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The Basic Terms
Insurance policies are legal contracts, and insurance companies employ thousands of attorneys and accountants. Which means that insurance documents are written in that annoying “legalese” that is necessary to satisfy court requirements but rather difficult for ordinary people to understand.
First, let’s cover the basics. An insurance policy is a legal contract between you and your insurance company. In this relationship, you are the policy holder and the company is known as the insurer.
Under the terms of this contract, you make payments to your insurer that are called premiums, and in exchange the insurer agrees to pay to your claims, which are specified amounts when and if you suffer from events that are specified in the details of your policy.
Be warned though that it’s these details that need to be clearly understood. Insurance may have begun as a kind of public service, providing protection against extremely expensive business and personal losses, but over time insurance companies have become enormous money-making ventures. And this profit motive has led some companies to hide lots of loopholes and clauses in the details which can be used as excuses not to pay promised claims when the time comes.
But the details are all in the insurance contract.
Make sure that you’ve read the policy and you understand what the details actually say before you sign and start paying premiums.
Actual Cash Value (ACV) — This is the amount of money it would take to replace the vehicle if necessary. It is determined by comparing the vehicle’s condition to similar vehicles. This will probably include input from recent sales in your area and local auto dealers. Adjusters should also consider the vehicle’s condition, equipment, and mileage.
Adjuster — The insurance company’s representative whose job it is to investigate the claim, negotiate a settlement, and authorize paymen.
Benefit — This is the actual amount that an insurance company pays as the result of a claim.
Claim — The policyholder’s request for the reimbursement of a loss covered by their insurance policy.
Collision — This covers damage to the policyholder’s car from any collision with another vehicle.
Comprehensive — This cover damage to the policyholder’s car that doesn’t involve hitting another car, such as from fire, theft, falling objects, earthquake, flood, and riot. This type of coverage is very popular in Southern California, I imagine.
Deductible — This is the amount of money that you must pay before the insurance company will pay you anything. For example, if your policy includes a $500 deductible and your car gets body damage that costs $300, then you pay all of that. But if the body damage costs $800 to repair, you pay the first $500 to cover the deductible and the insurance company should pay the rest.
A higher deductible can decrease your premiums.
Endorsements — Endorsements are changes to a policy, such as adding an additional driver or changing the deductible.
Exclusions — These are the situations where your insurance company will not pay for damage, spelled out specifically (or covertly hidden in small-type legaleze, depending on the honesty of your insurer). Some of the more common ones include wear and tear (a door latch broken in collision is claim-worth; a door latch that breaks because it’s old is not), mechanical breakdown or parts failure, and intentional or malicious damage (actually, damaging your own car and purpose and then filing a claim can land you in prison).
Read your policy closely and know what is excluded from your coverage.
Full Coverage — This one is misleading. It does not mean that you are fully covered against everything. Instead, it means that you have the minimum coverage required in your state.
Income Loss Coverage — This coverage is intended to replace income lost if the injured party is unable to work for a period of time following the crash.
Indemnity — This is a basic principle of insurance that provides that following a collision, policy holders should be restored to roughly the same financial condition they held before the collision.
Limits — This is the maximum amount of money that your insurance company will pay to cover your claims.
Medical Payments or Personal Injury Protection (PIP) — Covers the treatment of injuries to the driver and passengers of the policyholder’s vehicle. At its most extensive, PIP can cover medical payments and the lost wages of those injured in an accident. It may also extend to covering the policyholder if he/she is injured while in another vehicle or is hit by a car while on foot.
No-Fault Insurance — A no-fault policy pays claims regardless of who caused the collision. A no-fault system requires that drivers purchase insurance that covers themselves and which limits their ability to sue “the other guy” for damages. A few state have these no-fault systems.Texas, however, not not one of them. The Texas system assigns fault to one driver in a crash, and that driver may be responsible for compensating the driver and passengers of the other vehicle for medical expenses and lost wages.
Personal Auto Policy — Often called “PAP,” this is the most common type of auto insurance policy sold today. It covers liability, medical payments, uninsured/underinsured motorists, and physical damage.
Property Damage Liability — Pays for damage the policyholder causes to someone else’s property.
Split Limit — Numbers that state separate limits for different types of coverage
SR-22 — The piece of paper that proves you have adequate coverage. Texas law requires that you carry this in your car at all times. You’ll need to produce it to renew your registration and get your vehicle inspected, and whenever you get pulled over.
Term — The length of time that you are covered by your policy, usually six or twelve months. Buying your insurance on a 12-month term is often cheaper than a 6-month term.
Tort — Lawyers would call this “a negligent or intentional civil wrong not arising out of a contract or statute.” Basically, a tort is an act that injures someone in some way, and for which the injured party may sue for damages. This includes intentional acts (deliberately driving into someone because they cut you off, for example) and negligence (such as backing over someone because you didn’t look around well enough).
Usage — Your main reason for driving your car. If it is used primarily to drive to and from work, the usage is “commute.” Self-employed people who drive all over the place, meeting with clients and chasing leads, are “business.” And the four-wheel drive you take mudding on the weekend is “pleasure.”
Usage affects insurance coverage and cost because it affects driving behavior. Rush hour commuting is riskier than running errands around your neighborhood in the middle of the afternoon.