Glossary of Insurance Terms
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If your insurance company or independent agent is throwing complicated insurance terms your way, use this insurance glossary to make better sense of it all.
As with all things financial, the more you know, the more you save. Yes, knowledge is indeed power.
Absolute Liability (also known as “Strict”) – This concept deals with a person or company being fully liable or responsible for bodily injury or property damage as a result of their activities or business practices. For example, if you keep venomous snakes in your home, and someone is bitten and killed, you are known as absolutely or strictly liable. There is no need for the party suing you to prove negligence on your part to collect damages.
Accident – In insurance terms, an accident is the occurrence of an unexpected, sudden event that takes place at a certain time and place. The leaking of oil from your car for a year, resulting in the motor ceasing would not be considered an accident. You would not be able to collect insurance money in that event.
Actual Cash Value – The current value of an insured asset calculated as the cost of the asset when new, minus the depreciated current value.
Additional Insured – This is any person or company you have added to a policy as a named insured for whom the benefits of the policy are assigned. Your home mortgage may include your lender as an additional insured, lien holder or loss payee. In the event your house burns down, your lender would be compensated for their financial interest in your home (the money you still owe them).
Additional Living Expenses – This is the money you would receive above what your normal living expenses would be in the event you suffer a covered cause of loss on your home and need to live somewhere else while it is being repaired. Your normal living expenses are not covered, just the additional money you require. If you normally spent $1,000 per month and needed to spend $1,500 per month to stay in a hotel, only the remaining $500 would be reimbursed.
Admitted Carrier – This is an insurance company licensed to conduct business in a particular state. Insurers need to meet regulations and requirements for each state in order to become admitted. Being admitted in one state does not mean you are admitted in another.
Adjuster – Also referred to as a Claims Adjuster. This is the individual who prepares and submits your claim to your insurance company. They may interview witnesses, collect facts and potentially determine the validity and payment amount of your claim. He or she may be an employee of your insurance company or an independent adjuster who works under contract for many insurance companies.
Aggregate Limit – Refers to the total dollar amount an insurance company will pay for covered liability losses within a policy term, usually 1 year, regardless of how many individual losses take place. Your policy may have a “per occurrence limit” of $100,000 and an aggregate limit of $1,000,000. In this case, your insurance company will pay up to a maximum of $100,000 for a covered loss as many as 10 times within your policy term. If you have 11 $100,000 losses, you will have to pay for the 11th loss out of your own pocket, as it would exceed your aggregate line.
Agent – A person who is licensed to conduct insurance business practices within a state. Additionally, the individual has to be contracted by a company offering insurance products. An agent is capable of selling and servicing insurance. There are multiple types of insurance agents.
All Risk Insurance – A cause of loss form for an insurance policy, meaning all perils are covered except those specifically excluded in a policy. This is typically more expensive than a named peril policy.
Annuity – This is a tax deferred life insurance contract in which an individual pays into the account over time and when the contract matures, a guaranteed periodic amount of money (yearly or monthly perhaps) will be paid out to the beneficiary until their death. It is also possible to accept a lump sum payment when benefits are due. The person who starts the annuity may be the beneficiary, however it is more common for another individual to be the beneficiary.
Appraisal Clause – A clause in a property insurance policy that states an appraisal of the property must be completed when the insurer and insured cannot reach agreement on the value. Each party gets (an pays for their own) appraisal. The two appraisals are then given to a non-involved third party for review. If the third party and any one other party agrees on the value, the process is complete and the value stands. The costs are shared by the two original parties.
Appurtenant Structure – Covered under the “Other Structures” portion of the homeowner’s policy, these are unattached structures the insured may own on any insured location. An example may be a small shed in the back yard, separate from the house, where you store your lawn maintenance equipment.
Assigned Risk Insurance – This is for people who cannot get insurance through any regular means. Perhaps you have had too many tickets or accidents, deeming you an unacceptable risk to an underwriter. Since auto liability insurance is made mandatory by the state, you must have a means of obtaining coverage. Insurers within a state will pool together to offer insurance for these individuals, thereby spreading the risk. In fact, in order to sell insurance in a certain state, it is mandatory your company enters into the pool.
Auto Insurance Deductible – The amount of money you are responsible for paying in the event of a physical damage claim on your vehicle.
Automobile Liability Insurance – Insurance for the owner or operator of a vehicle that pays for damages resulting from covered losses they are responsible (“at-fault”) for causing.
Attained Age – This is the age at which a beneficiary becomes eligible for payment from an insurance contract. For example, you may have to reach an attained age of 35 to collect benefits (usually money) from a trust fund your grandparents started for you as a child.
Bailee – You are considered a bailee when you have possession of another person’s goods. There is a specific type of insurance for this risk, referred to as bailee’s customer’s policy, in which the bailee does not specifically have to be at fault for damaging your goods to file a claim and be compensated. This acts as good will coverage; to help you keep customers in the event their property is damaged while you have “control” of it.
Benefit Period – This is the timeframe, expressed in months or years, for which you are eligible to receive benefits from an insurance contract. You may have an annuity that guarantees periodic monetary payments until your death. This would be considered an unlimited benefit period.
Binder – A temporary oral or written contract that satisfies agreements until the final policy is issued. For example, our agent can issue you a binder for coverage until the actual policy is updated if you buy a car during the weekend and the insurance company is closed.
Bodily Injury – Any bodily harm, sickness, disease or death resulting from a covered loss. This term is associated with liability insurance.
Boiler and Machine Policy – Covers the insured against bodily injury and property damage claims resulting form the breakdown of boilers or other machines.
Bond – This is insurance against a contract in which financial loss will occur if a certain activity does not take place or is not completed. Contractors often have to purchase a performance bond when they win a bid. If the contractor doesn’t finish a building on time, and the store misses its grand opening as a result, the insurance company will pay the store for the lost money. Often times, the contractor is then subrogated against by the insurer to recapture the money they paid out.
Broker – An individual who represents the insured, who may be looking for insurance. For example, a company may not be able to find an insurer who will provide them coverage for certain activities (maybe manufacturing fireworks). A broker may be hired to seek coverage for them. This is the opposite of an agent, who represents the insurance company. However, a broker can also be an agent.
