Glossary of Insurance Terms
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Accident Year Loss Ratio: An Accident Year Loss Ratio is calculated as the total of losses incurred for accidents occurring in a given year divided by the calendar year earned premium for that same year.
Actual Cash Value: Term used to represent the fair price of property. The Actual Cash Value of a property is commonly equivalent to the cost to replace the property minus any depreciation.
Actual Cash Value: The value of property based on the cost of repairing or replacing it with property of the same kind and quality. Typically, actual cash value equals the current replacement cost minus depreciation (age, condition, length of time in use, and obsolescence).
Additional Insured: An individual or entity other than the named insured who is covered under the terms of the policy. Additional insureds are normally added by endorsement or included in the definition of insured in the policy itself.
Adjuster: A person who investigates and settles losses for an insurance carrier.
Admitted Company: An insurance company that is licensed and authorized to conduct business in any given state.
Adverse Selection: The result of the fact that those risks with a higher than average probability of loss are more likely to purchase insurance than those with below average probabilities of loss.
Agent: In insurance, the person authorized to represent the insurer in negotiating, servicing, or effecting insurance policies.
Aggregate Limit: The maximum amount an insurer will pay for all covered losses during the term of the policy regardless of how many losses occur.
All-risks: The term used to describe insurance that covers all losses, except those caused by perils specifically excluded in the policy.
Amount Subject: The total value exposed to loss at any one location.
Assigned Risk: A risk insured through a pool of insurers and assigned to a specific insurer. These risks are generally considered undesirable by underwriters, but due to state law or otherwise, they must be insured.
Assigned Risk: Provides a market for those insureds unable to obtain coverage in the voluntary market. Participating companies are required to write a share of these risks. In some states, Joint Underwriting Associations (JUA) or facilities are used.
Attractive Nuisance: An artificial condition that is likely to attract and cause injury. Applies mainly to children based on their reduced ability to recognize the danger.
Auto Collision Coverage: Optional auto insurance which pays for damage to your car caused by collision with another car or object, or by rolling the car over. Frequently required if you have a car loan.
Auto Comprehensive Physical Damage Coverage: Optional auto insurance which pays for damage to your auto caused by things other than collision or rolling the car over, such as fire, theft, vandalism, flood or hail. Frequently required if you have a car loan.
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Bailee: The individual taking possession of an item.
Bailor: The individual who owns the property entrusted to another.
Basic Limit: Represents the lowest amount of coverage for which a policy can be written.
Binder: A written or oral contract issued temporarily to place insurance in force when it is not possible to issue a new policy or endorse the existing policy immediately. A binder is subject to the premium and all the terms of the policy to be issued.
Broad Form: Includes four perils above the basic perils: breakage of glass; falling objects; weight of snow; ice or sleet; and water damage.
Broker of Record: Indicates the insurance agent the insured has designated to handle their insurance contracts.
Broker: A marketing specialist who represents insurance organizations and who deals with either agents or companies in arranging for the coverage required by the customer.
Builder’s Risk Coverage: Commonly used to describe the property coverage needed to protect policyholders with building or structures under construction.
Business Income Coverage: Provides coverage for indirect losses including income and extra expenses incurred due to property damage.
Buy-Sell Agreements: Agreement that a deceased business owner's interest will be sold and purchased at a predetermined price or at a price according to a predetermined formula.
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Calendar Year Loss Ratio: A Calendar Year Loss Ratio is calculated as the total of losses incurred for a given calendar year divided by the calendar year earned premium for that same year. The losses incurred in a calendar year equal losses paid plus the change in reserves.
Cancellation: The discontinuance of an insurance policy before its normal expiration date, either by the insured or the company.
Captive Insurer: A business or group of affiliated organizations that create an insurance company for the purpose of having that insurance company write all or part of their insurance.
Cash Value (cash surrender value): The cash amount payable to a life insurance policyowner in the event of termination or cancellation of the policy before its maturity or the insured event.
Certificate of Insurance: A statement of coverage issued to an individual insured under a group insurance contract, outlining the insurance benefits and principal provisions applicable to the member.
