Glossary of Common Insurance Terms
(These are general explanation of the terms and your insurance policy definition of these terms will dictate their meaning for purposes of the policy.)
Actual Cash Value.
An amount equivalent to the replacement cost of lost or damaged property at the time of the loss, less depreciation. With regard to buildings, there is a tendency for the actual cash value to closely parallel the market value of the property.
Accident.
An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place. See also Occurrence.
Additional Insured.
A person other than the named insured who is protected under the terms of the contract. Usually, additional insureds are added by endorsement or referred to in the wording of the definition of “insured” in the policy itself.
Agent.
One who solicits, negotiates or effects contracts of insurance on behalf of an insurer. His right to exercise various functions, his authority, and his obligations and the obligations of the insurer to the agent are subject to the terms of the agency contract with the insurer, to statutory law, and to common law
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 may occur.
All-Risks Insurance.
The term “All-Risks Insurance” is used to mean insurance against loss of or damage to property arising from any fortuitous cause except those that are specifically excluded. An insurance contract which provides All-Risks Insurance is an All-Risks policy. Contrast with Named Perils.
Amendment.
A formal document which corrects or revises an insurance master policy. See also Endorsement and Rider.
Application.
A form on which the prospective insured states facts requested by the insurer on the basis of which, together with information from other sources, the insurer decides whether to accept the risk, modify the coverage offered, or decline the risk.
Appraisal.
An evaluation of property made to ascertain either the appropriate amount of insurance to be written or the amount of loss to be paid.
Assets.
The items on the balance sheet of the insurer which show the book value of property owned. Under state regulations, not all property or other resources can be admitted in the statement of the insurer. This gives rise to the term “nonadmitted assets.” See also Nonadmitted Assets.
Assigned Risk.
A risk which is not ordinarily acceptable to insurers and which is, therefore, assigned to insurers participating in an assigned risk pool or plan. Each participating company agrees to accept its share of These risks.
Basic Limit.
Usually refers to Liability policies and indicates the lowest amount for which a policy can be written. This amount is either prescribed by law or company policy.
Benefits.
financial reimbursement and other services provided insureds by insurers under the terms of an insurance contract. An example would be the benefits listed under a Life or Health Insurance policy or benefits as prescribed by a Workers Compensation law.
Binder.
An agreement executed by an agent or insurer (usually the latter) putting insurance into force before the contract has been written or the premium paid. This term is not usually used in Life Insurance. See also Cover note.
“Buy-Back” Deductible.
A deductible which may be eliminated for an additional premium in order to provide “first-dollar” coverage.
Bobtailing.
Using the truck-tractor after unloading the trailer and not driving for trucking purposes.
Business Auto Coverage Form.
The latest commercial Automobile Insurance coverage form, which may be written as a monoline policy or as part of a commercial package. This form has largely replaced the Business Auto Policy.
Business Auto Policy.
A policy which provides Liability and Physical damage coverages on commercial vehicles. In most jurisdictions, this has been replaced by the Business Auto Coverage Part.
Cancellation.
Termination of a contract of insurance in force by voluntary act of the insurer or insured in accordance with the provisions in the contract or by mutual agreement.
Carrier.
Sometimes used to designate the insurer. The term “insurer” is preferred because of the possible confusion of “carrier” with transportation. See also Insurer.
Certificate of Insurance.
(1) A statement of the coverage and general provisions of a master contract in group insurance that is issued to individuals covered in the group. (2) A form which verifies that a policy has been written and states the coverage in general, often used as proof of insurance in loan transactions and for other legal requirements.
Claim.
A demand made by the insured, or the insured’s beneficiary, for payment of the benefits provided by the contract.
Claimant.
The person making a demand for payment of benefits
Class (or Classification).
A group of insureds having the same general characteristics and who are, therefore, grouped together for rating purposes. Class rates apply to dwellings and apartments, since they usually have the same general characteristics and are exposed to the same perils.
Clause.
A section of a policy contract or endorsement dealing with a particular subject. For instance, a Subrogation Clause deals with the rights of the insurer in the event of payment of a loss under the contract.
Commercial Lines.
This term is used to refer to insurance for businesses, professionals, and commercial establishments. See also Business Insurance. Contrast with Personal Lines.
