The ABC's of Insurance Coverage

By Diane Tait

Image courtesy flickr

If you’ve read my blog for any length of time, then you no doubt recall how I always advise you to “Read your policy including the fine print.”  While that’s prudent advice for any contract, what makes insurance policies unique is that they have a language all their own.  Unless you’re a contract attorney or work in the insurance industry, much of what’s expressed in an insurance policy may as well be written in Greek.  Therefore, I decided to dedicate today’s blog into giving you a leg up on many of the terms you’ll find in a typical policy.

Actual Cash Value/Actual Replacement Cost – The difference between these two terms is important for you to understand since the value of something that was damaged or lost can be far different from what it would cost to replace it.  It’s like the difference between wholesale and retail, since you may have to pay $1,000 to replace the leather sofa that was water damaged, but if it was a few years old, it may only sell for $200 today.

Additional Insured is someone other than the policyholder who is covered by the insurer. 

Additional Living Expenses – Should your home be damaged by a fire or a storm such that you and your family are unable to inhabit the dwelling, this is the portion of the policy that tells you how much and how long  your policy will provide living expenses until the repairs are completed.

Amendments change the provisions of a policy provided they are signed by the insurer and the policyholder or his/her authorized representative.

Collision Coverage refers to the portion of your auto insurance that pays for damage to your or another person’s vehicle.

Binder serves to provide coverage for a specified period until the actual policy is issued.

Blanket Insurance denotes coverage for two or more items or locations under a single policy.

Cede is to transfer all or part of the risk being taken on by an insurer to a second insurer.

Image courtesy flickr

Comprehensive Coverage kicks in when your vehicle is damaged by situations other than a crash.  For instance, if your windshield is cracked by a rock or the vehicle is crushed by a falling tree, comprehensive pays to repair or replace the vehicle, minus your deductible.  This is also true if your car catches fire or is submerged during a flash flood.   

Debris Removal Clause extends a homeowner’s policy to include removal of debris resulting from a covered cause.

Declaration Page – It describes who and what is being insured for how much and how long.   

Deductible is what you pay out of pocket on a claim.  This means if your home is damaged by a fire that does $10,000 in damage and you have a $1,000 deductible, the insurance company will issue you a check for $9,000 to repair the damage.

Endorsement - In the insurance industry, an endorsement is a specific change to your policy.  They can be used to add, modify or remove coverage.  They can also be used to clarify the terms of a policy without altering the coverage. 

Exclusions are items that are specifically omitted from coverage.  If you have a homeowner’s policy, flood damage is usually excluded, while water damage caused by anything other than a flood is usually included.

First Party Coverage provides a policy where the policyholder is paid for damages by their own insurer rather than from the insurance company of the party who caused the damage. 

Home Contents denote items in your home that aren’t part of the structure itself.  This can include furnishings, appliances and personal belongings.

Image courtesy flickr

Limits state the maximum amount a policy will pay out for any covered cause.  For instance, if you have a $100,000 liability limit and you wind up on the losing side of a $250,000 lawsuit, the insurer is only required to pay the first $100,000.  You get to pay the rest.

Peril in the insurance industry is a term used to specify a covered risk, such as fire, flood or wind damage that is covered by the policy.

PIP denotes personal injury protection that pays for medical coverage for you, your passengers and anyone else involved in an auto accident in which you’re involved.

Scheduled Personal Property denotes additional coverage for high-value items such as artwork, jewelry or other luxury items that exceed the limits of your policy or are otherwise excluded.

Subrogation is the term the insurance industry uses to address a situation where they pay your claim only to seek compensation from a third party.  For instance, if you were involved in an auto accident that caused $1,000 damage to your vehicle where you were not deemed to be at-fault, your insurance company would issue you a check minus your deductible before seeking to be compensated by the at-fault driver’s insurer.

Umbrella Policies provide liability coverage over and above your homeowner’s policy.  They typically cover all members of your household who don’t have property insurance in their own name.  This means if your teen winds up being sued for trolling someone’s good name online, you’re covered up to the limit of your umbrella policy.  While an umbrella policy will cover damage to other people’s property, the coverage doesn’t extend to your property.

Uninsured Motorist Coverage is the portion of your auto policy that kicks in should the driver of a car that collides with yours have little or no insurance.

Underwriting is insurance jargon used to describe whether a policy will be approved and for how much.  An insurance underwriter is tasked with assessing both the risk and value of any given person or property.  Underwriters input all the data related to the subject being assessed into sophisticated software that helps determine the risk, the worth and the amount that would be prudent for the insurer to cover.  It can also be used in certain circumstances to deny coverage.

Diane Tait owns and operates A&B Insurance.  To find out more about how you can save money on insurance, go to her site or fill out the form at right.