insurance policy owner’s request for the insurer to pay for damages and losses associated with a covered accident or theft.
  • Claimant: A claimant is a person who suffers losses due to an accident and files a claim with the insurance company. The claimant is often the policyholder or a named insured.
  • Claims adjuster: Also known as an insurance adjuster, a professional claims adjuster examines damages and losses related to the accident and determines a fair amount the insurance company should pay to reimburse the losses and settle the policy owner’s claims.
  • Coinsurance: Coinsurance is the cost sharing of risk between the insurance company and policy owner in a claim. Coinsurance is the percentage of the costs the policy owner pays in a claim after the insured pays the deductible. Percentages vary, but this is often an 80/20 insurer-policyholder split.
  • Comprehensive coverage: Comprehensive coverage is a specific coverage on an existing car insurance policy that insures for vehicle damages or accidental losses that are not related to collisions. This can include perils such as fires, vandalism, glass damage, or damaging acts of nature. Leased cars often require this type of coverage.
  • Coverage/effective date: The coverage date or effective date is the date when the insurance policy becomes effective and accepts claims.

BE AWARE

In certain cases, you or the insurer may choose to end your insurance coverage prior to renewal. This is called a non-renewal.

  • Covered incident/expenses: Covered incidents are specific incidents and expenses, like car accidents or theft, that an insurer will reimburse for in accordance with a car insurance policy.
  • Declarations page: Typically the first page of the policy, the declarations page contains an overview of key policy information such as the name(s) of the insured (policy owners), vehicle identification number and description, insurance policy number, term period for the policy, cost of the monthly premium, deductibles, and coverage information and limits.
  • Deductible: A deductible is the out-of-pocket amount the insurance policy owner must pay before the insurer covers the cost of accidents or losses. Insurers require deductibles with certain types of car insurance coverage such as collision and comprehensive insurance, rather than personal injury protection or liability coverage. Learn more about how deductibles work in our deductibles FAQs.
  • Endorsement/rider: An endorsement or rider is a policyholder-initiated change or addition to the insurance policy that adjusts coverage. Car insurance endorsements include roadside assistance and coverage for other vehicles.
  • Excess policy: A driver can purchase an excess policy as a secondary policy to the initial car insurance policy. If a particular loss due to an accident exceeds the initial policy limit, the excess policy can help cover this gap.
  • Exclusions: Exclusions in a car insurance policy mean it does not cover certain liabilities or drivers.
  • First-party medical benefits (FPB or MEDEX): First-party medical benefits are an add-on to a car insurance policy that covers accident-related medical expenses for the policy owner, drivers listed on the policy, and household family members, regardless of fault. This often includes emergency services, surgeries, rehabilitation, and acute care. Other add-ons include coverage for loss of income and funeral expenses.
  • Full coverage: Full coverage is a policy that includes liability coverage for damages to the policy owner’s vehicle as well as damages and injuries to the other driver. This usually includes collision coverage, bodily injury liability, property damage liability, personal injury protection, uninsured/underinsured motorist coverage, and comprehensive coverage for damage to vehicles due to perils and theft.

