California Auto Insurance Terminology
GLOSSARY OF INSURANCE TERMS
ACCIDENT: An event causing loss, which occurs without being expected or designed, usually specific in time and place.
ACCIDENT AND HEALTH INSURANCE: There are two major types: 1) Disability income insurance pays for loss of income due to disability, and 2) medical expenses pays for hospital, doctor and other medical expenses. Both types generally pay for losses arising from sickness or accidents. Some policies referred to as “accident policies,” do not cover sickness.
ACCIDENTAL DEATH BENEFIT: Provision for payment of an additional amount — usually equal to the face amount of insurance — if the insured is killed in an accident. Popularly known as double indemnity.
ACQUISITION COSTS: Expenses incurred to acquire new business premiums and conserve renewal business. Broad in scope, it includes costs of soliciting business, issuance of policies, collection of premium, agents’ compensation, field supervision, advertising, and any other expense reasonably attributable to acquisition and conservation of written premiums.
ACTUAL CASH VALUE (ACV): The cost of replacing or restoring property at prices prevailing at the time and place of the loss, less depreciation, however caused. Another definition: the sum of money required to replace property less depreciation, which includes physical wear and tear and obsolescence.
ACTUARY: A person whose principal function is to make the technical calculations required for the pricing of insurance policies.
ADDITIONAL EXTENDED COVERAGE: This coverage is a second endorsement on the fire policy (fire and lightning with extended coverage) which insures the dwelling and/or contents against water damage from plumbing, etc.; boiler explosion; glass breakage, damage by ice and snow, freezing, fall of trees, collapse, vandalism, vehicles owned by insured or tenants, and landslide.
ADDITIONAL INSURED: One who is protected by an insurance policy other than the named insured. Example: in automobile insurance, one who drives the insured’s car with his consent ordinarily is protected. In property insurance, this might be a co-owner, mortgagee, or lien holder.
ADJUSTER: A person who investigates and settles losses for an insurance carrier or the insured.
ADMITTED COMPANY: A company, whether from another state or country, is said to be “admitted” within a given state when licensed to do business in that state.
ADVANCE PREMIUM: Most companies give the insured the right of making premium payments in advance.
AGE CHANGE: An age change occurs on the date, halfway between birth dates, on which the life insurance age changes. Immediately after, the premium for new life insurance will be computed according to the age on the next following birth date. The life insurance age is the age at nearest birthday.
AGE LIMITS: The ages below and above which the company will not accept applicants.
AGENCY: An organization which solicits insurance for one or more carriers and may perform other functions such as issuing policies and adjusting losses.
AGENT: 1) An individual who solicits insurance for one or more carriers and may perform other functions, such as issuing policies. (Independent agent). 2) Agents of a direct writer are sales employes of one company only. (See Direct Writer.)
AGE OF CAR (age group): A term used to classify cars according to age for rating purposes.
ALLIED LINES: Types of insurance associated with property insurance, which may include earthquake, sprinkler leakage, income and extra expense coverages.
ANNUAL POLICY: Insurance policy written for a term of one year.
ANNUITANT: The person during whose life an annuity is payable, usually the person to receive the annuity.
ANNUITY: A contract that provides an income for life or for a specified period of time, such as a number of years.
APPLICATION: A request to a company for a policy. The application is a conditional offer to buy. If the medical examination and the inspection are in order, the company usually will accept the offer. It may be the policy named in the application or, if the applicant is substandard, it may be on a higher premium or another policy form.
APPRAISALS: Determination of the value of property or the extent of damage by impartial experts. Many property insurance policies provide for “appraisals” where the company and the insured cannot agree on the amount or the extent of a loss.
APPROVED: In fire insurance, it usually means that the construction, equipment, preventive and protective devices meet established requirements for insurance. In many cases, “approved” construction results in reduced insurance premiums.
ARBITRATION: When disputes arise between the insured and the company, especially with regard ARBITRATION: When disputes arise between the insured and the company, especially with regard to the amount of the loss, the matter can be referred to arbitration. Someone, approved by both parties, is appointed to consider the facts and decide the issue. If the parties cannot agree to one person, then each appoints a representative and these two appoint another person acceptable to both. The award brought by an arbitrator is binding and final on both parties.
AREA: A territorial subdivision, usually called “rating territory,” within a given state used for rating purposes.
ARSON: The willful and malicious burning of property, sometimes with the intent of defrauding an insurance company.
ASSETS: All of the property owned by a carrier.
ASSIGNED RISK: A program whereby high risk drivers or homeowners, unable to buy a private insurance policy, are assigned to a particular company, usually at a higher rate than the private market, i.e., California Automobile Assigned Risk Plan. (Also see Joint Underwriting Association.)
ASSIGNEE: One to whom the legal ownership of a policy or a limited interest therein is transferred.
