Keywords and terms that are used the most in auto insurance explained with simple language
Auto insurance uses words and terminology that are sometimes not so clear to policyholders. At GUROS one of our objectives is that when you take out your car policy, you are as satisfied with the service received as with the insurance you purchase. We prepare this post for you with the hope of helping you understand your auto insurance in depth.
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Key Auto Insurance Terms
Insurance is a legal contract between an insurer and a third party. An insurance policy is a simplified contract to the maximum, where the insurer agrees to pay in certain cases in exchange for a premium. Therefore, it is essential to understand (and explain) clearly all the terms that are used. Let's look at some of the most frequently heard terms in auto insurance together.
Without a doubt, the word we hear the most when talking about any insurance. It is important to mention that «deductible» is a term frequently used in accounting with a completely different meaning from that used in insurance. For accountants and financers, «deductible» refers to tax calculations and fiscal accounts.
In insurance, when we talk about deductible, we refer to the amount that the insured must cover in the event of a loss of a specific coverage .
In other words, when we report a claim to the insurer (of a coverage with a deductible), we will have to «pay» a minimum amount. We say «pay» because in practice the insurer subtracts that amount from the compensation it pays us. We would not be giving any additional money to the insurer.
The deductible can be a percentage or a fixed amount . In auto insurance, the deductible is usually a percentage of the value of the car. Mainly, the deductible is applied as a percentage for two coverages: material damage and theft.
However, it can also be applied to other coverage, such as Civil Liability. Civil Liability deductibles are usually a fixed amount expressed in UMA.
The deductible has three uses:
- Deter fraud.
- Reduce the cost of insurance.
- Reduce the frequency of risk assumed by the insurer.
The deductible in auto insurance is interrelated with the sum insured and the compensation value. Let's look at those terms below to better understand how the deductible works.
2. Sum Insured or Maximum Limit of Liability
The sum insured or limit Maximum liability is the maximum amount for which the insurer is liable.
In other words, it is the amount up to which the insurer covers us, beyond that amount it is understood that the insurer will not be responsible or pay any additional amount for it.
The insured sum is independent from one coverage to another. An insured sum of $ 500, 000 in property damage does not mean that the insurer covers any event up to $ 500, 000. In this example, the property damage limit would be $ 500, 000, but if we have a civil liability claim, the limit would be different.
This term is easy to understand with a practical example of auto insurance. Material damage coverage covers damage to our vehicle, so it would not make sense for the insurer to be liable beyond the value of the vehicle.
Some policyholders are confused by the names of coverage packages such as “Total Risk”, “Amplia Total Plus”, “Full Risk” or similar. Regardless of the name of the package, an insurer will never take care of a claim to infinity. The insured sum is where it is marked how far the insurer will pay . Any additional amount must be covered by the insured.
3. Commercial value, invoice value, agreed value or commercial value 10
The compensation value refers to how the value of the vehicle will be considered when compensating the insured in the event of a claim. In other words, how the insurer will value your vehicle if you claim a loss covered by your policy.
In auto insurance, there are mainly four compensation values:
- Commercial value: Considers the devaluation of the car throughout the life of the policy. That is, every day that the insurer considers that your car loses value.
- Invoice value: The value that appears on the invoice of your vehicle, without considering depreciation. Most insurers only allow policies with this value for vehicles less than 2 years old.
- Agreed value: It is a fixed value agreed between the insurer and the insured. Almost all insurers that allow agreed value policies limit the range that can be considered to insure a vehicle at agreed value. It would not make sense to insure a Nissan Tsuru by 10 million pesos if a new vehicle does not cost that.
- Commercial value 08: Has the same characteristics as the commercial value. The difference is that it considers a 10% of additional value at the beginning of the term of the policy. It also considers the depreciation of the value of the vehicle.
The coverage package or, simply, package, is a set of coverage that is frequently contracted together . In car insurance there are mainly three packages:
- RC or Civil Liability : covers road and legal assistance, as well as Civil Liability against third parties. It does not cover theft or damage to the vehicle itself.
- Limited: Covers everything that includes Civil Liability and also the theft of the vehicle.
- Extensive: In addition to what it covers The Limited package includes material damage to the vehicle itself.
Packages vary slightly from one insurer to another and from one insurance intermediary to another in terms of amounts insured and some specific coverages. Some insurers also include an additional package considered as “Comprehensive 10 ”or“ Amplia Plus ”or“ Amplia VIP ”or similar. These packages simply add insured amounts to the same coverages and include some additional coverages.
5. Policy owner or contractor
The owner or contractor of the policy is the policy holder . It is the person authorized to request changes to the policy from the insurer. The owner or contractor works in a similar way to the owner of a bank account. In a bank, an account can have several users, but in front of the bank there is a holder who can request changes or cancel the account. The policy owner receives the same treatment from the insurer.
Being a contractor or owner of a policy does not imply being covered by the policy, for that there is the figure of the insured.
The insured is the person who will enjoy the coverage contracted in the policy . In most cases of auto insurance, the insured and the contractor are the same person.
A curious fact about this figure: in several countries of the world, in life insurance it is illegal for the insured to be different from the contracting party. This avoids conflicts of interest where a person's life is the risk to be hedged.
7. Policy rights or shipping costs
The policy rights , also known as shipping costs, are a fixed cost that the contractor must pay at the one-time insurer when a new policy is issued. This payment serves to cover the administrative expenses that the insurer incurs in order to issue the policy.
Policy rights are paid in full on the first receipt to be paid. Therefore, the first receipt of a policy is more expensive than the others.