Insurance Policy

  • Gap insurance (loan/lease gap coverage): Gap insurance is optional insurance that covers the difference between what the owner owes on the financed or leased car and its actual cash value in the event that it is stolen or totaled in an accident. Insurers typically recommend gap insurance for financed or leased vehicles if you owe more than the vehicle’s depreciated value.
  • Graduated Driver Licensing (GDL): Graduated Driver Licensing is the multistep state-initiated process that drivers need to complete to progress from a learner’s permit to a full driver’s license. This process varies from state to state.
  • Hired auto: A hired auto is a vehicle that a business rents, leases, or borrows for business, such as rental cars and trucks. Hired auto insurance doesn’t cover employee-owned vehicles.
  • Hold harmless agreement: A hold harmless agreement is a legal document where one party agrees not to hold the other party liable for the damage or losses related to an accident. In general, insurance companies will not cover losses from claims when the parties have signed a hold harmless agreement.
  • Insured: The insured is the policy owner — the entity and/or named person(s) the insurance policy covers. The insured may be entitled to reimbursements in the event of a valid car accident or damage claim.
  • Insurer: The insurer is the company or entity that issues the insurance policy and takes on liability risk in exchange for a premium from the insured. The insurance company is responsible for paying the insured driver’s valid claims in the event of accidents or losses.
  • Liability insurance: Liability insurance pays for bodily injury and property damage related to accidents or losses where the driver is at fault.
  • Loss payee: The loss payee is the first person or entity who is entitled to an insurance claim payment because they have an insured interest in the vehicle. For example, the lender or leasing company for a vehicle that the driver doesn’t own outright can be listed as a loss payee on a car insurance policy if the car is totaled.
  • Market value: The market value is the value of the vehicle if you were to sell it in the open marketplace.
  • Mechanical breakdown insurance (MBI): Mechanical breakdown insurance is optional insurance that can be more extensive than auto insurance policy coverage. It often covers replacements for the breakdown of certain major vehicle parts like transmissions and electrical systems. Not all insurers offer MBI.
  • Medical payments coverage (MedPay): MedPay is optional insurance coverage that helps pay car accident-related medical expenses for the policyholder and passengers, even if the driver is at fault. Coverage can range from emergency and rehabilitative services to funeral expenses. Insurance carriers offer personal injury protection in states where MedPay isn’t available. PIP is a more comprehensive plan that covers medical expenses as well as accident-related lost wages and child care, unlike MedPay.
  • Minimum coverage: Minimum coverage is the minimum amount of auto insurance required to own and operate a vehicle according to local and state laws.
  • Negligence: “Negligence” is a legal term for acting in a careless manner, resulting in accidents, injuries, or losses. Attorneys and insurers can determine fault in an accident based on the driver’s negligence.
  • No fault: In no-fault states where personal injury protection insurance is required, both parties must file insurance claims in an accident and could be responsible for the medical costs regardless of who is at fault. The at-fault party still pays for the other party’s property damage, just not their medical payments. Learn more about no-fault vs. liability systems.
  • Non-hired auto: “Non-hired auto” refers to vehicles that employees use for business purposes and that they own or borrow themselves — i.e., the vehicle is not owned or rented by the employer. Employees need non-hired auto insurance coverage if their personal car insurance liability limits aren’t sufficient.
  • Personal injury protection insurance (PIP): PIP is a part of car insurance plans that covers accident-related medical expenses, funeral expenses, and lost wages for the policyholder and their passengers, regardless of who is at fault.
  • Policy lapse: A policy lapse is when a person loses state-required insurance coverage because of a non-renewal or the insurer’s cancellation of the policy. An insurer can cancel a policy for fraud, traffic violations or accidents, or nonpayment of premiums, which would cause the policy to lapse and fall short of the state’s minimum coverage.
  • Policy limit: The policy limit is the maximum amount an insurance company will pay in a valid claim for accident-related losses.
  • Premium: The premium is the amount a customer pays on a regular basis in exchange for insurance protection.
  • Primary driver: The primary driver is the vehicle’s most frequent driver listed on the insurance policy. The insurer uses this driver’s information to calculate risk.
  • Primary insurance: This is the main insurance that covers the driver under an auto insurance policy.
  • Proof of insurance: Proof of insurance is validation that the policy owner holds the state’s minimum amount of required car insurance coverage in the form of a physical or digital insurance ID card.
  • Property damage liability: An at-fault driver in an auto accident uses property damage liability insurance to cover damages to the other vehicles in the accident, as well as losses related to damaged physical property such as fences, signs, or building fronts.
  • Rental reimbursement insurance: Rental reimbursement insurance covers a certain amount toward a rental car if the policy owner’s vehicle is at the auto repair shop under a covered auto claim.
  • Secondary driver: A secondary driver is a person listed on a car insurance policy who uses the car less than the primary driver. The insurer considers the secondary driver’s accident history to calculate overall risk.
  • Secondary insurance: Secondary insurance is added on to offer liability protection above the payout limits on the driver’s primary policy. For instance, secondary insurance that credit card and rental car companies offer can cover gaps in primary insurance.
  • Settlement: A settlement is the amount a car insurance company pays out to the party (or parties) for damages, losses, and/or injuries related to a car accident.
  • SR-22, SR-50, and FR-44: SR-22s, SR-50s, and FR-44s are state forms required under court orders for drivers who have been found violating certain laws and driving regulations (such as DUIs and reckless driving). Forms SR-221 and SR-502 indicate that the driver has met the state’s minimum liability coverage requirements. FR-44s3 (in Virginia and Florida) have higher liability requirements and relate to more severe driving offenses.
  • Stacked insurance (stacking of limit): Stacked insurance allows the car insurance policyholder to combine separate coverage limits for multiple vehicles into one higher coverage limit. Stacked insurance usually applies to uninsured motorist coverage, multiplying the number of vehicles by the limits to create higher limits.
  • Stated value: Commonly used in insurance policies for classic cars, the stated value is what the policy owner states the vehicle is worth based on supported documentation at the policy signing. In the event of an accident where the car is totaled, the insurer can either reimburse the policy owner for the vehicle’s actual cash value or the stated value, whichever is less.
  • Subrogation: Subrogation is the legal right that allows an insurance company to recover the money it paid out for claims from the at-fault party in an accident through a lawsuit.
  • Threshold level: In a no-fault state, the threshold level is the monetary amount or the severity of bodily injury that must be reached in order for the policyholder to sue the other party for negligence related to a car accident. A threshold level can be qualitative, such as “severe disfigurement,” or a certain dollar amount.
  • Third party: A third party is any person or entity who suffers losses from the first party’s actions in an accident. For example, third-party insurance protects the first party from a pedestrian’s accident-related claims.
  • Tort (full tort): A tort is an act that causes harm to another party. Full tort insurance allows the policyholder to sue the at-fault party for damages, including pain and suffering.
  • Tortfeasor: This legal term refers to the party or parties who are considered negligent and at fault in an accident.
  • Towing and labor insurance: Towing and labor insurance is optional, supplemental coverage that pays to tow the policy owner’s disabled vehicle in an accident. It also covers a specified amount of labor costs to repair typical damages and breakdowns. Specific coverage and premiums vary by insurer.
  • Total loss: A total loss occurs when the cost to repair a vehicle damaged in an accident is above the actual market value of the vehicle. Based on an assessment from a claims adjuster, the insurer declares the vehicle beyond reasonable repair. Exact total loss thresholds vary by state.4
  • Umbrella insurance: Umbrella insurance is coverage that extends beyond the owner’s underlying car insurance policy limits. This can include coverage for property damage and injuries to others. Drivers with significant assets should consider an umbrella insurance policy, which has higher coverage limits if the policy owner’s car insurance liability is insufficient to cover all of the injured party’s losses.
  • Underwriting: Underwriting is the part of the insurance application process where the company assesses the applicant for risk. The insurer will approve or deny a car insurance policy issuance based on the underwriter’s risk calculation and assessment.
  • Uninsured/underinsured motorist coverage (UM/UIM): You can add this coverage to a car insurance policy, as is required in certain states. Uninsured coverage can pay for the policy owner’s injuries or vehicle damage due to an accident with an uninsured, at-fault driver. Underinsured coverage can offer the policy owner liability protection for damages and injury if the at-fault driver has insufficient insurance coverage.
  • Unsatisfied judgment fund: An unsatisfied judgment fund, which is paid by the state, helps to protect drivers from financial losses due to injuries from accidents that were not their fault. If they can’t secure all the necessary funds from the at-fault driver, the injured driver can file paperwork for an unsatisfied judgment fund through the state or DMV to cover medical costs in certain cases.
  • Unstacked insurance: Under this insurance option, the policy owner can’t stack insurance from several owned vehicles to increase the policy limit in an accident claim with an uninsured or underinsured driver.
  • Vehicle identification number (VIN): Auto shops and insurers use this unique code associated with each vehicle that corresponds with the vehicle’s records. Aside from key information such as make, model, and year of manufacture, the authorities and mechanics list VINs on accident reports, major car repair records, and reports of theft.
  • Waiver: A waiver is a clause or legal document that releases a party from liability.
  • Waiver of collision deductible: Optional with a car insurance policy, this particular coverage will pay the collision deductible for accidents where the at-fault driver is uninsured.
  • Youthful/inexperienced driver: A youthful or inexperienced driver, in car insurance and rental companies’ terms, is a person under 25 (or 30 in some cases) years old or with less than two years of driving experience on their record. Young or inexperienced drivers pay more for auto insurance, which is why auto insurance for teens is so expensive.