Burglary – The stealing of property by using forced entry or exit when a business is closed.
Business Owners Policy – More commonly known as a BOP, this is a standardized commercial package policy covering insured for the liability and property damage they may suffer as a result of their ownership or business practices. Large businesses typically do not qualify for this type of policy and must purchase a commercial package policy (CPP).
Cancellation (of a policy) – Either you as the insured or the insurance company can cancel a policy. You can cancel at any time for any reason, though the insurer must have a valid reason after what is usually a 60-day window. There are specific stipulations in the insuring agreement regarding cancellation.
Captive Agent – An insurance agent who represents (sells insurance products for) just one insurer. They are typically independent contractors rather than employees of the insurer, although this is not always the case. Examples include, State Farm, Allstate and Farmers insurance agents.
Casualty – For insurance purposes, this refers to the bodily injury or death of an individual as a result of an accident.
Casualty Insurance – Insurance coverage designed to indemnify a policyholder for bodily injury to others resulting from a covered cause of loss. For example, if you injure another person in an auto accident, they may sue you to recover damages as a result. Your casualty insurance will pay for those damages if they were the result of a covered loss.
Cause of Loss – Also referred to as perils, these are circumstances against which you are insured by an insurance contract. Examples may include wind damage to your home or collision damage to your vehicle. Some causes of loss may be excluded by your insurance policy, which means you will have no coverage for damages resulting from these circumstances. For example, your insurance company will normally exclude damages to your home resulting from a flood.
Claim – A demand for payment from another party (an insurance company for our purposes) for damages, either liability or physical damage, resulting from a covered cause of loss, often expressed as “filing a claim.” You may make a claim against your own insurance company or another person’s insurance company.
Coinsurance – A provision in an insurance contract detailing the responsibility of an insured to maintain a certain percentage of insurance to value on a piece of property (a home for example). Your insurer may require you to insure your home for at least 80% of its value (regardless of how much money you owe on it) in order to avoid a monetary penalty in the event of a claim. It is usually associated with replacement cost value determination in your contract. In commercial insurance you may be able to lower or raise the percentage in order to raise or lower your premium. This idea is similar to a deductible in that you are accepting more or less responsibility for a property claim in order to affect your premium.
Collision Damage Waiver (CDW) – a promise from a rental car company to not hold you responsible for physical damage caused by you to their vehicle while in your care or custody.
Collision Insurance – A form of physical damage insurance that pays for damages to an insured vehicle caused by something colliding or running into the vehicle, whether your at fault or not. This term is easily confused with comprehensive insurance. Click here to learn the difference between the two.
Commercial Package Policy – Any commercial insurance policy that contains more than one coverage part, usually containing the CGL and at least one type of property coverage.
Commission – This is the money earned by an insurance agent or representative who solicits and sells insurance products. Normally it is a pre-determined percentage of the policy premium. For example, if your policy is $500 per year, your agent may earn $50 or 10% commission for selling it to you.
Comparative Negligence – A negligence claim settlement ideology that states a person is only responsible for damages equal to the percentage of the incident that was their fault. If the other party is not at least 51% at-fault for the incident, you reserve no rights to collect for damages.
Competitive State Fund – This deals with workers compensation insurance. In some states, the state itself provides workers compensation insurance and is in competition with private insurers. A competitive state fund is the fund the state sets aside to pay for work related bodily injury and/or disease.
Comprehensive Insurance – A form of physical damage coverage in which your insurer agrees to pay for damage to your vehicle resulting from covered causes of loss not resulting from collision. For example, if a tree falls on your car while parked in your driveway, you would file a claim with your insurer under your comprehensive coverage. This coverage is often confused with collision coverage.
Compulsory Insurance – This is insurance coverage made mandatory by a state. Typically, at least minimum liability is necessary to comply with state laws or car insurance. Additionally, workers compensation insurance is compulsory as well.
Concealment – With regard to insurance, this refers to withholding a material fact when filling out an application for insurance. This is highly discouraged; as concealing information on an insurance policy may void coverage and leave you stuck with an unpaid claim.
Conditions – This is the section in your insurance policy that deals with the duties set forth for you and the insurer as part of the contract. An example of a common condition is the necessity to inform your insurance company of any accident or property damage you suffer as soon as reasonably possible.
Consequential Loss – A loss that occurs as a result of a direct loss. It can be referred to as a time element loss as well. An example may be fair rental value, which is the money you would be out if your rental property burns down and you are no longer able to collect rent from your tenants. Consequential losses are not necessarily covered on your policy.
Contingent Business Income – Consequential, or time element, loss coverage. It protects an insured against the indirect loss of business income in the event a necessary supplier has a direct loss and you cannot continue your business operations as a result. An example may be if you manufacture furniture, and the wood supplier burns down. You would not be able to continue operations until you found a new supplier or replacement supplier. This coverage would pay for your lost earning for a specified time period.
Contingent Liability – Also referred to as vicarious liability, this term describes your liability for the actions of others. Perhaps an employee of your company causes property damage to another person. You may be liable if the incident occurred while they were performing their described job functions or duties.
Contractual Liability – This is any liability you assume as a result of becoming party to a contract. For example, if you rent an apartment, you may sign an agreement with the landlord that states you are liable for any bodily injury or property damage that occurs within your rented premises. This is quite common when signing a lease.
Co-payment – Typically associated with life and health insurance, a co-payment is a predetermined amount of money the insured must pay out of their own pocket for each visit to a doctor’s office or for prescription drugs. It is a form of coinsurance designed to limit the moral hazard of individuals visiting the doctor unnecessarily several times during their policy period. It is basically the same idea as a deductible for physical damage coverage to your automobile or other property.
Coverage – Any loss, or peril, for which an insured will receive benefits in the event of an insurance claim they file or is filed against them during a policy period. Personal insurance coverage types include liability and physical damage. Commercial coverage types include liability, property, theft, business income and many others.
Damages – Claims for monetary compensation to indemnify (make whole) an individual in the event they suffer physical or financial loss as a result of a negligent party’s acts. For example, someone can sue you for bodily injury damages if you are found to be liable for causing the accident in which they were harmed.