Claim: A person's request for payment from an insurer for a loss covered by the insurance policy.
Claims Reserve: Funds set aside to pay costs of claims that have occurred but have not yet been settled or closed.
Coinsurance Penalty: Amount that an insured shares in a loss due to inadequate levels of insurance.
Collision Insurance: Protection against loss resulting from any damage to the policyholder's car caused by collision with another vehicle or object, or by upset of the insured car, whether it was the insured's fault or not.
Collision: Damage to a motor vehicle or watercraft caused by its impact with another vehicle, object, vessel or caused by its upset or overturn.
Combined Ratio: The sum of the Loss Ratio, Loss Adjusting Expense Ratio, Expense Ratio and Dividend Ratio. It is a measure of profitability as it shows where a premium dollar is spent.
Comprehensive Automobile Insurance: Protection against loss resulting from damage to the insured auto, other than loss by collision or upset.
Concurrent Causation: When two or more perils occur in sequence or at the same time to cause a loss.
Conditions: The part of your insurance policy that states the obligations of the person insured and those of the insurance company.
Consequential Loss: Loss not directly resulting from a peril but rather indirectly as a result of a peril. An example of a consequential loss is loss to spoiled meat resulting from a direct loss of mechanical breakdown to a freezer.
Contingent Liability: A liability exposure resulting from liability imposed as the result of accidents caused by individuals or organizations other than the insured, but for which the insured can be held liable.
Coverage Part: All coverage forms, endorsements, and declarations that make up a single insurance contract for one line of coverage.
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Declination: The insurer's refusal to insure an individual after careful evaluation of the application for insurance and any other pertinent factors.
Deductible: The insured's share of a loss that is subtracted from the amount the insurer would otherwise pay.
Deductibles: The portion of the loss that the policyholder agrees to pay out of pocket, before the insurance company pays the amount they are obligated to cover. For example, if the covered claim is $1000 and your deductible is $250, you pay $250 and your company will pay $750. Deductibles help to keep insurance rates reasonable. Raising the amount of the deductible lowers the cost of insurance.
Depreciation: A decline in value of property due to the property’s age, wear and tear on the property, or the property’s decreasing usefulness.
Depreciation: Reduction in the value of property due to age and use.
Dividend Ratio: The Dividend Ratio is the ratio of incurred dividends to earned premium.
Dividend: Amount returned to a policyholder based on loss ratio for a given period of time.
Dividends (policyholder): Policyholder dividends are monies returned to policyholder due to the profitability of the policy.
Drive Other Car Endorsement: Individuals named in the endorsement are afforded auto coverage while driving autos not owned by them and not named in the policy.
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Earned Premium: Represents premium for coverage actually provided during a given period of time within the policy period.
Earth Movement: A peril inclusive of landslide, mudflow, earth sinking, rising or shifting, and earthquake.
Employee Dishonesty: A criminal act committed by an employee alone or in collusion with others that contributes to a loss for the employer.
Endorsement: Attachment or addendum to an insurance policy; an endorsement changes the contract's original terms.
Excess Insurance: Coverage that is excess over primary coverages and which does not pay until the loss exceeds a predetermined amount.
Experience Rating: Involves the adjustment of rates and subsequent premium for a risk based on its past loss experience, and how that loss experience compares to loss experience for an average risk. Extra Expense: Includes expenses that either allow an insured to continue operations after a loss or to reduce the length of time business is interrupted.
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Fire Legal Liability: Affords coverage for the liability incurred when an insured's negligence causes destruction of property in their care, custody or control.
Fire Resistive: Buildings with exterior walls, floors and roofs constructed of masonry or fire resistive materials having a fire resistance rating of not less than two hours.
Flat Cancellation: When a cancellation has the same effective date as that of the policy.
Frame Construction: Buildings with exterior walls of wood or other combustible materials. Includes buildings where combustible materials are combined with other materials such as stone and brick veneer or stucco on wood.
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Governing Classification: Under Workers Compensation, those operations that generate the largest amount of payroll are considered the Governing Classification for rating purposes.