Commercial Package Policy (CPP).
A commercial lines policy that contains more than one of the following coverage parts: Commercial Property, Commercial General Liability, Commercial Inland Marine, Commercial Crime, Boiler and Machinery Insurance, Commercial Automobile Insurance, and Farm Coverage.
Contract.
(1) An agreement entered into by two or more persons under which one or more of them agree, for a consideration, to do or refrain from doing acts in accordance with the wishes of the other party(s). (2) In insurance, the agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A “policy” is the written statement of the terms of the contract. (3) An agreement under which an agency or agent does business with an insurer
Collision Insurance
A form of Automobile Insurance that covers loss to the insured’s own vehicle caused by its collision with another vehicle or object or its upset but not covering bodily injury or property damage liability arising out of the collision.
Comprehensive Coverage.
Traditional name for physical damage coverage for losses by fire, theft, vandalism, falling objects, and various other perils. On Personal Auto Policies, this is now called “other than collision” coverage. On commercial forms, it continues to be called “comprehensive” coverage.
Covered Loss.
Illness, injury, death, property loss, legal liability, or any other situation or loss for which an insurance company will pay benefits under a policy when such event occurs.
Credit Report.
A confidential report made by an independent individual or organization that has investigated the reputation and record of an applicant for insurance.
Declination.
Rejection of an application for insurance by the insurer.
Deductible.
The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.
Drive-Other-Car Endorsement (DOC).
A coverage that may be added to an Automobile policy affording auto coverage to the individuals named in the endorsement while they are driving cars not owned by the individuals and not named in the policy.
Deductible Clause.
A contract provision that sets forth the deductible.
Depreciation.
A decrease in the value of any type of tangible property over a period of time resulting from use, wear and tear, or obsolescence.
Disability.
A condition that curtails to some degree a person’s ability to carry on his normal pursuits. A disability may be partial or total, and temporary or permanent.
Drive-In Claim Service.
A facility maintained by an Automobile insurer in which the extent of damage to a claimant’s automobile can be determined and, in many cases, a settlement made.
Earned Premium.
The amount of the premium that has been “used up” during the term of a policy. For example, if a one-year policy has been in effect six months, half of the total premium has been earned.
Effective Date.
The date on which the protection of an insurance policy or bond goes into effect.
Employers Nonownership Liability Insurance.
Protects the employer for liability arising from the use by employees of their own cars on company business.
Extended Non-Owner Liability.
An endorsement attached to a Personal Auto Policy to provide broader liability coverage only for specifically named individuals. When attached, it covers non-owned autos furnished for the regular use of an insured, use of vehicles to carry persons or property for a fee, and broader coverage for business use of vehicles
Endorsement.
A written or printed form attached to the policy which alters provisions of the contract.
Estate Plan.
A plan for the disposition of one’s property at death, including the handling of property in the event of the incompetency or total disability of the estate owner. A will is part of an estate plan.
Estimated Premium.
A provisional premium which is adjusted at the end of the year. For example, in Workers Compensation Insurance an estimated premium is based on estimated payrolls for the coming year. At the end of the year, final payrolls are determined and the final premium is computed.
Excess Insurance.
A coverage designed to be in excess over one or more primary coverages, and which does not pay a loss until the loss amount exceeds a certain sum. Contrast with Primary Coverage.
Face Amount.
The amount of insurance provided by the terms of an insurance contract, usually found on the face of the policy. In a Life Insurance policy, the death benefit.
Fiduciary.
A person holding the funds or property of another in a position of trust. An example would be the executor of an estate.
Financial Statement.
The disclosure of the financial results of a firm’s operations. It involves the balance sheet, profit and loss statement, and associated information.
First Named Insured.
The first named insured appearing on a commercial policy. The latest forms permit the insurer to satisfy contractual duties by giving notice to the “first” named insured rather than requiring notice to all named insureds.
First Party Insurance.
Insurance which applies to coverage for the insured’s own property or person. Contrast with Third Party Insurance.
Financial Responsibility Clause.
A clause which states that a policy conforms to the financial responsibility laws of any state in which the insured is operating the insured vehicle.
Fleet Policy.