Deductible – This is the amount of money an insured must pay, prior to an insurance company paying anything, for physical damage or property damage to a vehicle or home in the event of a claim for a covered cause of loss. It is designed to ensure claims are not filed for every scratch, dent or missing roof shingle from an insured’s property. It helps keep the cost of insurance down for everybody, as insurance companies do not have to pay the costs associated with potentially millions of minor claims. The higher your deductible, the lower your overall premium and vice versa. A commercial insurance deductible can also be referred to as “first dollar, which means the first dollar for the claim is paid by the insured.
Death Benefit – The total amount of money a beneficiary will receive in the event a life insurance policyholder dies.
Debris Removal Coverage – This type of insurance pays for the removal of debris from your property in the event of a covered property loss. For example, if your house burns down, there is a cost associated with removing the remains of the house from your lot. In certain policies, this is coverage in addition to your policy limits.
Declarations Page – Referred to as the “Dec Page” in insurance circles. This is the portion of your policy that states basic information about the contract. Typically included are the names of the insured, the property insured (along with it’s location), the coverage limits and the premium paid for the policy.
Depreciation – This refers to the decrease of property value over time. When you purchase real property, the value often goes down over time. When you file a claim for damages to your property, the actual cash value loss settlement option determines the current value of your property as the current replacement cost minus depreciation, which can significantly lower the value of the property.
Direct Loss – This is any loss that is caused by a peril. For example, if your house burns down, it is a direct loss from the peril of fire. Indirect losses can result from direct losses.
Direct Writer – A type of insurance company who solicits insurance directly to consumers versus through an insurance agent. Direct insurers rely heavily on direct mail marketing and television and radio advertising to sell insurance. Geico and Progressive sell insurance in this manner, although Progressive also utilizes independent insurance agents to sell their products as well.
Dividend – An insured that purchases insurance through a mutual insurer may receive a portion of their premium back as a dividend.
Domestic Insurer – This is an insurance company that resides in the state it sells insurance in. For example, if an insurance company was formed in Texas, and sells its products there, it is a domestic insurer. An insurer can also be referred to as a foreign or alien as well. In fact, depending on where all products are sold, and insurer can be all three.
Earned Premium – This refers to the amount of money an insurer has “earned” during a policy term. For example, your insurance company may charge you $1,200 per year for auto insurance, which is referred to as the Written Premium. Your insurance company “earns” 1/12 of the premium each month (12 months per year). If your policy were to cancel for any reason prior to the term end the unearned portion of the premium is refunded to you, subject to the terms of the contract. You may receive a short rate refund if you cancel the policy or a pro-rata refund of your premium if the insurance company cancels the policy.
Effective Date – This term refers to the date (and in some cases) time a policy actually begins providing coverage. Often times, the time is 12:01 a.m. on the date of the policy. Claims for damages that occurred prior to the effective date will be denied.
Employers Liability Insurance – This is a workers compensation coverage part. Specifically, part 2 of the policy. It’s insurance coverage for liability claims filed by employees or their family members against an employer for bodily injury or death as a result of performing their job duties.
Employers Non-Ownership Liability – This is a coverage type that can be added to a business auto or commercial policy that covers the employer for liability resulting from an employee using their own car for the purposes of their employer. For example, if you work for an attorney and drive your own vehicle to pick up documents from a client, the company you work for would be liable for damages you may cause while doing so.
Endorsement – Also referred to as a policy endorsement, this is any change or modification that is added to a policy. Both the insured and the insurer have to agree to the change for it to be effective.
Errors and Omissions – Referred to as E & O in insurance circles, this is professional liability coverage for agents. It is necessary to protect an insurance agent from liability claims resulting from them making an error in consultation for insurance or omitting a necessary coverage type. If your agent neglects to offer you Uninsured Motorist and Underinsured Motorist coverage (if necessary in your state) and you are involved in an accident where this coverage is necessary, he or she is liable for the resulting damages.
Exclusions – Part of every insurance contract, exclusions are a list of persons or causes of loss your insurer will not provide coverage for or insure you against. Examples of auto insurance exclusions may include persons with poor driving records or people you don’t want to pay additional premium for insuring who live in your household (a teenager perhaps). Cause of loss exclusions may include war or flooding.
Expediting Expenses – With regard to insurance, this is coverage for any expenses incurred by the insured for getting their equipment back in working order. It has to do with business income insurance. If the insurance company is paying you for money you are losing as a result for a covered claim, they are more than willing to cover your expenses for getting the machinery up and running as soon as possible.
Exposure – Any risk of financial loss you are susceptible to resulting from the ownership of a business or property or from the use of a motorized vehicle. For example, you are exposed, or “at risk,” of injuring and being responsible for paying damages to another person if you own and operate a motor vehicle.
Extended Coverage Endorsement – An endorsement commonly attached to the standard fire insurance policy that adds coverage for additional perils. These perils include; wind, hail, aircraft, riot, vehicles, volcanic eruption, explosion and smoke. Please note, the coverage for vehicles is not for damage to your vehicle, rather if a vehicle, driven by someone else, damages your home. Your vehicle is covered under your auto insurance policy.
Extra Expense Insurance – This is a time element, or indirect loss, that provides monetary benefits for the insured in the event they have to spend additional money to get their business up and running after a covered cause of loss.
FAIR Plan – A program that provides property insurance to people who cannot obtain it through normal means. All companies that sell property insurance in a state must contribute to the fund. An example would be if you own a house in a hurricane zone, and private insurers will not offer you coverage. It is typically more expensive than insurance through a private company.
Fidelity Bond – This is a type of bond (or form of insurance) that ensures an employee of an organization completes their work properly and ethically.
Fiduciary – This is any person who has a job where they are entrusted with valuable items of other people. These items may include money or securities. An example of a fiduciary may be a hedge fund manager who is responsible for investing large sums of others’ money.
Financial Responsibility Laws – These are the laws that make automobile liability insurance mandatory. The belief is drivers should have a minimum amount of liability insurance to protect other motorists in the event they are negligent and cause bodily injury or property damage as a result.
Fire Insurance – A type of insurance that protects the insured party against property damage resulting from a fire. Sometimes in the insurance industry, “fire” insurance is used to describe property insurance in general, even as it relates to other perils beside fire.
