Insurance & Terminology
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.
Risk which can be insured by private companies typically shares seven common characteristics:
- Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd’s of London, which is famous for insuring the life or health of actors, sports figures, and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates.
- Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place, or cause is identifiable. Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
- Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable.
- Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.
- Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer. Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, then the transaction may have the form of insurance, but not the substance (see the U.S. Financial Accounting Standards Boardpronouncement number 113: “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”).
- Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
- Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers’ ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the United States, flood risk is insured by the federal government. In commercial fire insurance, it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.
Insurance Terms and Definitions
Additional Interest Insured
A company or person who has been named as an additional interest insured on a policy can be liable for an accident that involves an insured person or vehicle. For example, a lienholder can be an additional interest insured.
There are essentially two types of anti-theft devices: passive and active. Passive devices require no action or activation and automatically arm themselves when the vehicle is turned off, the ignition key is removed or a door is shut. Active devices require some action or activation, such as pushing a button or placing a “lock” somewhere in your car. Typically with active devices, you must re-activate them every time you set them or they won’t work. Keep in mind that you could get a discount for having an anti-theft device in your car.
Bodily Injury Liability Coverage (BI)
If an insured person is legally liable for an accident, BI coverage pays for injuries/death to people involved in the accident other than the insured driver. BI also pays for legal defense costs if you are sued. Certain exclusions may apply. Refer to your policy.
If your insured vehicle is damaged due to an event other than a collision, Comprehensive coverage will pay for the damage. This includes damages from fire, theft, windstorm, flood and vandalism. If your vehicle is stolen, Comprehensive covers transportation and loss of use expenses when applicable.
When your insured vehicle overturns or collides with another object, Collision coverage pays for the damage to your vehicle. Collision coverage also may extend to a non-owned vehicle or one rented for personal use that is in your custody or that you are operating. Certain exclusions may apply. Refer to your policy.
Being continuously insured means your insurance coverage from an insurer or more than one insurer was in effect at all times, without a break or lapse in coverage for any reason.
Declarations Page (Dec Page)
Also known as an auto insurance coverage summary, this page is provided by your insurance company and lists the following:
- Types of coverage you have elected
- Limit for each coverage
- Cost for each coverage
- Specified vehicles covered by the policy
- Types of coverage for each vehicle covered by the policy
- Other information applicable to the policy
A deductible is the amount you agree to pay out of pocket for damage resulting from a specific loss or accident. Generally, choosing a higher deductible will lower your premium.
Driver Improvement Course
Drivers age 55 and older can take a voluntary driver improvement course to refresh and enhance their driving skills. Taking this course may qualify these drivers for a discount if they meet eligibility requirements.
People can be added to policies with the following types of driver status:
- Rated – Actively drive vehicles on the policy
- Excluded – Not allowed to drive vehicles on the policy and will not be covered under your policy in the event of an accident
- Listed – Residents of the household who do not drive the vehicles on the policy (such as a roommate)
“Full coverage” is a common term that people use to describe how much auto insurance coverage they have. Though there is no such thing as “full coverage,” it often implies that the policy has more than just Liability coverage.
A garaging location is the place you primarily park your vehicle when you’re not using it. Generally, this is your primary residence.
An insurance coverage limit is selected by you and is the most an insurance company will pay for damages or injuries that apply to the coverage. Most states have laws that specify the minimum limit that must be purchased for each required insurance coverage.
Life insurance is a financial safety net for your family. If you pass away, your life insurance policy will pay a lump sum of money to your beneficiaries. There are a few common types of life insurance: term, final expense and permanent. See more on the different types of life insurance.
Loan/Lease Payoff Coverage
Loan/Lease Payoff coverage, sometimes called “gap” coverage, pays the difference between what you owe on your vehicle and what your insurance pays if your vehicle is declared a total loss or stolen and not recovered, less your Comprehensive or Collision deductible. Learn more about Loan/Lease Payoff coverage.
Medical Payments (MedPay) Coverage
MedPay is an optional insurance coverage that pays for reasonable and necessary medical and funeral expenses for covered persons. These expenses must be incurred as a result of an auto accident.
The first person in whose name the insurance policy is issued.
A person who is not the primary or principal driver of the insured vehicle is an occasional driver.
Personal Injury Protection (PIP) Coverage
PIP is a coverage in which the auto insurance company pays, within the specified limits, the medical, hospital and funeral expenses of the insured person, people in the insured vehicle and pedestrians struck by the insured vehicle. PIP is the basic coverage implemented in no-fault automobile insurance states.