An insurance contract that applies to a number of vehicles. Usually 5 or more self-propelled vehicles constitute a fleet.
Form.
(1) An insurance document which, when attached to a policy, makes it complete. For example, a Standard Fire policy would have to have a Business Interruption form attached to it to make up a Business Interruption policy. (2) Any rider or endorsement, such as a Deductible Endorsement “form.”
Garage Coverage Form.
A commercial Automobile Insurance coverage form used to insure automobile dealers, repair shops, service stations, and garage risks. Garage liability, garagekeepers coverage, and physical damage coverages may be included.
Good Student Discount.
A discount granted to students with high scholastic ratings. There is a proven relationship between good grades and safe driving.
Hazard.
A specific situation that increases the probability of the occurrence of loss arising from a peril, or that may influence the extent of the loss. For example, accident, sickness, fire, flood, liability, burglary, and explosion are perils. Slippery floors, unsanitary conditions, shingled roofs, congested traffic, unguarded premises, and uninspected boilers are also hazards.
Hired Automobile.
Autos the insured leases, hires, rents, or borrows, but not autos owned by employees or members of their households.
Indemnify.
To restore the victim of a loss to the same position as before the loss occurred.
Indemnity.
Restoration to the victim of a loss by payment, repair, or replacement.
Independent Agent.
An agent operating as an independent contractor under the independent agency system.
Inspection Report.
A summary statement of the physical, financial, and moral attributes of an insured or an applicant for insurance on his property. Such reports are prepared by inspection bureaus, specialized organizations, and insurers.
Insurability.
Acceptability to the insurer of an applicant for insurance.
Insurable Interest.
Any interest a person has in a possible subject of insurance, such as a car or home, of such a nature that a certain happening might cause him financial loss.
Insurance.
A formal social device for reducing risk by transferring the risks of several individual entities to an insurer. The insurer agrees, for a consideration, to assume, to a specified extent, the losses suffered by the insured.
Insurance to Value.
Insurance written in an amount approximating the value of the property insured.
Insured.
The party to an insurance arrangement whom the insurer agrees to indemnify for losses, provide benefits for, or render services to. This term is preferred to such terms as policyholder, policy owner, and assured. See also Named Insured.
Insurer.
The party to an insurance arrangement who undertakes to indemnify for losses, provide pecuniary benefits, or render services. It is desirable to use the word “insurer” in preference to “carrier” or “company” since it is a functional word applicable without ambiguity to all types of individuals or organizations performing the insurance function. The word insurer is generally used in statutory law.
Insuring Agreement (or Clause).
That portion of an insurance contract which states the perils insured against, the persons and/or property covered, their locations, and the period of the contract.
Lapse.
Termination of a policy because of failure to pay the premium. In Life Insurance, the term refers to nonpayment before the policy has developed any nonforfeiture values. If it has, and the premium is not paid, it is said to have lapsed “except as to any nonforfeiture benefits that may apply.”
Lapsed Policy.
One which has been allowed to expire because of nonpayment of premiums.
Limits.
(1) Ages below or above which the insurer will not issue a policy or above which it will not continue a policy presently in force. (2) The maximum amount of benefits payable for a given situation or occurrence, e.g., a limit of $50,000 on the contents of a home, or a $40,000 per accident limit for Property Damage Liability. See also Limit of Liability.
Line of Business.
The general classification of business as utilized in the insurance industry, e.g., Fire, Allied Lines and Homeowners.
Livery Use.
Use of a vehicle for hire to carry persons. Livery use is excluded in Automobile Insurance contracts unless coverage for it is stated in the policy
Loss.
Generally refers to (1) the amount of reduction in the value of an insured’s property caused by an insured peril, (2) the amount sought through an insured’s claim, or (3) the amount paid on behalf of an insured under an insurance contract.
Loss Payee.
The party to whom money or insurance proceeds is to be paid in the event of loss, such as the lienholder on an automobile or the mortgagee on real property.
Lost Policy Release.
A statement signed by an insured releasing the insurer from all liability for a lost or mislaid contract of insurance. It is usually signed after the company has issued a replacement policy.
Malicious Mischief.
Similar to vandalism. Purposely damaging the rights or property of another. See also V&MM.