Floater Policy – A type of insurance policy that covers property that is not typically in a fixed position. You may have a separate insurance policy for expensive jewelry you own and wear. This may be necessary because you leave the house with it and because a typical homeowner’s policy may not have high enough limits to cover more expensive items.
Flood Insurance – Insurance for damages to any property you own or in which you have financial interest, resulting from a flood. This coverage is typically excluded by a homeowner’s policy and can be purchased through an independent agent or directly through the National Flood Insurance Program (NFIP) where available in areas that participate in the program.
Fraud – The act of fraud includes purposely deceiving another party, in this case the insurance company, for financial gain. An example may be lying about the condition of a home to get a homeowner’s policy, then filing a claim for damages that already existed. This practice is highly discouraged and may result in your policy being voided.
Gap Coverage – This coverage is designed as a safety net for those who owe more money on a car than it is actually worth. Gap coverage will pay the difference to your lender, or loss payee, between what you owe and a vehicle’s current value in the event you suffer a covered total loss as a result of an accident you cause. For example, if you are “upside down” on your car loan, owing $20,000 when your car is only worth $15,000, and it is wrecked, the insurance company is only on the hook for the $15,000 per your policy agreement. You are responsible for the remaining balance owed to the bank, unless you have Gap coverage.
Garage Keepers Liability – This coverage can be included in a Garage Liability policy. It will cover the insured specifically against liability resulting from having customer’s property in their care or control. For example, it would cover a car repair business owner who backed a customer’s car into a pole.
Garage Policy – A specific type of commercial insurance designed expressly for businesses that deal with automobiles. It provides coverage for liability on the premises, physical damage, and any liability resulting from the use of cars in their day-to-day business. An example may be a car dealership that has multiple cars on their lot at any given time.
General Agent – Also known as a GA or managing general agent (MGA), this is a person or company who represents an insurer in a specified territory. The GA would manage other individual agents and sell product for one particular company. There are certain GA’s who solely sell homeowner’s insurance for a particular region or state.
General Liability Insurance – This is a commercial coverage that provides protection against covered causes of liability loss resulting from the ownership, maintenance of property, or daily operations. For example, if someone slips and falls on your icy sidewalk, they can sue you for damages resulting from your negligence. Additionally, if a contractor is working on a roof and drops a tool on somebody’s head, injuring them, the injured party can sue because you are liable, or “at-fault.”
Guaranty Association – This is typically a state specific organization formed to pay claims in the event the insurance company who issued the policy is incapable of doing so, perhaps in the event they become insolvent. Normally, insurers who reside or write insurance in a particular state must pay a portion of their written or earned premium into the fund in order to operate within that state.
Guest Passenger Liability – This is a motorcycle liability coverage designed to protect the insured from liability claims made by passengers resulting from covered causes of loss the insured is liable for in the event of an “at-fault” accident. This coverage is not mandatory in every state and in some cases is included in bodily injury liability coverage.
Hazard – This is any item or situation that increases the likelihood of a loss. A good example may be storing gas cans near a gas water heater. That certainly raises the risk of explosion of fire.
Hazard Insurance – Sometimes referred to as homeowner’s insurance or property insurance, this coverage can protect the insured against covered causes of loss that may damage a piece of property. It is typically necessary to obtain if you are borrowing money to finance a home purchase. This protects the lending institution’s financial interest in the property as a lien holder or loss payee.
Health Maintenance Organization (HMO) – A group of doctors and/or hospitals, referred to as a managed care organization (MOC) that are contracted to provide health and medical services to a particular group of participants that pay into the plan.
Hold Harmless Agreement – This is a form of contractual liability, in which you agree to hold an individual or organization harmless in the event of a bodily injury or property damage claim. As a renter, you will likely sign a hold harmless agreement as part of your lease. This means you assume the liability for negligence in lieu of the landlord for damages that occur in your living space.
Hull Insurance – This is the equivalent of physical damage coverage for ocean going vessels and aircraft.
Impaired Insurer – An insurer who cannot meet a minimum reserve requirement, an amount of assets they must have on their balance sheet greater than the potential of all possible losses they may have to pay, set by a specific state institution. Though an impaired insurer may not necessarily be insolvent, they are not maintaining the strict financial requirements required to operate in the state in which they are selling insurance.
Improvements and Betterments – Any additions you make to property, whether you own it or not.
Indemnity – The principle of making a person “whole again” after suffering a loss. Insurers theoretically intend to bring a person back to their exact status “prior to” an accident or loss. Part if this principle states an individual or company should not “gain” in any manner as a result of rewards from an insurance claim. Basically, if your property is damaged, you should not receive more money than it was worth at the time of loss. This concept is much more easily achieved with property damage than casualty damage, as it is more difficult to determine the worth of a person than a piece of property.
Independent Agent – An insurance agent who owns their own company and represents (sells insurance products for) multiple insurers.
Indirect Loss – This is a property loss that results from a direct loss. It may also be referred to as a time element loss. For example, you may suffer the indirect loss of additional living expenses if your home burns down, which is the direct loss.
Inherent Vice – This is any condition that may increase the chance of a property loss that exists prior to the property being evaluated for insurance. It is similar to the idea of strict liability, although it pertains to property versus liability insurance.
Inland Marine Insurance – This type of insurance was born of marine insurance, which was created to insure goods traveling by sea. Inland marine insures goods traveling over land.
Insolvent – An insurer who cannot meet their financial obligations to their insured. Simply put, they do not have enough money to pay claims on their policies. While not exactly the same, it can be somewhat thought of as insurance company bankruptcy. Guarantee Associations are formed in individual states to make certain claims are paid for the insured in this circumstance. An insurance company cannot deny a claim in the event of insolvency.
Insurance – A means of spreading the risk of loss from one individual to a large group of individuals with similar risks. Each participant pays a small guaranteed amount, or premium, into a pool of premium with others. The premium is exchanged for protection against the potential for a large unknown potential loss.
Insurance Commissioner – The person in charge of insurance operations for a state department of insurance (the name may vary by state).
Insurance Policy – This is actually a contract. The contract is the agreement between the insured and the insurer with regard to the exchange of money, or premium, for the insurance coverage provided.