Group Health Insurance: An insurance plan designed for a group, such as employees of a single employer. Insurance is provided to them under a single policy.
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Hazard: Any condition that tends to increase the probable severity or frequency of losses.
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Incurred Losses: Incurred Losses are the amount expended or estimated to be expended to pay claims.
Indemnification: Compensation to the victim of a loss, in whole or in part, by payment, repair, or replacement. Indemnity. Legal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.
Indemnify: To restore a victim who has had a loss to the same position as before the loss occurred.
Indirect Loss: Losses caused by direct damage but which occur over a period of time such as spoilage and business income losses. Insurance to Value: Level of coverage written equivalent to the value of the property.
Insurable Interest: Any interest a person has in property that is the subject of insurance, so that damage to this property would cause the insured a financial loss.
Insurable Risk: The conditions that make a risk insurable are (a) the peril insured against must produce a definite loss not under the control of the insured, (b) there must be a large number of homogeneous exposures subject to the same perils, (c) the loss must be calculable and the cost of insuring it must be economically feasible, (d) the peril must be unlikely to affect all insureds simultaneously, and (e) the loss produced by a risk must be definite and have a potential to be financially serious.
Insurance Company: An organization that has been chartered by a governmental entity to transact the business of insurance.
Insured: A person or organization covered by an insurance policy, including the named insured and any other parties for whom protection is provided under the policy terms.
Insurer: The party to the insurance contract who promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.
ISO: Insurance Services Organization. An advisory bureau for most personal and commercial lines of business (other than Workers Compensation).
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Joint and Several Liability: Each wrongdoer is fully responsible for the consequences of the wrong with payment of damages based on ability to pay and not degree of negligence.
Joisted Masonry: Buildings with exterior walls constructed of masonry materials including concrete, hollow concrete blocks, brick, stone or similar materials. Roof and floors are of combustible materials.
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Key Employee: Insurance Protection of a business against financial loss caused by the death or disablement of a vital member of the company, usually individuals possessing special managerial or technical skill or expertise. Also called key executive insurance.
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Lapse: Termination of a policy due to nonpayment of premiums.
Lessee: The person or organization to whom the lease is granted.
Lessor: The person or organization granting the lease.
Liability Coverage: Insurance that provides compensation for harm or wrong to a third party for which an insured is legally obligated to pay.
Liability: A legal obligation to compensate a person harmed by one's acts or omissions.
Life Insurance: Insurance that pays a specified sum of money to designated beneficiaries if the insured person dies during the policy term.
Loss Adjusting Expense: Loss Adjusting Expenses are the expenses associated with settling claims. They are categories as allocated (attributable to a specific claim) or unallocated (overhead type expenses, such as home office claims expenses).
Loss Development: The difference between the amount of a loss initially estimated or reserved and the amount of the loss payment at a later date.
Loss Expense - Allocated: Handling expenses, such as legal or independent adjuster fees, paid by an insurance company in settling a claim which can be definitely charged to that particular claim.
Loss Expense - Unallocated: Salaries and other expenses incurred in connection with the operation of a claim department of an insurance carrier which cannot be charged to individual claims.
Loss Ratio: Loss Ratio is the ratio of incurred losses to earned premium. Typically, losses are pure losses and do not include loss adjusting expense.
Loss: The happening of the event for which insurance pays.
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Manual Rates: Also known as class rates, the rates to be charged for a particular class of insured are published in rating manuals.
Masonry Non-Combustible: Buildings with exterior walls constructed of masonry materials and with floors and roofs constructed of metal or other non-combustible materials.
Medical Payments Coverage: Medical and funeral expense coverage for bodily injuries sustained from or while occupying an insured vehicle, regardless of the insured's negligence.
Misrepresentation: Act of making, issuing, circulating or causing to be issued or circulated an estimate, an illustration, a circular or a statement of any kind that does not represent the correct policy terms, dividends or share of surplus or the name or title for any policy or class of policies that does not in fact reflect its true nature.