Motor Vehicle Record (MVR).
The record of an automobile driver’s accidents and/or traffic violations.
Market Value.
The price for which something would sell, especially the value of certain types of assets, such as stocks and bonds. It is based on what they would sell for under current market conditions. For example, common stock market value would be the price of the stock as of a specified date. See also Actual Cash Value.
Monoline Policy.
Any insurance coverage written as a single line policy. Contrast with Multiple Line or Package policy.
Moral Hazard.
A condition of morals or habits that increases the probability of loss from a peril. An extreme example would be an individual who previously burned his own property to collect the insurance.
Morale Hazard.
Hazard arising out of an insured’s indifference to loss because of the existence of insurance. The attitude, “It’s insured, so why worry,” is an example of a morale hazard.
Named Insured.
Any person, firm, or corporation, or any member thereof, specifically designated by name as the insured(s) in a policy. Others may be protected as insureds even though their names do not appear on the policy. A common application of this latter principle is in Automobile policies where, under the definition of insured, protection is extended to cover other drivers using the car with the permission of the named insured.
Named Non-Owner Policy.
An Automobile Insurance policy issued to someone who does not own an automobile, but who drives borrowed or rented autos.
No-Fault Insurance.
Many states have passed laws permitting the individual automobile accident victim to collect directly from his or her own insurance company for medical and hospital expenses regardless of who was at fault in the accident. There are many variations in the laws of those states which have no-fault statutes. Most states do allow the individual to sue the negligent party if the amount of damages exceeds a certain stated limit. See also Keeton-O’Connell Plan.
Nonowned Auto.
Any autos not owned, leased, hired, or borrowed which are used in connection with the business.
Negligence.
Failure to use that degree of care which an ordinary person of reasonable prudence would use under the given or similar circumstances. A person may be negligent by acts of omission or commission or both.
Nonrenewal.
Termination of insurance coverage at an expiration date or anniversary date. This action may be taken by an insurer who refuses to renew, or by an insured who rejects a renewal offer.
Notice of Cancellation.
Written notice by an insurer of intent to cancel insurance, or written notice by an insured requesting cancellation.
Occurrence.
An event that results in an insured loss. In some lines of insurance, such as Liability, it is distinguished from accident in that the loss does not 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.
Other Insurance Clause.
A provision found in almost every insurance policy except Life and sometimes Health stating what is to be done in case any other contract of insurance embraces the same property and/or hazards. See also Nonduplication of Benefits and Apportionment.
Package Policy.
Any insurance policy including two or more lines or types of coverages in the same contract. Personal and commercial package policies are very common today. In fact, most policies sold are package policies.
Physical Damage.
A term indicating damage from such perils as collision, comprehensive, fire and theft or any damage to the vehicle itself.
Peril.
The cause of a possible loss. Contrast with Hazard and Risk.
Personal Lines.
This term is used to refer to insurance for individuals and families, such as private passenger automobile insurance and homeowner policies. Contrast with Business Insurance and Commercial Lines.
Personal Property of Others.
Property, other than real property, which is not owned by an insured. Liability forms have traditionally excluded coverage for property of others in an insured’s care, custody or control. Modern homeowner forms and commercial property forms provide some coverage for property of others.
Physical Hazard.
Any hazard arising from the material, structural, or operational features of the risk itself apart from the persons owning or managing it.
Policy.
The written statement of a contract effecting insurance, or certificates thereof, by whatever name called, and including all clauses, riders, endorsements, and papers attached thereto and made a part thereof.
Policy Anniversary.
The anniversary of the date of issue of a policy as shown in the policy declarations.
Policy Period (or Term).
The period during which the policy contract affords protection, e.g., six months or one or three years.
Policyholder.
(1) The person in actual possession of an insurance policy. (2) Often used loosely to refer to the policy owner and/or insured. See also Insured.
Premises.
The particular location of property or a portion thereof as designated in a policy.
Premium.
The price of insurance protection for a specified risk for a specified period of time.
Primary Coverage.
Insurance coverage which covers from the first dollar, perhaps after a deductible, as distinguished from excess coverage which pays only after some primary coverage has been exhausted. Contrast with Excess Insurance.
Proof of Loss.