Insurance Premium – This is the amount of money collected by an insurance company in exchange for coverage over a specific period of time.
Insured – The party to an insurance policy, or contract, who pays the premium to the insurer. This is the person or organization that will be covered by the policy.
Insurer – This is the company who, in exchange for premium, will offer coverage to the insured.
Insuring Agreement – This is the section of an insurance policy that details specifics about which property is covered and against what perils. Additionally, it discusses which losses will be indemnified.
ISO – Short for the Insurance Services Organization, a group of member companies that generate insurance forms and rates based on statistical data. It is not necessary for insurance companies to adopt their rates or forms, though many companies adopt them or use their forms as a basis for creating their own forms.
Law of Large Numbers – This is a mathematical principle used in insurance that states the higher the number of similar risks retained, the more accurate the prediction of losses can be. For example, if a company insures only 5 cars, it would be difficult to predict their losses, whereas a company insuring 5,000,000 cars would be able to accurately predict the potential losses they will suffer (which is how rates are determined). The more accurate the prediction of losses, the better the odds the rates will be correct and the insurance company will make money.
Least Expensive Alternative Treatment – This is a principle in dental insurance coverage in which your insurance company will only pay for the lowest cost alternative treatment to fix a particular problem. It is not uncommon in dental insurance to have many options to correct a problem. For example, instead of replacing your teeth with the most expensive surgery and technology available, your insurer may only approve dentures.
Liability – The legal obligation of a party, in our case an insured or insurer, to indemnify another party or settle a debt for an “at-fault” loss, usually in the form of monetary damages.
Liability Limits – The amount of money an insurer will pay for any loss on a per occurrence basis or as an aggregate during a policy period.
Living Benefits – These are monetary benefits payable to a person with a life insurance policy prior to their death.
Lloyd’s Insurer – Any group of individuals who get together to insure a specific type of risk. This is not a typical insurance company. Lloyd’s insurers typically deal with surplus lines insurance.
Loss – In insurance, this is any situation where an unpredictable reduction in value takes place. For example, if your house burns down unexpectedly, you experience a loss in the value of the home.
Loss Adjustment Expenses – This is the additional expense incurred by an insurance company for settling claims. For example, an insurer may settle a claim for $100,000 as a result of an accident caused by their insured. While the injured party collects $100,000, the insurer also has to pay for court defense costs and the cost to have the claim adjusted, which in smaller dollar value claims can often exceed the cost of the payout for damages.
Loss Ratio – This is calculated as a means for determining if an insurance company is making a profit on a particular product. The formula is determined by dividing the pure losses plus loss adjustment expense by the earned premium for a given time period. It is expressed as (LR = Loss Expense + LAE / EP). For example, an insurer who earns $100,000,000 in premium in one year and pays out $85,000,000 in claims (including the cost to settle and adjust the claims), has a loss ratio of 85%. This figure would represent an underwriting profit of 15%, or $15,000,000.
Loss Reserve – This is the amount of money an insurer must set aside to pay a potential claim when it initially happens. It is ultimately a calculated guess based on similar claim settlements they have previously paid. The actual amount paid, after potentially years in court, may be higher or lower than the reserve. The loss reserve is calculated to help ensure an insurer does not become insolvent. For example, if you badly injure another person in an auto accident, your insurance company may set aside the entire limit of your policy in case they have to pay the whole amount in the future. Of course, it is in their best interests to pay as little as possible to indemnify the claimant, but a jury may award much more than that amount based on the circumstances of the accident.
Malpractice Insurance – A type of professional liability insurance commonly used in the medical profession. If a doctor were to botch a surgery, malpractice insurance would pay for damages resulting from the lawsuit.
Marine Insurance – This is a type of insurance that covers property in transit over land or sea. It is believed to be the oldest form of insurance.
Material Fact – In insurance terms, this is a fact that is instrumental in the determination of consideration for coverage. For example, in health insurance, a material fact would be a pre-existing condition. Failure to disclose this fact on an application for insurance would potentially void a policy.
Misrepresentation – This is any statement, orally or written, that doesn’t fully represent the reality of a situation or fact regarding any part of an insurance policy. For example, it would be considered misrepresentation if an agent didn’t notify an insured of exclusions for coverage in an insurance policy.
Monopolistic State Fund – This deals with workers compensation insurance. It refers to a state that does not allow private insurers to sell workers compensation insurance; rather employers can only purchase it from the state.
Moral Hazard – This is any situation or condition where an individual would purposely allow or cause a loss with the intention of collecting for damages on an insurance policy.
Morale Hazard – Any situation or condition where an insured does not take proper caution to ensure a loss does not occur, specifically because they have insurance. An example may be leaving your keys in the car overnight. The idea being, if you didn’t have insurance, you would be more cautious with regard to your car being stolen.
Mortgagee – This is a person or organization that has financial interest in a piece of property. This person or organization is considered an insured on an insurance policy. An example would be the lender for your home. If your house burnt down, the mortgagee would receive their money back from the insurer and you would receive the remainder, up to the policy limits.
Mutual Insurer – This is an incorporated insurance company in which policyholders own the company (versus stock holders). In a Mutual Insurer, there is a chance you will receive a dividend from the company if there is money left over after paying all expenses and claims within a certain time period.
Mysterious Disappearance – In insurance terms, this is when tangible property disappears with no explanation. For example, if a television monitor disappeared from you office and there are no signs of burglary, it would be considered a mysterious disappearance. A specific type of crime insurance would have to be purchased in order to indemnify you for a loss of this nature.
Named Non-Owner Auto Insurance – A form of liability-only car insurance for those who need coverage, but do not own a vehicle.
Named Peril Policy – This is the opposite of an all risk policy. Named peril policy specifically lists the causes of loss insured against.
Non-Owners Liability – This coverage protects the insured against liability arising out of the use of non-owned or rented cars driven by their employees. An example would be if your employee drove their own car to conduct business for your company and injured another party while doing so. You would be liable for the resulting bodily injury or property damage.
Non-Resident Insurance Agent – Any agent who is writing business in a state in which they do not reside.