8. Vehicle code or vehicle code
This term is rarely used when talking about car insurance, but we include it in case you see it on your policy face. It refers to the unique code that the insurer uses internally to identify a specific version.
9. Description or version of the vehicle
The description or version of the vehicle is a short text that the insurer uses to distinguish a more equipped vehicle from another less equipped or vice versa. On your policy face you will see a text similar to “JEEP PATRIOT SPORT FWD AUT”. In this example, it refers to the Jeep Patriot Sport version with 4-wheel drive (FWD) automatic transmission (AUT).
10. Use or service
The use or service is the purpose for which the vehicle is going to circulate . In other words, what will we be using the vehicle for? Some of the most common uses are:
- Public service
Some insurers do not distinguish between use and service, while others do. For those who clearly separate these two concepts, they do so for further clarification.
It is important to mention that the use or service is decisive for the insurer to pay a claim. For example, insurers distinguish a vehicle for private use from a vehicle for ambulance use. If the ambulance was insured for private use, they will reject the claim and pay nothing.
We said before that a policy is a simplified contract. Along the same lines, an endorsement of a policy is the equivalent of an annex to a contract . An endorsement modifies the information or conditions of the original policy and replaces the original policy in the data or conditions that it modifies.
There are endorsements that do not modify premiums, that is, they simply update the information in the policy. Any endorsement that does not modify the original conditions of the policy or the risk to be covered will not modify the premiums. For example, in car insurance, a change of plates does not change the premiums. On the other hand, a change in the insured amount or coverage does modify the premiums and the contracting party must pay the difference to the company.
It is possible to make an endorsement of practically any information or condition that appears in an auto insurance policy. However, it is at the discretion of the insurer whether to accept the endorsement or reject it. For example, in auto insurance, making an endorsement that changes the vehicle to a completely different one is unlikely to be applicable.
12. Net Premium
The net premium is the cost of the insurance, without taxes and without policy rights. The net premium is the compensation required by the insurer to cover the risk.
13. Surcharge for installment payment
The installment surcharge or installment payment surcharge is an amount established by the insurer as additional surcharge for paying the policy installments . The more fractioned the payment (monthly), the higher the surcharge established by the insurer.
The reason for this surcharge is financial, its detail is beyond the scope of this article, but you should know that the cheapest form of payment for a car insurance policy will always be annual. If the annual amount is too much to pay in a single installment, our advice is to check the interest-free months offered by the insurer.
13. Total Premium
The total premium is the total cost of the insurance, considering policy rights, taxes and other surcharges . It is the amount that the contractor pays to the insurer to be covered by the policy.
16 . Beginning of validity and end of validity
The beginning of the term and the end of the term are the dates between which the policy covers the risk . For the insurer to consider the compensation payment, the claim must occur between these dates. Otherwise, the insurer will consider that the policy was not valid and will reject the claim.
As a general rule, insurers do not allow an effective date prior to the current date. The purpose is to avoid fraud (people who try to insure when they already had the claim).
On the other hand, when the effective date is in the future, it is known as “post-dated”. Post-dating a policy helps you contract for renewal before your current policy expires. This way, the car remains covered once the original policy expires.
In auto insurance, a term of 1 year is generally used. That is, between the beginning of the term and the end of the term there is one year of coverage.
16. Issue date or issue date
The issue date or issue date is the date on which the insurance is formalized. In other words, it is the date the insurer issues the policy . It does not have much legal or coverage importance, since the start and end dates of validity are those that determine the period in which the risk is covered.
17. Regular driver
The usual driver in auto insurance is the person who will drive the vehicle quite often. The purpose of registering a habitual driver is to extend the benefit of certain coverage to someone other than the insured. Some auto insurance coverages include benefits that only apply to the insured and the regular driver. Therefore, our recommendation is to register a regular driver whenever possible.
19. Preferred beneficiary
The preferred beneficiary is the person or company that is entitled to compensation in the event of a claim .
In car insurance, it is common to use the figure of preferred beneficiary in financed cars. Thus, the finance company reduces the risk that the car has a loss and the credit remains pending settlement. For their part, the person will be able to avoid having to continue paying the credit of a wrecked car.
Additionally, a preferred beneficiary will have some additional rights on the policy. For example, to change the preferred beneficiary of a policy, we require written authorization from the current preferred beneficiary.
19. General conditions
The general conditions is the document where all the insurance conditions are exhaustively specified . In this document we can see in which cases each coverage applies and in which it does not. We can also consult general limits of a coverage, for example, a policy of a vehicle applies only to that vehicle.
The general conditions, as its name indicates, are general, so all the possible coverages that can be contracted for a specific insurance appear.
The insurer has the right to modify the general conditions as many times as it wishes. However, if a policy was issued with specific general conditions, they cannot be modified. It would only modify policies that were issued after the date that the new general conditions came into effect.
The exclusions of a policy are the cases in which the insurance explicitly does not cover . Exclusions are specific to each insurance coverage (each coverage has specific exclusions). All exclusions can be consulted in the general conditions of a policy.
22. Particular conditions or special conditions
The particular conditions or special conditions are the conditions that are explicitly mentioned in the policy . In other words, they are the conditions (within the overall general conditions) that apply to a specific policy.
Let's take an example to understand it better:
I contract a policy in a Civil Liability package and a friend contracts another policy in a Comprehensive package with the same insurer. The general conditions that apply to each of our car insurance will be the same. However, the particular conditions of each policy will be different. Therefore, each of our coverages will apply differently and we will be covered differently.
22. Policy cover
The policy cover is the document that specifies the particular conditions of the coverage that is being protected by the insurer. By law, this document must also include other information, such as the insurance company's claims telephone number, the policy number or the coverage that the insurance covers.
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