A formal statement made by a policy owner to an insurer regarding a loss. It is intended to give information to the insurer to enable it to detemine the extent of its liability.
Rate.
The cost of a given unit of insurance. For example, in Ordinary Life Insurance, it is the price of $1,000 of the face amount. In Disability Income Insurance, it is usually the price per $10 or per $100 of monthly benefits. In Property Insurance, it is the rate per $100 of value to be insured. The premium, then, is the rate multiplied by the number of units of insurance purchased.
Renewal.
The reestablishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed.
Return Premium.
A portion of the premium returned to a policy owner as a result of cancellation, rate adjustment, or a calculation that an advance premium was in excess of the actual premium.
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 such practices as avoiding the risk, reducing the risk, retaining the risk, or transferring the risk, usually by insurance.
Risk Retention Groups.
Liability insurance companies owned by their policyholders. Membership is limited to people in the same business or activity which exposes them to similar liability risks. The purpose is to assume and spread liability exposure to group members and to provide an alternative risk financing mechanism for liability.
Self-Insured Retention (SIR).
That portion of a risk or potential loss assumed by an insured. It may be in the form of a deductible, self-insurance, or no insurance.
Settlement.
Usually, a policy benefit or claim payment. It connotes an agreement between both parties to the policy contract as to the amount and method of payment.
Short Rate Cancellation.
A cancellation procedure in which the premium returned to the insured is not in direct proportion to the number of days remaining in the policy period. In effect, the insured has paid more for each day of coverage than if the policy had remained in force for the full term. Contrast with Pro Rata Cancellation.
Specified Causes of Loss.
A commercial automobile physical damage coverage for loss by the specified perils of fire, lightning, explosion, theft, windstorm, hail, earthquake, flood, vandalism, or the sinking, burning, collision or derailment of any conveyance transporting a covered auto. Comprehensive coverage is slightly broader.
Single Limit.
Any insurance coverage which is expressed as a single amount of insurance, or a single limit of liability. Contrast with Split Limit.
Split Limit.
Any insurance coverage which is expressed in different amounts for different types of losses. For example, automobile liability of 50/100/50 means bodily injury limits of $50,000 per person, $100,000 per accident, and a property damage limit of $50,000 per accident. Contrast with Single Limit.
Subrogation Clause.
A clause giving an insurer the right to pursue any course of action, in its own name or the name of a policy owner, against a third party who is liable for a loss which has been paid by the insurer. One of its purposes is to make sure that an insured does not make any profit from his insurance. This clause prevents him from collecting from both his insurer and a third party. It is never part of a Life Insurance policy.
Term.
The period of time for which a policy or bond is issued.
Total Loss.
A loss of sufficient size so that it can be said there is nothing left of value. The complete destruction of the property. The term is also used to mean a loss requiring the maximum amount a policy will pay.
Underinsurance.
A condition in which not enough insurance is carried to cover the insurable value.
Underwriter.
A technician trained in evaluating risks and determining rates and coverages for them. The term derives from the practice at Lloyd’s of each person willing to accept a portion of the risk writing his name under the description of the risk.
Underinsured Motorists Coverage.
A coverage in an Automobile Insurance policy under which the insurer will pay damages up to specified limits for bodily injury damages, if the limits of liability under the liable motorist’s policy are exhausted and he cannot pay the full amount he is liable for.
Unearned Premium.
That portion of the written premium applicable to the unexpired or unused part of the period for which the premium has been paid. Thus, in the case of an annual premium, at the end of the first month of the premium period eleven-twelfths of the premium is unearned.
Valuation Clause.
A clause stating the value of items for insurance purposes, making it a valued policy.
Waiver.
(1) A rider waiving (excluding) liability for a stated cause of injury or sickness. (2) A provision or rider agreeing to waive premium payments during a period of disability of the insured. (3) The act of giving up or surrendering a right or privilege that is known to exist. In Property and Liability fields, it may be effected by an agent, adjuster, company, employee, or company official, and it can be done either orally or in writing.
We/Us/Our.
These words are used to refer to the insurer in many of the modernized/personalized policy forms recently introduced.
You/Your.
These words are used to refer to the named insured in many of the modernized/personalized policy forms.