Non-Standard Auto Risk – A term used to describe insured that are less than desirable to an insurance company. Potentially undesirable insured would be those who represent a higher than average risk of filing a claim or who have a poor payment history. Nonstandard auto insurance is more costly than Standard Auto Risk insurance. Click here to learn more about the types of auto insurance companies.
Negligence – This is the legal principle of causing property damage or bodily injury to another person as a result of not acting in a reasonable manner. For example, if you run a red light and injure somebody as a result, you might be found negligent. It is considered reasonable behavior to stop at a red light. Negligence has to be proven in order for an injured party to collect damages under the tort liability system.
No Fault Insurance – A type of auto insurance in which an individual’s own insurance company pays for damages resulting from a covered cause of loss. It is basically the opposite of tort liability.
Obligee – This term is used to describe the person who will receive benefits in the event a bond is not completed as to the terms of the contract.
Occupancy – This term is used to describe the use of a property. For example, a home may be “owner” or “tenant” occupied.
Occupational Disease – A disease resulting from exposure to a dangerous element at a place of work. You may be familiar with individuals getting cancer after working at companies where they were exposed to asbestos.
Occurrence – Typically referred to as a “per-occurrence” liability limit, this is the total dollar amount your insurer will pay in the event of one covered cause of loss you are found to be “at-fault” for during your policy term, usually one year. The per-occurrence limits may be associated with an aggregate policy limit.
Ocean Marine Insurance – This is the class of insurance for ocean going cargo vessels. It offers similar coverage to what you can purchase for land vehicles. The coverage types are cargo, hull (referred to as physical damage coverage on land) and protection and indemnity, which are referred to as liability insurance on land.
Other Insurance – This is typically a clause in an insurance policy that states when there is more than one insurance company insuring the same piece of property, each will only pay a portion of a covered loss, as it is not possible to receive more than you financial interest when you suffer a loss. For example, if you have a $100,000 house insured by two companies for $100,000 each, and it burns to the ground, each company would pay only $50,000, rather than allowing you to collect $200,000.
Out-of-Pocket Limit – In life and health insurance, this is the maximum dollar amount an insured would have to pay during a specified policy term, regardless of the number of visits made to a hospital or doctor or the total dollar cost of all care provided for. Typically, the higher your out-of-pocket limit, the lower your premium.
Owner’s Protective Liability – This is a type of commercial insurance that protects a business owner from the liability arising out of contracting other companies to do work for them. For example, a contractor who hires a sub-contractor to work on a project is liable for any bodily injury or property damage resulting from their work. This practice is quite common, which is why this type of coverage is also called contractor’s liability.
Pair and Set Clause – A clause in an insurance policy that offers the following options when one piece of a set is either lost, stolen, or damaged. (1) The cost to repair or replace the damaged/lost item is paid, (2) the difference in value between what is remaining and the original value is paid, or (3) the damaged/lost item is replaced.
Partial Loss – This occurs in property insurance when there is not a total loss in the value of the property. In liability insurance, it is when there is a loss that does not exhaust the liability limits.
Performance Bond – This is a bond for contractors. They will purchase this bond as insurance against not finishing a job on time or properly. Bonds are a three party insurance policy (surety, principal and obligee), whereas regular insurance is between two parties (insurer and insured).
Perils – Also referred to as causes of loss, these are circumstances against which you are insured by an insurance contract. Examples may include wind damage to your home or collision damage to your vehicle. Some perils may be excluded by your insurance policy, which means you have no coverage for damages resulting from these circumstances. For example, your insurance company will normally exclude damages to your home resulting from a flood.
Personal Articles Floater – Also referred to as a PAF, this is a type of coverage for specified types of personal property that do not remain at a fixed location or require higher limits than are available on an unendorsed policy. Also, an unendorsed personal property policy usually only covers specific perils, whereas a PAF covers all risks.
Personal Auto Policy – Also referred to as a PAP, this is the basic car insurance policy.
Personal Injury Coverage – This is typically coverage B on the commercial general liability (CGL) policy. It covers the insured for damages that are not physical in nature (meaning NOT bodily injury or property damage). These damages may include false arrest, slander, or invasion of privacy.
Personal Injury Protection – A form of no-fault insurance, this is a coverage that will pay for bodily injury to you or your passengers in the event of covered cause of loss. The key to personal injury protection is that fault does not have to be determined in order to collect benefits.
Personal Lines Insurance – This refers to insurance products marketed and sold to individuals, including property and casualty insurance for auto and home. It does not include business or commercial insurance.
Personal Property Floater – Similar to a Personal Articles Floater (PAF), the only difference is that the property covered does not have to be specifically named.
Physical Damage Insurance – Also referred to as Phys Dam, this coverage protects the insured for damage to their own property. Liability insurance on the other hand protects the insured against claims for damages to other people’s property.
Point-of-Service Plan – Also referred to as a POS plan, this is a type of managed care organization (MCO), similar to a PPO or HMO, in which the insured are able to access medical services outside of their “network.” It is typically a requirement for insured members to sign up with one primary care physician.
Policy – This is the legally binding contract or agreement between the insurer and insured. The policy contains all aspects, or provisions, of the contract.
Position Schedule Bond – A type of Fidelity bond in which a person who occupies a specific position at a company is covered. The person does not have to be named in the policy itself. For example, you may purchase a bond for the President of a company. If your company elects a new President, that individual is automatically covered because they hold that specific position. You would not have to inform the insurance company of the change.
Pre-Existing Condition – In life and health insurance, this term is used to describe medical conditions that were discovered or known of by the insured prior to applying for or being offered insurance through a new insurer.
Preferred Auto Risk – A term used to describe insured that are most desirable to insurance companies. Characteristics of these insured are little to no claims history and excellent payment history or financial responsibility scores. Ultimately, these individuals are statistically more profitable to insure as they cost insurance companies less money from a claims and operations (customer service) standpoint. Preferred Auto is typically less expensive than Standard and Non Standard Auto Risks.
Principal – This is the party to a bond that makes the promise to perform a duty or function. If the work is not completed according to the terms of the contract, the surety (insurance company) will pay the obligee.
Private Passenger Auto – This term is used to describe a car not used for business purposes. Also, in insurance circles, it is used to describe the “line” of insurance dealing with this vehicle type.
