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Car Insurance Terminologies Explained
The A-Z of Car insurance in India
You have finally bought your dream car, and you are excited to take it out on the streets. You have also done your research and found yourself the best car insurance policy there is.
However, when you were handed down the documents for that policy, the language there made little sense to you, because there were a host of terms that you were either unaware of or made no contextual sense.
These complicated terms or jargon per se might make the policy difficult for you to understand. In order to make sense of the policy conditions, you thus need an in-depth understanding of the listed terms to comprehend the extent of coverage properly.
In addition to the text in insurance documents, you also need to be aware of the following insurance jargons to stay informed in case of claim settlements or disputes.
Accessory - It refers to additional equipment that car owners install in their cars and which do not affect the performance or quality of the vehicle or causes any fundamental change in it.
Actuary - An actuary is a business professional who scientifically reckons the possibility of risk and computes their financial consequences, primarily for insurance companies. They are specialists in risk mathematics.
These professionals use their proficiency in risk analysis to reckon probabilities of events that result in loss such as accidents, injuries, disabilities, etc. Actuaries compute these possibilities on an individual scale, i.e. for individual policyholders. Through this miniscule scale of risk analysis and computation, actuaries help insurance companies decide the premiums for car insurance policies.
Add-ons - Add-ons are additional coverage which you can choose to include in your car insurance policy during the time of its purchase. Inclusion of add-ons to your insurance policy hikes up the premium amount.
Bumper-to-Bumper Cover - Bumper-to-Bumper Cover is a warranty provided by an insurance company as per which everything that falls between a car’s bumpers (rear and frontal) are financially covered against damages.
Breakdown Assistance - It is an add-on where policyholders can ask for assistance from the insurance company during a car’s breakdown causing the policyholder to be stranded.
Claim - A claim, in the insurance context, means a formal request raised or made by a policyholder with the insurance company in the event he/she has incurred any losses covered under such insurance policy.
In most cases, only a policyholder is entitled to raise a claim; however, under certain circumstances, an unrelated party can file a claim as well.
Comprehensive Coverage - It refers to a variant of car insurance policies other than third-party liability coverage. Under this kind of insurance plan, the insured vehicle is financially covered against a host of perils such as theft, fire, explosion, vandalism, accidents, collision, etc. This form of car insurance policy also provides coverage for third-party liability payments.
Claim Settlement - As the name suggests, it refers to the process of settling a claim. There are two methods of how a claim is settled – reimbursement and cashless settlement. In reimbursement, the policyholder submits a claim after making necessary payments. In a cashless settlement, the policyholder does not have to pay anything, and costs related to repairs are directly paid by such insurance company to the concerned garage.
Claim Settlement Ratio - It is the ratio between the number of times an insurance company has received claims and the number of times it has settled them. A higher claim settlement ratio implies a better settlement history.
Consumable Cover - It refers to financial coverage provided on a car’s nuts and bolts, engine oils, grease, etc. in the event of an accident.
Contributory Negligence - It signifies a policyholder’s negligence towards basic safety measures and instructions of the car’s manufacturer, which led to damage to the insured vehicle.
Consequential Damage - Any damage which is not a direct product of an accident is called consequential damage. Most insurance companies do not cover consequential damage.
For instance, if your car was subject to vandalism, and you still chose to drive it, which resulted in engine collapse, such damage is considered as consequential damage.
Deductible - It is the monetary amount which shall be paid by the policyholder before he/she can submit a claim for reimbursement with his/her insurance company. There are primarily two types of deductibles – compulsory deductible and voluntary deductible.
The compulsory deductible is set by an insurance company during the time of policy purchase. Voluntary deductible is chosen by a policyholder as per his/her volition. Depending on the voluntary deductible amount, the premium is set — a higher voluntary deductible results in a lower premium amount.
Depreciation - It refers to the depreciation in the actual value of a car. It is computed in the event an insured vehicle has suffered irreparable damage or has been subject to theft, causing total loss of the vehicle.
Factors like the number of years it has been used, kilometres it has been driven in its lifetime, and the car’s overall condition are taken into account when calculating depreciation.
Damage/Loss - Damage refers to the result of an incident that has impacted the insured vehicle’s condition. The incidents considered under a comprehensive car insurance policy as claimable damage are fire, collision, vandalism, intentional harm by a third-party, and natural calamities. The monetary equivalent of damage is referred to as loss.
Effective Date - It signifies the date from which a car insurance policy is operational.
Exclusion - Circumstances or objects which do not qualify for coverage under an insurance policy are considered as exclusions. For instance, the circumstance of drunk driving is excluded from car insurance policies; hence, any damages arising out of it are not financially covered.
Endorsement - It is a document which states the addition or removal of a benefit to or from the existing insurance policy or any change of information in the policy document. In other words, it is a written agreement formally mentioning any amendments to a car insurance policy.
Extended Coverage - It refers to the extension of policy limits with the inclusion of an add-on to an existing insurance policy.
Grace Period - A grace period is a predetermined time frame within which individuals are allowed to renew their insurance policy without causing it to lapse. This period starts from the due date of an insurance policy and the length of such period varies from one insurance company to another and also depends on the type of insurance policy.
Insured Declared Value - IDV or Insured Declared Value is the maximum amount which an insurance company provides as the sum insured upon events such as loss or total damage of a car. It is calculated by deducting the depreciation of a car from its listed price as set by such car’s manufacturer. In case a car has accessories which the car owner has separately installed after its purchase, IDV for them would be calculated separately and then added with the car’s IDV.