Recap

Now that you are more familiar with the commonly used auto insurance terms, be sure to check out our list of the best auto insurance of 2022. Also visit our page for more frequently asked questions about car insurance.

Auto Insurance FAQs

Here are some of the top questions we’ve received about auto insurance policies.

No, an insurance binder is not your policy. A binder is an overview of your policy that acts as temporary proof of insurance until the insurer issues the official certificate in roughly 30 to 90 days.

You can generally change your mind and cancel the policy at any time in the insurance process. However, there might be penalties.

First, discuss your concerns with your agent. If you are comparison shopping and notice a better product for your needs, mention this. If you decide to cancel the policy, ask your agent about the process. Some insurers require written cancellations.

Depending on how far into the insurance contract you are at the time of cancellation and if you made advanced payments, you could be entitled to a refund for your unused portion, so ask your agent about this as well.

You can change your coverage, coverage amounts, and/or terms through an endorsement. You can add an endorsement when you purchase the policy, in the middle of the policy term, or upon policy renewal.

Contact your agent for specifics, then submit your endorsement to the insurance company for approval. As soon as it is approved, be sure to save all new documents associated with your existing policy.

Follow these steps to add a car to your existing policy:

  1. Contact your insurer.
  2. Provide the new car’s VIN, make and model number, and license plate number. Your insurer may require more information.
  3. Have your agent add the car to your existing policy.

When you purchase a car, don’t delay adding it to your existing policy. The grace periods in which you can add another car to your existing policy vary by carrier, but they tend to range from about a week to a month.

Citations

  1. SR-22 Insurance- What is it and how does it work? GEICO. (2022).
    https://www.geico.com/information/sr22-details/

  2. SR – 50 Affidavit of Insurance. Indiana Bureau of Motor Vehicles. (2022).
    https://secure.in.gov/apps/bmv/olvs/sr50.action

  3. What’s an FR-44 form? Progressive. (2022).
    https://www.progressive.com/answers/fr-44/

  4. Total Loss Threshold by State. Total Loss Appraisals. (2022).
    https://totallossappraisals.com/total-loss-threshold-by-state/