Modified Fire Resistive Construction: Buildings with exterior walls, floors and roofs constructed of fire resistive materials. Fire resistive rating to be one hour or more but less than two hours.
Monopolistic State Fund: States in which the state fund is the only workers compensation insurance available in the state.
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NCCI: National Council on Compensation Insurance. An advisory bureau of Workers Compensation active in most states.
Negligence: Failure to use a generally acceptable level of care and caution.
No Benefit to Bailee: Inland marine clause that states that any insurance coverage a person may have on property in the possession of the bailee will not be for the benefit of the bailee.
No-fault Insurance: A system of compensation enacted by law in many states under which indemnification is made by the insured's own insurance company regardless of who is at fault. Details of this system vary significantly from state to state.
Non-Combustible: Buildings with exterior walls, floors and roofs constructed of and supported by asbestos, gypsum, metal or other non-combustible materials.
Nonowned Auto: Any auto not owned, leased, hired or borrowed that is used in connection with the business.
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Occurrence Coverage: Provides coverage only for injury or damage that occurs during the policy period, regardless of when the claim is actually made.
Offer and Acceptance: The offer may be made by the applicant by signing the application, paying the first premium and, if necessary, submitting to physical examination. Policy issuance, as applied for, constitutes acceptance by the company. Or the offer may be made by the company when no premium payment is submitted with the application. Premium payment on the offered policy then constitutes acceptance by the applicant.
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Pair and Set Clause: In the event of a loss to part of a set or pair, the insurer is under no obligation to pay for the total loss of a set when only one part is lost, damaged, or destroyed.
Peak Season: Provides increased amounts of coverage during specified periods of time during the policy period.
Peril: A cause of loss. Fire, windstorm and vandalism are types of perils that cause loss to property.
Peril: The cause of loss or damage.
Permanent Insurance: A general term for ordinary life and whole life insurance policies that remain in effect as long as their premiums are paid.
Personal Property Insurance: Protects against the loss of or damage to property other than real property (real estate) caused by specific perils.
Physical Damage: Damage to or loss of the automobile resulting from collision, fire, theft or other perils.
Policy Declarations: The part of the insurance contract that lists basic underwriting information, including the insured's name, address and description of insured locations as well as policy limits.
Policy Limits: The maximum amount an insured may collect or for which an insured is protected, under the terms of the policy.
Policy Loan: A loan from a life insurer to the owner of a policy that has a cash value.
Policy Period: The amount of time an insurance contract or policy lasts.
Policy: The written forms that make up the insurance contract between an insured and insurer. A policy includes the terms and conditions of the coverage, the perils insured or excluded, etc.
Policyholder: The person who buys insurance.
Policyholders Surplus: The funds available, (assets minus total liabilities), that the insurer has available to meet future obligations to its policyholders.
Policyowner: An individual with an ownership interest in an insurance policy.
Preexisting Condition: A physical illness or disability that existed before the health or life insurance policy effective date and generally, which was not disclosed on the application.
Preferred Risk: A risk whose physical condition, occupation, mode of living and other characteristics indicate a prospect for longevity superior to that of the average longevity of unimpaired lives of the same age.
Premium: The price for insurance coverage as described in the insurance policy for a specific period of time.
Pro Rata Cancellation: Cancellation of an insurance policy with the premium charge adjusted to be in proportion with the amount of time the policy was in force.
Probable Maximum Loss: The maximum amount of loss that one would expect under normal circumstances.
Proof of Loss: A sworn statement that usually must be furnished by the insured to an insurer before any loss under a policy may be paid.
Property Damage Coverage: An agreement by an insurance carrier to protect an insured against legal liability for damage by an insured automobile to the property of another.
Proximate Cause: Means there was an unbroken chain of events from the occurrence of an insured peril to the final damage producing event.
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Quota Share: Type of reinsurance in which the reinsurer indemnifies the primary insurer against a fixed percent of loss on each risk covered.
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Rate: The pricing factor upon which the insurance buyer's premium is based.
Rated Policy: Sometimes called an extra-risk policy, an insurance policy issued at a higher-than-standard premium rate to cover the extra risk where, for example, an insured has had a DUI or other traffic violations.
