Insurance Tips > Understanding Insurance Terms
Your policy defines the terms used in that contract. Please read it carefully.
Because you are considering a policy from American Modern, to help you understand the coverage options we offer, we have built this glossary to explain key terms using as little insurance jargon as possible. If you have particular questions, talk to your agent or give us a call.
Actual cash value – In the event of a total loss, the insurance company will establish a value for the damage. The standard settlement option, actual cash value (ACV) takes into account the depreciated value of your vehicle or property. This may not provide enough cash to replace the item with an equivalent. Keep in mind that the policy will pay up to the maximum value listed on the policy.
All-risk policy – A form of property insurance, all-risk offers very broad coverage. It covers all perils except those specifically excluded by the policy. Some policy descriptions use the words comprehensive or special form, which mean the same as all-risk.
Builder’s risk – An endorsement to a property policy, such as our manufactured home program, this temporary coverage provides protection on a work site during construction, such as theft of building materials or equipment and damage to neighboring property. For a manufactured home, it also covers the transporting of the home from the manufacturer to the home site.
Coinsurance – In some property policies, it makes sense for the policy holder to absorb some percentage of the loss before the insurance policy begins to pay. Coinsurance is the division of that financial responsibility. When a loss occurs, the policy holder pays up to his percentage of the loss, and the insurance company pays the remainder, up to the policy limit.
Collision coverage – Casualty insurance has three components: liability, collision and comprehensive. The collision portion of the policy covers your vehicle from physical damage caused by accidental contact with another vehicle or an object such as a tree or street sign.
Comprehensive coverage – Casualty insurance has three components: liability, collision and comprehensive. The comprehensive portion of the policy protects your vehicle from physical damage caused by anything other than a collision, such as fire, windstorm or vandalism. Theft is also a comprehensive coverage.
In property insurance, comprehensive coverage refers to the scope of coverage that includes all causes other than those specifically excluded in the policy language.
Declaration – A policy has several sections, most of which are standard to every policyholder. The portion of the policy that identifies you as the specifically insured party is the declaration, commonly called the “dec page.” This section of the policy lists your name and address, describes the property insured, gives its location, defines the policy term, states the limits and premium.
Deductible – When a covered loss occurs, a defined portion of the loss is the responsibility of the policyholder. Depending on the policy type, the deductible can be either a set dollar amount or a percentage of the claim. Increasing or decreasing the deductible will alter the premium for your policy because it shifts the likelihood that a claim will be filed.
Endorsement – An endorsement is any modification to the standard policy language or coverage. For example, the breakdown endorsement in our manufactured home program provides expanded coverage to include the mechanical or electrical failure of items such as appliances or the furnace.
Exclusion – Every insurance policy defines what it will and will not cover. Any item or condition or person that is not covered is an exclusion.
Extended coverage – A policy offers a defined set of coverages and exclusions, and most insurance companies offer a standard package. The scope of coverage can be extended to provide additional coverage to meet your particular circumstances and coverage requirements.
Fire insurance – The most basic coverage in property insurance, fire insurance covers losses caused by an accidental fire or lightning strike. This kind of policy often includes coverage for other named perils.
Flood insurance – Coverage for a flood is typically excluded from property insurance policies. You may be able to add extended coverage from your insurance carrier, but often your only option is to purchase a separate policy from the federal government through its National Flood Insurance Program.
Hazard – Any circumstance that increases the likelihood of a loss or that increases the severity of a loss is a hazard. It is not a cause of loss, just a variable that make a loss more costly.
Homeowners policy – A homeowners policy is a wide-ranging package of protections that goes beyond physical damage coverage to your house. Also included are property coverage for other structures on the grounds, personal property coverage, personal liability coverage, and any endorsements. The policy will define the causes of loss, which may be named perils or a comprehensive list. Note that earthquake and flood are not covered. It will also specify any limits, exclusions and conditions.
American Modern offers a specialty homeowners program that provides a well-rounded package of coverage, and also a residential fire program that offers just the basics.
Liability coverage – Casualty insurance has three components: liability, collision and comprehensive. The liability portion of the policy covers your legal responsibility for bodily injury to someone or damage to someone’s property. It does not include physical damage protection for your own vehicle or injuries.
In property insurance, liability coverage protects you against claims for bodily injury to someone or damage to the property of someone resulting from your negligence, such as slip-and-fall.
Limit – A limit is the maximum amount paid for a covered loss. In casualty policies for auto or motorcycle, some minimum limits will be defined by your state. In property policies, you should choose a limit high enough to cover the value of your home and possessions.
Loss of use – If a covered loss requires that the homeowner move out of the house during repairs or rebuilding, the loss of use provision provides money for temporary housing and extra living expenses.
Medical payments – Included in casualty policies is coverage for medical expenses caused by an accident-related injury. It is intended to cover basic medical costs without the need to assign responsibility for the accident. The coverage amount is generally a few thousand dollars. It is separate from liability coverage.
Named peril – A peril is any cause of damage or loss. Your policy will define what perils are covered. Named perils are specifically listed in the policy. If a loss occurs that is caused by an event not listed, then the policy will not offer you any compensation.
The list of named perils can vary depending on the policy and the company offering it, but generally includes:
Fire or lightning Windstorm or hail
Explosion Riot or civil commotion
Aircraft Vehicles
Smoke Vandalism or malicious mischief
Theft Falling objects
The policy will define any additional exclusions and your payment limits.
Policy – When you purchase a policy from an insurance company, you are entering into a binding contract. The contract defines its terms, your rights and coverages. You have several obligations as well. It is important that you read and understand your policy. Its language takes precedence over what you were told by your agent, or what you have read in a brochure or Web site.
Property/casualty insurance – The insurance industry is divided into segments. Property/casualty companies write coverage for damage to or loss of property, plus legal liability for damages caused to other people or their property.
Replacement cost – In the event of a total loss, the insurance company will establish a value for the damage. This is based on the kind of coverage you selected when you opened the policy. Replacement cost coverage is the most extensive coverage you can purchase. Its major advantage is that it avoids depreciation adjustments that apply to an actual cash value settlement, which can leave you without enough money to rebuild or replace your vehicle or property. Keep in mind that even though you may have replacement cost coverage, the policy will pay up to the maximum value listed on the policy.
Settlement options – A settlement is the fulfillment by the insurance company of the terms of its policy following a covered loss. In the event of a partial loss, this is the repair of the damage. For a total loss, the settlement is based on a choice you make when you enter into the policy. One of the benefits of specialty insurance is that you have multiple choices, including actual cash value, replacement cost and agreed value. The policy will pay up to the maximum value listed on the policy.
Total loss – When the damage to a vehicle or property is at a level where the cost of repairs exceeds its value, the insurance company will define it as a total loss. At that point the loss settlement to the policyholder is based on its actual cash value, replacement cost, or the agreed value stated on the policy. The policy will pay up to the maximum value listed on the policy.
Uninsured/Underinsured motorists coverage – Not everyone purchases adequate insurance, or even has insurance. If you are unfortunate to be in an accident caused by someone with inadequate insurance, you can be stuck with the bill. To protect yourself, you can add uninsured and/or underinsured motorist coverage to your policy. This extra coverage fills in the gap between the policy coverage of the at-fault driver and the actual cost of the damages or injuries.
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