ASSIGNMENT: The partial or complete transfer by a person of his right or interest in a policy to another person. The ability of a person to so assign the policy may be limited by law or individual circumstances. An assignment must be written, signed by the owner-policyholder whose interest is being transferred, properly attested, and the original or a certified copy must be filed with the insuring company. A valid assignment so filed is binding on the company.
ASSURANCE-INSURANCE: These terms are today generally accepted as synonymous, although not originally so. The term “assurance” is used more commonly in Canada and Great Britain than in the United States.
ASSURED: Synonymous with “insured.” One who has an insurance policy with an insurance carrier. “Insured” is preferred.
AUDIT: An examination of the books of accounts and/or vouchers for the purpose of ascertaining the accuracy or inaccuracy of the records.
AUTOMATIC PREMIUM LOAN: A feature in a life insurance policy providing that any premium not paid by the end of the grace period (usually 31 days) be paid automatically by a policy loan if there is sufficient cash value.
AUTOMOBILE DEATH INDEMNITY COVERAGE: Provides limited life insurance protection to insured persons specifically named in the policy in the event of a death that is a direct result of a vehicle accident. Payment is not contingent upon the establishment of negligence, but death by an intentional act of the insured is not covered.
AUTOMOBILE DISABILITY INCOME COVERAGE: Provides persons specifically named in the policy with the weekly benefit shown in the policy in the event of continuous total disability as a direct result of bodily injury, sickness, or infection caused by an auto accident.
AUTOMOBILE INSURANCE (Coverages): For definitions of specific types available, see following auto insurance coverages listed alphabetically throughout the Glossary — AUTOMOBILE DEATH INDEMNITY COVERAGE, AUTOMOBILE DISABILITY INCOME COVERAGE, AUTOMOBILE LIABILITY INSURANCE, AUTOMOBILE PHYSICAL DAMAGE INSURANCE, BODILY INJURY LIABILITY INSURANCE, COLLISION INSURANCE, COMPREHENSIVE AUTOMOBILE INSURANCE, DEDUCTIBLE COLLISION AND DEDUCTIBLE COMPREHENSIVE AUTOMOBILE COVERAGES, MEDICAL PAYMENTS AUTOMOBILE INSURANCE, PERSONAL INJURY PROTECTION (PIP) AUTOMOBILE INSURANCE, PROPERTY DAMAGE LIABILITY INSURANCE, TOWING COVERAGE, UNDERINSURED MOTORIST COVERAGE, UNINSURED MOTORIST COVERAGE.
AUTOMOBILE LIABILITY INSURANCE: Protection for the insured against loss arising out of legal liability when his/her car injures others or damages property.
AUTOMOBILE PHYSICAL DAMAGE INSURANCE: The collision and comprehensive coverages in the automobile insurance policy.
AVIATION INSURANCE: Coverage against aviation perils, primarily involving operation of aircraft and characterized by a constant exposure to potential catastrophe loss. Types of coverages include insurance for damage to the aircraft or contents, aircraft owner’s liability insurance on passenger bodily injury or death, airport liability, hangarkeeper’s liability, and aviation products liability insurance.
BASIC PROTECTION INSURANCE: (no-fault plan): Minimum required coverage that pays benefits without regard to fault.
BENEFICIARY (LIFE): The person named in the policy to whom the insurance money is to be paid at the death of the insured.
BENEFITS: Amount to be paid by the insurer under an insurance contract.
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.
BODILY INJURY: Bodily harm, sickness or disease (including death at any time resulting from the accident) resulting from ownership, maintenance or use of a motor vehicle.
BODILY INJURY BENEFIT COVERAGE: This automobile coverage is designed to protect the insured and any passengers in his/her car against loss by reason of bodily injury or death caused by the owner or operator of an uninsured automobile (or a “hit-and-run”). Also called uninsured motorist coverage.
BODILY INJURY LIABILITY INSURANCE: This coverage, often called “public liability insurance,” protects an insured against legal liability for injury to the person of another arising from an accident.
BOILER OR MACHINERY INSURANCE: Coverage for loss arising out of the operation of pressure, mechanical and electrical equipment. It may, among other things, cover loss to the boiler and machinery itself, damage to other property, and business interruption losses.
BOOK OF BUSINESS: The total in force business of an insurance company. It includes the sum of the policy contracts in force at any particular time.
BROAD FORM: A policy affording more liberal benefits, or in fire insurance, an endorsement that grants broader or additional coverages to a basic policy. It is usually added to a standard fire and extended coverage policy. For example, on a dwelling policy, it usually adds the following: vandalism, glass breakage, falling trees, weight of ice, snow or sleet, and collapse. If added to a commercial fire policy, it might include vandalism, falling objects, weight of ice, snow or sleet, and collapse.