Products and Completed Operations – This is a coverage part (A) in the commercial general liability policy. It protects the insured against bodily injury and property damage liability that results out of the manufacturing and selling of goods.
Professional Liability – This term is used to describe the liability associated with services or products that are professional in nature. Examples include medical malpractice liability for doctors or Errors & Omissions liability for insurance agents.
Proof of Loss – This is a formal notification to an insurer concerning a loss that has been suffered on behalf of the insured. The insurer requires this in order to determine if they are liable for damages from the resulting claim. For example, if your house burns down, you would have to submit proof of the loss to the insurance company as soon as reasonably possible.
Property Damage – This is covered on your liability policy. It concerns damage you do to others’ property, not your own. This term is sometimes confused with physical damage, which is a no-fault coverage designed to insure you against losses to your own property on a personal auto policy.
Pro–Rata Liability – This is another term for the other insurance clause on a property insurance policy. It states that when more than one insurance policy is in effect on a piece of property at the time of loss, each insurer will only pay a portion of the loss. For example, if you have a $100,000 house insured by two companies for $100,000 each, and it burned to the ground, each company would pay only $50,000, rather than allowing you to collect $200,000.
Pro-Rata Refund – When the insurer cancels your policy, they are obligated to pay you the exact portion of unearned premium calculated by the number of days the policy was in force. For example, if your auto policy cost $1,200 for one year, you would be owed $600 if they cancelled your policy after it was in-force for 6 months. You may be subject to short rate refund.
Protection and Indemnity – This is ocean marine’s answer to bodily injury and property damage insurance.
Pure Loss – This is the dollar amount an insurance company pays for a given time period solely for awarded damages. It does not include the dollar amount of loss adjustment expenses.
Pure Risk – The only type of risk insurance will cover. In pure risk, there is only a chance of loss, no chance of any gain. For example, when you gamble, it is referred to as speculative risk, meaning there is a chance you may win money. Insurance will not cover that. The only risk associated with insuring your home is the pure risk that you may suffer a loss of value.
Rate – The calculated dollar cost of one unit of insurance. This term is often used interchangeably with premium, which is not the correct use. A premium is comprised of the rate times the number of units. You rate may be expressed as $.30 per $100. This would amount to a premium of $300 ($100,000 / 100 x $.30) for a $100,000 home.
Rebating – This is illegal in insurance practices. An example would be offering anything other than the terms of coverage in a policy for the purchase of the policy. It would be considered rebating if an agent offered you a $50 kickback for allowing him or her to write your insurance policy.
Reciprocal – This is an unincorporated company where a group of people share risk of loss with one another. It is common for a group of doctors to do this with medical malpractice insurance.
Reinsurance – This is insurance for insurance companies. Reinsurers will make agreements with insurance companies in which they will pay losses for the insurance companies over a certain dollar amount in exchange for a portion of the premium. Insurers can have the option to purchase reinsurance on a blanket basis (a portion of every risk written) or only certain risks. This allows insurance companies to write more insurance overall by having another organization to help keep them from becoming insolvent.
Removal – This is the act of removing property from harms way when another covered peril is occurring. This is considered a peril, as it may lead to damage. An example would be removing property from a burning building. Your insurance company will specifically insure the property while being moved and while it remains at the temporary location.
Renewal – This term describes the offer of your insurer to continue your policy for an additional term after it is set to expire.
Replacement Cost – This is a loss cost valuation method in which your insurer pays the full cost to replace damaged items in the event of a total loss. It is also the beginning point of the loss cost valuation method of Actual Cash Value (ACV). Replacement Cost coverage is more expensive than ACV coverage because it will typically force the insurer to pay out more money in the event of a covered claim.
Representations – This is information provided by an insurance applicant. The applicant is expected to provide facts that are true and accurate to the best of their knowledge when applying for insurance.
Residual Benefit – This term describes benefits that are ongoing as a result of a contractual agreement. In an annuity for example, the beneficiary may receive these benefits, in the form of money, until their death.
Retention Limit – The amount of money the insured must pay out of their own pocket in the event of a loss covered by an umbrella policy that the underlying policy does not cover. This is similar to a deductible on a standard insurance policy, however unlike a deductible, this may also apply to liability claims.
Risk – Risk is present any time the possibility of a financial loss may occur.
Robbery – When a person steals something from someone else using the threat of bodily harm. This term is often confused with burglary.
Safe Burglary Insurance – As the name implies, this is insurance specifically covering the burglary of property from a safe or taking the safe itself (and trying to break into it at another location).
Salvage – This is the remaining property after a covered loss. The insurer has the right to salvage after they pay for a loss. The insured may request the salvaged property, but has to pay for its value to do so. Insurers recoup some of their money for a loss by selling the salvaged property. For example, if your car is totaled, the insurance company will reimburse you in the event it resulted from a covered claim. The insurer may then sell the scrap to a junkyard and get some of their money back.
Second Injury Fund – This is a state fund put together by workers compensation insurers for the purposes of paying for a second injury of an employee. This is done to protect companies if they hire someone who has already suffered an injury at another job and suffers another related injury. If this fund didn’t exist, people who have filed workers compensation claims would not likely ever be hired again for fear the new employer would be at higher risk for having to pay a claim for the second related injury.
Short Rate Refund – This is a potential method for the calculation of return premium in the event the insured cancels an insurance policy. It is calculated as the unearned premium minus a processing fee.
Speculative Risk – This is a type of risk where there are two possible outcomes, the outcome of gain or the outcome of loss. Insurers do not offer insurance for this type of risk, only pure risk.
Standard Auto Risk – A term used to describe insured that are more desirable to insurance companies than Non Standard Auto Risks, but less desirable than Preferred Auto Risks. Characteristics of these insured are little to no claims history and excellent payment history or financial responsibility scores. Ultimately, these individuals are statistically more profitable to insure as they cost insurance companies less money from a claims and operations (customer service) standpoint. Preferred Auto is typically less expensive than Standard and Non Standard Auto Risks.
Stated-Value Insurance – This is a type of property coverage where the value of the insured item is determined at the outset of the policy and the entire value is paid at the time of loss with no depreciation. Typically, this type of coverage is written for items where the value is hard to determine. An example may be an autographed baseball.
