Glossary of Insurance Terms
Accidental Death and Disability: A term used to describe a policy that pays additional benefits to the beneficiary if the cause of death is due to a non-work-related accident. Fractional amounts of the policy will be paid out if the covered employee loses a bodily appendage or sight because of an accident.
Actual Cash Value: Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence. For example, a 10-year-old sofa will not be replaced at current full value because of a decade of depreciation.
Adjuster: A representation of the insurer who seeks to determine the extent of the insurer's liability for loss when a claim is submitted.
Independent Agent: Individual who sells and services insurance policies. The agent represents at least two insurance companies and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage.
Aggregate Limit: Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.
Automobile Liability Insurance- Coverage if an insured is legally liable for bodily injury or property damage caused by an automobile.
Builder's Risk: An insurance policy that covers the construction, remodeling, or renovation of commercial and residential structures. This type of policy typically protects the contractor or developer from the loss and may cover owners as well. The coverage is purchased within the first 30 percent of the project and ends with owner possession, 90 days after completion or abandonment.
Captive Agent: Representative of a single insurer or fleet of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.
Casualty: Liability or loss resulting from an accident.
Chartered Property and Casualty Underwriter (CPCU): Professional designation earned after the successful completion of 10 national examinations given by the American Institute for Property and Liability Underwriters. Covers such areas of expertise as insurance, risk management, economics, finance, management, accounting, and law.
Claim: A demand made by the insured, or the insured's beneficiary, for payment of the benefits as provided by the policy.
Coinsurance: In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage each claim above the deductible paid by the policyholder. For 20% health insurance coinsurance clause, the policyholder pays for the deductible plus 20% of his covered losses. After paying 80% of losses up to a specified ceiling, the insurer starts paying 100% of losses.
Collision Insurance: Covers physical damage to the insured's automobile (other than that covered under comprehensive insurance) resulting from contact with another inanimate object.
Commercial Lines: Refers to insurance for businesses, professionals, and commercial establishments.
Comprehensive Insurance: Auto Insurance coverage providing protection in the event of physical damage (other than collision) or theft of the insured car. For example, fire damage or a cracked windshield would be covered under the comprehensive section.
Coverage: The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.
Deductible: Amount of loss that the insured pays before the insurance kicks in.
Directors and Officers Liability: Personal liability insurance that provides general cover to a firm's directors and senior executives. Paid usually by the firm, it reimburses (in part of in full) the costs resulting from lawsuits and judgments arising out of poor management decisions, employee dismissals, shareholder grievances, and other such acts committed in a good faith. Criminal offenses are not covered under this insurance.
Earned Premium: The amount of the premium that has been paid for in advance that has been "earned" by virtue of the fact that time has passed without claim.
Employers' Liability Insurance: Coverage against common law liability of an employer for accidents to employees, as distinguished from liability imposed by a workers' compensation law.
Employee Benefits: In general, indirect and non-cash compensation paid to an employee. Some benefits are mandated by law (such as social security, unemployment compensation, and worker's compensation); others vary from firm to firm or industry to industry (such as health insurance, life insurance, medical plan, paid vacation, pension, gratuity).
Exposure: Measure of vulnerability to loss, usually expressed in dollars or units.
Fidelity Bonds: A form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
General Liability Insurance: Insurance designed to protect business owners and operators from a wide variety of liability exposures. Exposures could include liability arising from accidents resulting from the insured's premises or operations, products sold by the insured, operations completed by the insured, and contractual liability.
Hazard: A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.
Hurricane Deductible: Amount you must pay out-of-pocket before hurricane insurance will kick in. Many insurers in hurricane-prone states are selling homeowners insurance policies with percentage deductibles for storm damage, instead of the traditional dollar deductibles used for claims such as fire and theft. Percentage deductibles vary from one percent of a home's insured value to 15 percent, depending on many factors that differ by state and insurer.
Indemnity: Restoration to the victim of a loss by payment, repair or replacement.
Inflation Protection: An optional property coverage endorsement offered by some insurers that increases the policy's limits of insurance during the policy term to keep pace with inflation.
Insurable Interest: Interest in property such that loss of destruction of the property could cause a financial loss.
Liability Insurance: Insurance that pays and renders service on behalf of an insured for loss arising out of his/her responsibility, due to negligence, to others imposed by law or assumed by contract.
Life: A contract that pays the beneficiary a set sum of money upon the death of the policyholder. These plans pay benefits usually in the form of a lump sum, but they may be distributed as an annuity.
Long-Term Disability: Provides a monthly benefit to employees who, due to a non-work-related injury or illness, are unable to perform the duties of their normal occupation or any other, for periods of time extending beyond their short-term disability or sickness and accident insurance.
Loss Control: All methods taken to reduce the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units, and non insurance transfer of risk. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program, which includes the use of appropriate insurance, avoidance of risk, loss control, risk retention, self insuring, and other techniques that minimize the risks of a business, individuals, or organization.
Loss Ratio: The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company's underlying profitability, or loss experience, on its total book of business.
Named Perils: Perils specifically covered on insured property.
National Association of Insurance Commissioners (NAIC): Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency, and develop model laws for passage by state legislatures.
Occurrence: An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn't have to be sudden and fortuitous and can result from continuous or repeated exposure, which results in bodily injury or property damage, neither expected nor intended, by the insured.
Peril: The cause of possible loss.
Personal Lines: Insurance for individuals and families, such as private-passenger auto and homeowners insurance.
Policy: The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clauses, riders, endorsements, and papers attached thereto and made part thereof.
Premium: The price of insurance protection for a specified risk for a specified period of time.
Premium Earned: The amount of the premium that has been paid for in advance that has been "earned" by virtue of the fact that time has passed without claim. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium.
Professional Liability: Legal obligation arising out of a professional's errors, negligent acts, or omissions during the course of the practice of his or her craft.
Property: Insurance that covers the owner or another person with an interest in property. The insurance covers the loss of income produced through or because of the property.
Replacement Cost: The dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation, but limited by the maximum dollar amount shown on the declarations page of the policy.
Risk Management: Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through practices, such as avoiding the risk, retaining the risk, reducing the risk, or transferring the risk, usually by insurance.
Short-Term Disability: Provides short-term (typically 26 weeks) income protection to employees who are unable to work due to a non-work-related accident or illness.
Subrogation: The right of an insurer who ha taken over another's loss also to take over the other person's right to pursue remedies against a third party.
Surety Bond: A contract guaranteeing the performance of a specific obligation. Simply put, it is a three-party agreement under which one party (the surety company) answers to a second party (the owner, creditor or "obligee") for a third party's debts, default, or nonperformance. Contractors are often required to purchase surety bonds if they are working on a public projects. The surety company becomes responsible for carrying out the work or paying for the loss up to the bond "penalty" if the contractor fails to perform.
Umbrella Policy: Coverage for losses above the limit of an underlying policy or policies such as a homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those underlying policies.
Underwriter: The individual trained in evaluating risks and determining rates and coverage's for them.
Underwriting: The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.
Uninsured Motorist Coverage: Endorsement to a personal automobile policy that covers an insured collision with a driver who does not have liability insurance.
Workers' Compensation: Policy purchased by a firm to cover worker's compensation costs. Its premium rate varies according to the nature of employees' work and is based on the employer's payroll. Also called workmen's compensation insurance.