BROKER: A representative of the insured in placing insurance with companies. He is paid a commission by the company or its agents. Often a broker also is a licensed “agent” for one or more companies.
BURGLARY: Breaking and entering into the premises of another for the purpose of stealing with visible signs of forced entry.
BURGLARY AND THEFT INSURANCE: Protection for loss of property due to burglary, robbery or loss.
BUSINESS IN FORCE: A measurement of the total policies or premiums that might be in effect at any particular time.
BUSINESS INSURANCE (LIFE): Insurance concerned primarily with the protection of an insured’s business or vocation. Business insurance protects a business against the loss of its valuable lives or key personnel; stabilizes the business through the establishment of better credit relations; and provides a practical plan for the retirement of business interest in the event of the death of one the owners.
BUSINESS INTERRUPTION INSURANCE: Coverage for loss of earnings in case the policyholder’s business is shut down by fire, windstorm, explosion or other insured peril.
CALIFORNIA AUTOMOBILE ASSIGNED RISK PLAN (CAARP): The mechanism through which high risk drivers, who are unable to acquire coverage in the voluntary market, are assigned to participating companies.
CANCELLABLE POLICY: A policy which may be cancelled by the company at any time by giving advance notice to the insured and refunding any unearned premium.
CANCELLATION: The discontinuance of an insurance policy before its normal expiration date.
CAPITAL SUM: A term in accident insurance to describe the amount payable for death or for loss of hands, feet or sight. Also called principal sum.
CARRIER: The insurance company or the one who agrees to pay the losses. The carrier may be organized as a company, either stock, mutual, or reciprocal, or as an association of underwriters such as Lloyd’s of London.
CASH SURRENDER VALUE: The amount available in cash upon surrender of a life insurance policy before it matures as a death claim or otherwise.
CASUALTY INSURANCE: A general class of insurance covering liability resulting from accidents and some types of property insurance. It includes among other coverages: automobile, workers’ compensation, employer’s liability, general liability, plate glass, theft and personal liability. It excludes life, fire and marine insurance, but, as ordinarily used, includes health insurance and fidelity and surety bonds.
CATASTROPHE: Event which causes a loss of extraordinary magnitude.
CATASTROPHE REINSURANCE: This is a form of insurance written on an excess of loss basis in order to improve the spread of risk against unknown concentrations of liability subject to one occurrence. A deductible is chosen at the amount necessary to reduce the probable frequency of loss to an acceptable level to the reinsurer, and severity of loss to a level acceptable to the reinsured company.
CEDE: Transfer all or part of a risk written by an insurer (the ceding, or primary company) to a reinsurer.
CESSION: The unit of insurance passed to the reinsurer by the ceding company. The unity (cession) may accordingly be the whole or a portion of: a) single risks; b) defined type or class of policies; or c) defined divisions of a policy as agreed.
CHARTERED LIFE UNDERWRITER (CLU): A designation conferred in recognition of the attainment of certain standards of education and proficiency in the art and science of life insurance underwriting.
CHARTERED PROPERTY AND CASUALTY UNDERWRITER (CPCU): A designation conferred in recognition of the attainment of certain standards of education and proficiency in the art and science of fire and casualty insurance underwriting.
CLAIM: A request for payment of a loss which may come under the terms of an insurance contract. There are two types of claims. A first party claim is one made by the policyholder in which the policyholder reports the claim directly to his company. A third party claim is one in which a person makes a claim against a policyholder of another company and the payment, if any, will be made by that company.
CLAIMANT: One who makes a claim.
CLAIM FREQUENCY: The number of claims under a given coverage divided by the number of earned exposures for the given coverage. It is usually expressed as the number of claims paid per 100 of such exposures. Example: for bodily injury (BI), the frequency of 2.50% means that bodily injury accidents were incurred at the rate of 2-1/2 for every 100 cars insured for BI for one year.
CLAIM SEVERITY: The average cost per claim considering all claims under a certain coverage for a specified period.
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 (other than his own willful act). This does not cover other people’s property. (See DEDUCTIBLE COLLISION.)
CO-INSURANCE: A provision under which an insured, in consideration of a reduced premium rate, promises to maintain a certain percentage of insurance to the value of the property. The co-insurance clause attached to the policies specifies the percentage, and has no bearing on loss payment if the insured keeps his promise. If he carries less than the stipulated percentage of insurance to value, loss payment is limited to the same ratio which his insurance bears to the amount required. For example, if the co-insurance clause says he must carry 80% to value but he only carries 60% to value, the company will only pay 60/80 of any loss, up to the policy limit.
CO-INSURANCE-ACCIDENT AND HEALTH MEDICAL INSURANCE: A provision in a medical insurance policy which requires that the insured person pay part of the expense and the insurance company will pay the remaining part.
