Auto Insurance Terms — A Quick Reference

Actual cash value (ACV) of your car is what it would cost to replace it with one in the same condition. Age of the vehicle, mileage, previous damage, and general wear and tear are all factors when determining the actual cash value. The book value is a starting point for determining the ACV.
Assigned risk. If an applicant for auto insurance cannot find a company willing to insure him or her voluntarily, the state assigns the risk to an insurance company in that state.
Bodily injury liability is insurance coverage that helps protect you from financial loss and pays legal defense costs when if you’re judged legally liable for injuring other persons. In auto insurance, state law usually requires both bodily injury and property damage liability insurance. The two are often referred to jointly as liability insurance.
Book value. The value of a car based on information in one of several reference books (or websites); values are listed by make, model, age, etc.
Claim. The notification of an insurance company to request payment for losses covered by an insurance policy is a claim.
Collision insurance provides protection against loss resulting from any damage to a policy owner’s car caused by collision with another vehicle or object, whether it was the insured’s fault or not.
Combined single limits. The number that is the maximum dollar coverage (e.g., $100,000) for bodily injury and property damage liability combined, no matter how many people are involved or the amount of injury or property damage.
Comprehensive insurance is insurance that reimburses you for damage to your vehicle from causes other than collision, rollover, or general wear-and-tear. It covers perils such as hail, flood, fire, earthquakes, windstorms, vandalism, riot or civil commotion, and damage from a bird or animal. It may include glass replacement, towing charges, and theft. Coverage varies from state to state.
Coverage. A term used to describe the monetary limits and risks covered by an insurance policy.
Damages. A specific sum of money that a party is legally obligated to pay to another as compensation for injury.
Deductible. The amount you must pay before your insurance coverage begins paying. For example, if you have a $250 deductible and a loss of $800, you pay the first $250 and the insurance company pays the remaining $550. If the loss were only $250, you would pay the entire amount and the insurance company would pay nothing. Depreciation. The gradual loss of value of an asset (e.g., your car) through increasing age: natural wear and tear, deterioration, or damage, even though the item may retain or even increase its replacement value due to inflation.
Exclusion. A type of loss a policy will not cover.
First party coverage. Compensation for losses by each driver’s own insurance company rather than by the insurer of the person who caused an accident (e.g., collision and comprehensive insurance).
Insured. A person covered by a policy.
Liability. Any legally enforceable obligation.
Liability insurance. Covers accidental injuries and damages resulting from an accident caused by the insured. Liability insurance pays on behalf of the insured.
Limit. The maximum amount that an insurer is bound to pay for a covered loss. For example, if you have a $5,000 loss and the limit on your policy is $2,500, then $2,500 is the maximum your insurance company will pay.
Loss. A value reduction in an insured’s automobile caused by an insured peril; also, the amount sought in a claim, or the amount paid on behalf of an insured under an insurance contract.
Medical payments insurance. Coverage that reimburses you and your passengers—regardless of legal liability—for medical or funeral expenses stemming from bodily injury or death by accident.
No-fault insurance allows automobile accident victims to be directly reimbursed for medical and hospital expenses and loss of income by their own insurance company, regardless of who caused the accident. Only some states have no-fault provisions; the right to sue in no-fault states may be restricted.
Peril. Possible causes of loss (e.g., fire, windstorm, theft, riot). Some perils may be excluded.
Personal injury protection (PIP). Under no-fault insurance, the portion of an auto insurance policy that covers medical costs, loss of earnings, additional living expenses, and funeral costs for occupants of the insured automobile and pedestrians, other than those insured under other policies. Coverage varies from state to state.
Policyholder. The person who pays a premium to an insurance company in exchange for the protection outlined in an insurance policy.
Premium. The amount of money paid for an insurance policy. Often stated in terms of an "annual premium."
Property damage liability. Insurance that protects you against financial loss if you are legally liable to others for auto-related damage to their property.
Renewal. A policy issued to replace one that has expired.
Safe Driver Discount. A system for adjusting standard rates up or down based on good or bad driving records of the those insured.
Split limits. A type of auto liability overage that has separate limits for bodily injury and for property damage. See "combined single limits."
Uninsured/Underinsured motorists insurance provides protection in the event that damage is caused by a motorist who has no insurance or not enough insurance to cover the loss.