Rebating: Giving any valuable consideration, usually all or part of the commission, to the prospect or insured as an inducement to buy or renew. Insurance rebating is prohibited by law.
Reimbursement: The payment of an amount of money by an insurance policy for a covered loss.
Reinstatement: The process by which a life insurance company puts back in force a policy that has lapsed or has been canceled for nonpayment of premium.
Reinsurance: One insurer ceding risk for loss to another insurer for the purpose of the ceding insurer to avoid risk.
Replacement Cost: The cost to replace damaged property with new property of like kind and quality.
Reporting Form: The policy requires the insured to make periodic reports of values, usually on a monthly or quarterly basis.
Representation: Representations when used with an application for insurance, are correct and true statements made by the applicant of insurance on an application.
Residual Markets: Insurance markets outside the standard marketing system for high risk exposures or classes of business.
Retrospective Rating: An insured's premium is reduced or increased at the end of the policy term based on that insured’s losses during the same period.
Risk: The possibility or chance of loss or injury.
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Safety Group: A Safety Group is a group of policyholders engaged in the same business or profession who have a defined program for actively promoting loss control. Based on the aggregate results of the group, a dividend is paid to the members of the safety group.
Salvage: Recovery made by an insurance company by the sale of property which has been taken over from the insured as a part of loss settlement.
Self-Insured Retention: The portion of a potential loss or risk assumed by an insured either through self insurance, a deductible or no insurance.
Settlement: An agreement between a claimant or beneficiary to an insurance policy and the insurance company regarding the amount and method of a claim or benefit payment.
Short Rate Cancellation: The insured pays a penalty in that the returned premium is not proportionate to the number of days remaining in the policy term.
Standard Risk: A person, who, according to a company's underwriting standards, is entitled to purchase insurance protection without extra rating or special restrictions.
Statement of Values: In order to determine a blanket or average rate, the insured is required to submit a declaration of the amounts of value at each location indicated on the Statement of Values form.
Subrogation: A provision that allows the insurer to assume the insured's right to collect damages from any other person responsible for the loss.
Substandard Risk: A risk that cannot meet the normal requirements of an auto insurance policy. Protection is provided in consideration of a waiver, a special policy form, or a higher premium charge. Substandard risks may include those persons who are rated because of poor driving habits.
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Tail: Exposure to continued losses after the policy has expired and the coverage that may be purchased by the insured to extend coverage beyond policy expiration.
Theft Limit (or Inside Policy Limits): The highest amount an insurance company will pay on certain items of personal property. For instance, some policies have a $5,000 limit for computers. If an item would cost more than the limit to replace.
Time Element Loss: The direct physical loss to property, which results in a loss of business income and extra expense that continues over a period of time.
Trailer Interchange Agreement: An agreement in which one truck transfers a trailer containing a shipment to a second trucker for continued transportation.
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Underwriter: (a) A company that receives the premiums and accepts responsibility for the fulfillment of the policy contract; (b) the company employee who decides whether or not the company should assume a particular risk; (c) the agent who sells the policy.
Underwriting Expenses: Underwriting Expenses include the expenses of selling, underwriting and servicing a policy. Included would be commissions, salary expenses of marketing, underwriting and servicing staff, and underwriting reports.
Underwriting: The process of reviewing applications for coverage. Applications that are accepted are then classified by the underwriter according to the type and degree of risk.
Unearned Premium: The premium paid that represents the unexpired portion of the policy term.
Uninsurable Risk: One not acceptable for insurance due to excessive risk.
Uninsured (Underinsured) Motorist Coverage: A form of insurance that pays the policy holder and passengers in his/her car for bodily injury caused by the owner or operator of an uninsured or inadequately insured automobile.
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Value Reporting Form: The amount of insurance and corresponding premium is adjusted based on the values reported by the insured, normally on a monthly or quarterly basis.
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Waiver: An agreement attached to a policy which exempts from coverage certain disabilities or injuries that otherwise would be covered by the policy. Top