Demystifying Car Insurance Jargon

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Generally speaking, finance-related industries are notorious for complex terminology. Although most insurers strive to simplify their customers’ policies, the car insurance industry is no stranger to confusing jargon due to a myriad of legal considerations. While we hope your insurer makes it as easy for you as possible to understand your policy, as we know that it can sometimes feel downright confusing trying to understand all of the complicated jargon and what some of these words mean for your policy.

Here’s a list of some of the most common car insurance jargon you’ll likely come across and how to understand their impact on your policy.

Deductible
Your car insurance deductible represents the portion of damages or repair costs for which you are responsible; your insurance company covers the rest, if the damages are covered by your car insurance policy, of course.

Scenario: Marc files for a $1,000 claim in damages for his car and he has a $300 deductible. His insurance company will cover $700 and Marc will be responsible for the remaining $300.

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Comprehensive coverage
Comprehensive coverage covers vehicles for damages that are not directly related to a collision or the actions of the driver. Examples of events that comprehensive coverage protects against are those such as theft, vandalism, weather-related incidents, or damages from animals.

Scenario: Troy’s windshield was severely cracked by a hail storm. Luckily for him, he has comprehensive coverage that covers the damages.

Fault vs. Non-Fault Collision
Fault in a collision is defined as the party who was legally responsible for the accident. Generally, the driver at-fault is the one who performed an illegal or reckless action while in control of their vehicle.  Insurance companies keep records of both “at-fault” and “non-fault” collisions. At a policy’s renewal, and depending on claims history, amongst other factors, drivers might see an increase in annual premiums.

Fault in a collision is not assigned arbitrarily. In Ontario, fault is assigned using the Fault Determination Rules set out in Regulation 668 under the Insurance Act. In Quebec, in many cases, fault is determined according to the Direct Compensation Agreement for the Settlement of Automobile Claims and enforced through provincial legislation governing car insurance.

Scenario: Carrie rear ended another car and was found to be at fault for the accident. When Carrie renewed her policy, it had an impact on her annual premium.

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Third Party Liability
If you are at fault in an accident, you can be held legally responsible for the damages and injuries (in Quebec, injuries are covered by the SAAQ) you’ve caused.  In Ontario, the required minimum amount of third-party liability coverage that a car insurance policy must cover is $200,000.  In Quebec, this minimum is set at $50,000.  Although when considering the potential medical and legal fees associated with a bad accident, it can be prudent to have at least $1,000,000 in liability coverage.

Scenario: Jason, a resident of Ontario, loses control of his vehicle and collides with a nearby car. He faces a civil law suit as a result of the injuries incurred by the other party. The other party’s total medical and legal expenses equal to $600,000. With $1,000,000 liability coverage Jason’s insurer covers the full cost. With $200,000 in liability coverage, Jason would have been required to pay $400,000 out of his pocket.

Accident Forgiveness
Accident Forgiveness programs can decrease the impact that an at-fault accident can have on your premium.  Not all insurers have forgiveness programs and conditions may vary from one company to another.

Scenario:
Joel was involved in an accident where he was found to be at fault. However, since it was his first at fault accident, and his insurance company allowed for accident forgiveness, with all else being the same, Joel only experienced a modest premium increase.

Endorsement
An endorsement is a modification to your current policy that alters the terms of your insurance contract or coverage.

Scenario:
  Allen is going on vacation, so he called his insurance company to add an endorsement to his policy that covers damages to a car he plans to rent.

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Primary/Secondary Driver
The primary driver is defined as the person who drives the vehicle the majority of the time, and in most cases is the owner or co-owner of the vehicle. A secondary driver is defined as someone who regularly drives the vehicle but is not the primary. There is no difference in coverage between primary and secondary drivers.

Scenario: Mike shares his car with his girlfriend Sarah. Mike operates it most days of the week.  Sarah occasionally uses his car to run errands.  In this case, Mike is listed as the primary driver and Sarah is listed as a secondary driver.

Replacement vs. Actual Cash Value
The main difference between replacement value and actual cash value is depreciation. Replacement value considers the cost of the repair or damages without depreciation, whereas actual cash value looks at the cost of replacing an item less depreciation due to factors such as age and condition.  Market factors such as product popularity or supply and demand are not considered when calculating actual cash value.

Scenario: Stacey was involved in an accident where she totaled her 5-year-old car. The replacement value of the car would be the cost of buying the same model car brand new. The actual cash value would be the cost of buying the same model car new, minus the depreciation of the 5-year-old car at the time of the accident.

What other insurance related terms leave you confused? Leave your questions in the comments section below and we’ll be happy to help clarify!

Marc Nashaat is a close follower of U.S. mortgage insurers and wealth management firms as well as a contributing author to the belairdirect blog. As one of Canada’s largest and most positively reviewed insurance brands belairdirect offers affordable car and home insurance quotes with no hassle. It’s insurance simplified.

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