IDV = (Manufacturer’s listed price – Depreciation) + (Cost of accessories – Depreciation)
Lapse - It refers to the discontinuation of a car insurance policy wherein the insured individual stops receiving the privileges offered to him/her under such policy. It occurs when a policyholder fails to renew his/her insurance policy prior to the due date. Any claims made post due date (provided there is no grace period) are not taken into consideration by the insurance company, and such policyholders stand to lose their No Claim Bonus.
Letter of Experience - It is a document which individuals can ask from an insurance company that previously insured him/her. In a letter of experience, the insurance company notes their record with the insured party on whose regards such letter is drafted. It is similar in nature to a letter of recommendation.
Limit - It is a predetermined amount of money up to which extent the insurance company will provide coverage or cover losses suffered by the insured individual. Computation of premiums for car insurance plans is based on the sum of money prescribed under Limit. Hence, a higher limit would result in a higher premium amount and vice versa.
MVR - MVR or Motor Vehicle Record refers to the driving history of a car insurance policyholder. It contains relevant details such as the concerned individual’s traffic citations, i.e. times when he/she was summoned to court for payment of fines, history of traffic violations, points on such individual’s driving license, etc.
Natural Calamities - Dangerous events that are not caused by humans are called natural calamities under the car insurance policy. It primarily refers to natural disasters such as earthquakes, cyclone, hurricanes, etc.
No Claim Bonus - No Claim Bonus or NCB is provided in the form of a discount on premiums of car insurance policies. Insurance companies offer NCB to individuals who have not made a single claim in the previous year. The percentage of discount offered under NCB increases with the passing of each claimless year. It can also be carried forward to a different insurance company when changing policies.
Network Garages - Car insurance companies authorise certain garages to provide the cashless repair facility to their policyholders, where expenses related to repairs are directly reimbursed to such network garages. Hence, they are also called cashless garages.
Own Damage Policy - Own damage policy is where a policyholder is indemnified against losses that arise out of damages caused to his/her car. In the context of car insurance, own damage policy provides coverage to the insured in case his/her car incurs damages due to fire, vandalism, natural calamities, theft, collision, etc.
Policy Period - It refers to the time frame within which an insurance policy is in effect.
Policy Document - It is an integral part of an insurance contract which contains exhaustive information regarding the policy covenants, the extent of coverage, perils covered under such contract, and exclusions from the policy.
Personal Injury Protection - It is a clause which states that an insurance company would bear the policyholder’s medical expenses if he/she is hospitalised due to a car accident. This coverage is provided regardless of which party is held liable for such an accident.
Personal Accident Cover - This is a mandatory add-on cover with a car insurance policy (third party or comprehensive) stipulated by the IRDAI under which policyholders can receive compensation for disability due to an accident. This policy also provides compensation to the policyholder’s family members on the event of his/her death due to an accident involving the vehicle.
Premium - It is the amount of money which the policyholder pays to an insurance company in order to enjoy privileges under a car insurance policy. In most cases, premiums are paid on an annual basis.
Passenger Cover - It is an additional coverage under which medical expenses on account of bodily injuries sustained by a passenger in an insured vehicle is covered.
Quote - It refers to an estimation of the premium amount which an individual might need to pay to purchase a car insurance policy. It is essential to note that an insurance quote is not the final amount one needs to pay and might vary when actually purchasing the policy. Accuracy of a quotation primarily depends on the legitimacy and extent of information provided by an individual.
Return to Invoice - It is included under car insurance add-ons, wherein a policyholder is reimbursed the entire amount mentioned in the insured vehicle’s invoice along with registration fees and road tax in the event the car’s stolen or damaged beyond repair.
Renewal - It simply refers to the extension of a policy for another term after the previous insurance contract has ceased. Individuals need to renew their car insurance policy within the due date or grace period (if any).
Replacement Cost - It is the cost of replacing or repairing a car to the state in which it was before an accident. During the calculation of replacement cost, depreciation or the vehicle’s market value is not considered.
Repairs - Repairs that are necessary due to an accidental collision, vandalism, fire, or natural calamities are covered under a comprehensive car insurance policy.
Risk - Risk signifies the possibility of adverse occurrences which would require an insurance company to cover losses arising out of it.
Surcharge - It refers to an extra charge which the insurance company levies on the policyholder when he/she demonstrates any compromising behaviour that poses as an additional risk to the insurance company. This extra charge effectively increases the premium amount of an insurance policy.
For instance, if you repeatedly violate traffic rules, the insurance company might consider you as a bigger liability than previously determined, owing to which it might levy a surcharge.
Third-Party - A third party is an entity other than the policyholder.
Third-Party Coverage - It is a form of an insurance contract, where the policyholder is insured against losses that arise out of liability to compensate a third-party due to bodily injuries or property damage. It is also called liability coverage.
Traffic Violation - It is the act of violating traffic rules which are in force.
Tyre Protect Cover - It refers to an additional coverage which allows policyholders to receive compensation for losses suffered on account of tyre damage under all possible circumstances, barring intentional damage of tyres.
Underwriter - An underwriter analyses and evaluates the risk of insuring a certain individual. Based on such analysis and evaluation, an underwriter computes the cost of insuring an individual and subsequently sets a premium amount. This act of analysis and evaluation of individual risk exposure and subsequent determination of premium is called underwriting.
Zero Depreciation Cover - It is a form of add-on under which insurance companies do not consider depreciation in a car’s and its parts’ values when computing the claim settlement amount for repairs or replacement.