Stock Insurer – This is an insurance company where stockholders are the owners.
Subrogation – The process by which an insurer recovers money they paid out for a claim from the person or organization that was actually responsible, or negligent. For example, you may file a claim for damage to your car that was actually caused by another driver. In order to quickly settle your claim and retain your business, your insurer might cut you a check for the repairs very quickly. Your insurer will then subrogate against the negligent party’s insurance company to collect the money they would have paid you if the other driver filed the claim in the first place.
Supplementary Payments – These are payments that go above the limits stated in an insurance policy. For example, if your insurer appeals a judgment on a lawsuit and loses, there may be additional interest payments due to the party who won the lawsuit in the original judgment. Your insurance company would pay for the interest that accrued during the appeal process, even if the original judgment exhausted your policy’s liability limits.
Surety – This is the term used to describe the insurance company when a bond is issued. The surety would make the payment to the obligee if the principal does not complete something according to the terms of the contract.
Surety Bond – A type of bond in which an individual or organization makes a promise to complete a project or an act according to the terms of the contract.
Term Life Insurance – A very basic form or life insurance in which you pay a specified premium for a predetermined benefit amount. You can only collect the benefit if the named insured dies while the policy is in force. For example, you may purchase a policy for 10 years that costs you $50 per month. After the 10-year period the policy can be renewed or allowed to terminate. This is usually cheaper than whole life insurance because there is no guarantee the insurer will have to pay a claim.
Theft – Any act of stealing.
Time Element Coverage – This is a type of indirect loss associated with a time period. It would be covered if it were the result of a covered direct loss. For example, if your business burnt down, you may have business income insurance (a time element coverage) that would indemnify you for the income you did not receive from normal operations during the time your property was being repaired.
Tort – A wrongful act committed by an individual or organization against another individual or organization, other than a crime or a breach of contract.
Tort Liability – The concept by which a person or organization retains the right to sue a negligent party for bodily injury or property damages.
Total Loss – When the cost to repair your property exceeds the cost to replace it with property of a similar type and quality. The insurance company uses a simple formula for calculating a total loss.
Trip Transit Policy – This is a policy that covers the liability for the damages resulting from one specific delivery of goods.
Umbrella Policy – A form of insurance that provides excess insurance coverage above existing policies. An Umbrella may also provide a first level of coverage excluded from underlying policies. This coverage is typically cheap for what it encompasses. For example, you may have auto insurance coverage up to $250,000 and homeowner’s coverage up to $500,000. You can purchase an Umbrella Policy that will cover you for liability up to $1,000,000 in the event your underlying policy limits are exhausted by a claim made against you.
Underinsured Motorist Coverage – This is a form of bodily injury liability coverage that will provide you, as the insured, coverage for damages from your own insurer that exceed the policy limits of the negligent party who injured you.
Underwriter – A person employed by an insurance company for the purpose of selecting those to insure among those who have applied for a policy. Their job entails ensuring the company they work for does not insure people who do not fit the guidelines put forth by the company.
Uninsured Motorist Coverage – This coverage type will provide benefits for you, as the insured, in the event you are seeking damages from your own insurer as a result of the negligent party not having insurance.
Universal Life Insurance – This is a form of cash-value life insurance in which the policy will pay the beneficiary the actual cash-value of the policy at the time of the insured’s death. The cash value is determined monthly by calculating the amount of premium paid plus a predetermined interest rate, minus the cost of servicing the policy. The difference between this and whole life insurance is that in whole life, the death benefit is determined at policy inception and does not change throughout the policy period.
Unoccupied Property – This term is used to describe a property that is currently uninhabited, but will not be for a long period of time. This term does not have the same meaning as vacancy.
Usual, Customary and Reasonable Fees – This term is used to help health insurance companies determine a general dollar amount to be paid for medical services to be rendered. It is designed to ensure the insurance company is not paying an exorbitant amount to settle claims. For example, you may choose any physician you want to perform a surgery, but if that particular surgeon charges double what the average surgeon charges for the procedure, your insurer will only pay reimburse you for the average cost to perform the surgery among typical doctors and the rest is up to you to pay out of pocket.
Vandalism and Malicious Mischief – This is a peril that can be insured against in a property policy. Damage caused by vandals is covered here.
Variable Life Insurance – This term describes life insurance policies that do not have a constant or predetermined cash-value throughout the policy period. The value is determined by the premium paid, which is tied to a specific investment vehicle.
Variable Universal Life Insurance – This term describes a life insurance policy in which the cash-value fluctuates depending on what vehicle it is invested in, which can be chosen by the insured or an investor chosen by the insured. The main difference between variable and variable universal life is the ability to determine which investment vehicle your premium funds are applied to. This is similar to the concept of a mutual fund.
Vicarious Liability – Liability that may be assumed by one party for another. For example, you may be considered vicariously liable for damages caused by an employee of yours while they are performing their day-to-day job function.
Waiver of Premium – This describes an insured’s option to not pay a policy premium in the event they are unable to as a result of extreme financial duress caused by disablement or illness.
Warranty – Unlike a representation, a warranty made by an individual is a guarantee that a statement is fact.
Whole Life Insurance – Unlike Term Life Insurance, whole life will pay benefits whenever the insured dies. The cash value and the premium payments are typically calculated at policy inception and do not change at any point. This policy also builds cash-value as a percentage of income resulting from interest your insurer makes from investing your premium and can be applied to the overall death benefit on the policy. This type of policy is usually more expensive than term life insurance because there is a guarantee the insurer will have to pay benefits when the insured dies.
Workers Compensation – This is a type of insurance that provides benefits to employees when they are injured or die as a result of performing their job functions. Employers also reserve the right to purchase Employer’s Liability Insurance for excess coverage over workers compensation claim, or in the event workers compensation is not mandatory in their state.
Written Premium – This represents the total dollar amount of premiums sold to insured persons during a given period of time. Written premium does not necessarily belong to an insurance company. In the event an insurance policy is cancelled prior to the end of its term, the insurer has to return the Unearned Premium using either the pro-rata calculation or short rate calculation method.
If you need the definition of specific insurance term that isn’t currently part of our insurance glossary, please let us know and we’ll add it promptly.