Policy Expiration Date
Your current insurance policy ends on your policy expiration date, which is found on your current policy documents, Declarations Page (Dec Page), insurance identification card or recent cancellation notice. This date should not be confused with payment due dates.
The length of time your policy is active and in force is your policy term.
A premium is the amount of money paid to an insurance company in return for insurance protection.
A primary residence is the place where you will live for the majority of your policy term.
Primary use is how you mainly use your vehicle. Primary use options include to/from work, business, pleasure or farm use.
The person who drives the car most often is the principal driver.
Property Damage Liability Coverage (PD)
If an insured person is legally liable for an accident, PD coverage pays for damage to others’ property resulting from the accident. PD also pays for legal defense costs if you are sued. Certain exclusions may apply. Refer to your policy.
Rental Reimbursement Coverage
Rental Reimbursement provides rental car coverage if you have a claim that is covered under Comprehensive or Collision coverage. Daily rental amounts are subject to the limit purchased.
Roadside Assistance Coverage
Roadside Assistance provides services such as towing, flat tire change, locksmith service and battery jump-start to customers, who can elect the service for an additional premium if it is not already included with their insurance policy. Learn more about Roadside Assistance.
State laws determine if a vehicle requires a salvage title.
- Some states base salvage titles on the extent of damage a vehicle has sustained. For example, in Louisiana, damage to a vehicle must equal or exceed 75 percent of the vehicle’s retail value in order for it to require a salvage title, according to state law.
- Other states, such as Florida, require a vehicle to have a salvage title if the insurance company declared the vehicle a total loss. These titles generally indicate whether the vehicle is “rebuildable” (can be repaired and driven on the road) or “not rebuildable” (must be sold for parts).
- Other states “brand” or “notate” the vehicle’s title when the estimate of damages reaches a certain percentage of the vehicle’s retail value (in New York, it is 75 percent), even if the vehicle has not been declared a total loss and is able to be repaired.
- Other states have no guidelines for issuing salvage titles.
Second Named Insured
The named insured or listed agent/broker on a policy may request to designate any other person listed on the policy as a second named insured. The second named insured has the same coverage under the policy as the named insured.
An SR-22 is a document required by the court that demonstrates proof of financial responsibility for persons convicted of certain traffic violations.
Uninsured Motorist Coverage (UM)
If a driver or owner of a vehicle does not have insurance and is legally liable for an accident, you can use UM coverage for injuries, including death, that you, your resident relatives, and occupants of your insured vehicle sustain, up to the limits you select. Certain exclusions may apply. Refer to your policy.
Underinsured Motorist Coverage (UIM)
If a driver or owner of a vehicle is legally liable for an accident but does not have enough insurance, you can use UIM coverage for injuries, including death, that you, your resident relatives, and occupants of your insured vehicle sustain, up to the limits you select. Certain exclusions may apply. Refer to your policy.
Uninsured/Underinsured Motorist Property Damage Coverage (UMPD)
If driver or owner of a vehicle is legally liable for an accident but does not have insurance or does not have enough insurance, you can use UMPD to cover damage to your insured vehicle, up to the limits you select. In some states, UMPD is available as an alternative to Collision coverage. Certain exclusions may apply. Refer to your policy.
Vehicle Identification Number (VIN)
The Vehicle Identification Number (VIN) for your vehicle is usually found on the driver’s side of your dashboard, the vehicle registration or the title. The VIN is a combination of 17 letters and numbers that can be used to identify the make, model and year of a car.
Laredo (// lə-ray-doh; Spanish: [laˈɾeðo]) is the county seat of Webb County, Texas, United States, located on the north bank of the Rio Grande in South Texas, across from Nuevo Laredo, Tamaulipas, Mexico. According to the 2010 census, the city population was 236,091, making it the tenth-most populous city in the state of Texas and third-most populated on the Mexico–United States border, after San Diego, California, and El Paso, Texas. Its metropolitan area is the 178th-largest in the U.S. and includes all of Webb County, with a population of 250,304. Laredo is also part of the cross-border Laredo-Nuevo Laredo Metropolitan Area with an estimated population of 636,516.
Because Laredo is 95.6 percent Hispanic and Latino, it is one of the least ethnically diverse cities in the United States. When economic diversity, household diversity and social class diversity, are considered, Laredo is rated the 19th least diverse city overall out of the 313 largest cities in the nation.
Laredo’s economy is based on international trade with Mexico. Most major transportation companies have a facility in Laredo. The city’s location on the southern end of I-35 close to the manufacturers in northern Mexico promotes its vital role in trade between the two nations. Laredo International Airport is within the Laredo city limits, while the Quetzalcoatl International Airport is nearby in Nuevo Laredo on the Mexican side.