COMBINATION COMPANY: An insurance company which markets both ordinary and industrial life insurance by the home service method.
COMMERCIAL FIRE: This coverage insures all property not occupied as a residence, excluding farming and manufacturing, against loss by fire.
COMMERCIAL LINES: The various kinds of insurance which are written for businesses. (Also see Commercial Insurance [COVERAGES].)
COMMISSIONER OF INSURANCE (INSURANCE COMMISSIONER): Title of the head of the state Insurance Department who is responsible for the enforcement of insurance laws.
COMMON DISASTER CLAUSE: In life insurance, this clause is designed to alleviate the hardship that can result if the insured and primary beneficiary die at the same time or within a short period of time of each other. Usually the clause provides that if the primary beneficiary dies either before proof of the insured’s death is submitted to the company or within a stated period (usually 14 or 30 days after the insured’s death), the proceeds will be paid to the contingent beneficiary.
COMPARATIVE NEGLIGENCE: Under this concept, a plaintiff (the person bringing suit) may recover damages even though guilty of some negligence. His/her recovery, however, is reduced by the amount or percent of that negligence. There are various forms of comparative negligence, such as: “pure comparative,” in which the plaintiff recovers so long as he/she is not solely at fault; “less than,” in which the plaintiff recovers so long as his/her negligence is less than that of the defendant; and “not greater than,” in which the plaintiff recovers so long as his/her negligence is not greater than the defendant’s.
COMPETITIVE STATE FUND: State-operated workers’ compensation insurer which competes with private insurers for employers’ workers’ compensation business in certain states.
COMPREHENSIVE AUTOMOBILE INSURANCE: Protection against loss resulting from damage to the insured auto, other than loss by collision or upset. Broad coverage is provided and includes protection from such hazards as fire, theft, glass damage, wind, hail and malicious mischief. This is a first party coverage.
COMPREHENSIVE PERSONAL LIABILITY INSURANCE: Protection for an insured against loss arising out of his/her legal liability to pay money for damage or injury he/she has caused to others. This does not include automobile liability, but includes almost every activity of the insured except his/her business operations.
COMPULSORY AUTO LIABILITY INSURANCE: Insurance laws in some states require motorists to carry at least certain minimum auto liability coverages for bodily injury and property damage.
CONCEALMENT: The withholding of material facts from an insurer, either in applying for a policy or making a claim.
CONTENTS: A term used to refer to the personal property contained in a building. It may be household furniture, personal effects, or other types of personal property, movable in nature and not firmly affixed to the real property.
CONTINGENT BENEFICIARY: A beneficiary whose right to receive benefits depends upon the occurrence of a certain contingency — for example, the right to receive certain benefits only in the event that another named beneficiary dies prior to the time of payment.
CONTINGENT LIABILITY INSURANCE: Covers the insured individual or business in cases of indirect or “contingent” liability, where direct liability for an accident, for example, falls on another, but because of the relationship between the insured and the other party, the insured might still be held indirectly liable. (Example: a business being responsible for the work performed by an independent contractor.)
CONTRACT: The “Law of Contracts” specifies four requirements for the formation of a single contract: 1) parties of legal capacity; 2) expression of mutual assent of the parties to a promise, or set of promises; 3) a valid consideration, and 4) the absence of any statute or other rule declaring such agreement void. A life insurance policy qualifies as a contract under the above definition.
CONTRACT OF SALE CLAUSE: The clause attached to a fire policy when a dwelling has been purchased on a “contract” basis. Title to the property in a “contract sale” remains in the name of the seller; the buyer gets use and possession of the property.
CONTRACTUAL LIABILITY INSURANCE: Provides coverage for claims arising out of liability that has been assumed by the insured under a written or oral contract.
CONTRIBUTORY NEGLIGENCE: Carelessness of the injured person that helped to cause the accident in which he was injured. Some states bar recovery to the plaintiff if the plaintiff was contributorily negligent.
COVERAGE: The type or the extent of the insurance afforded under an insurance contract.
Bodily Injury Liability: An agreement by a company to protect an insured against loss from legal liability for injury to another person arising from an automobile accident. This is usually referred to as “third party coverage.”
Collision or Upset: (usually called collision): A form of insurance protecting the insured against loss resulting from any damage to his/her car caused by collision with any object, or upset.
Comprehensive: An agreement to protect an insured against loss resulting from damage to his/her automobile, exclusive of loss by collision or upset. Broad coverage is provided and includes protection from such hazards as fire, theft, glass damage, wind, hail and malicious mischief (first party coverage).
Medical Payments: Similar to PIP, but pays after PIP benefits have been exhausted.
Personal Injury Protection: Coverage under which a company agrees to pay medical, hospital, and funeral expenses resulting from an automobile accident, regardless of the liability of the insured.
Property Damage Liability: An agreement by an insurance company to protect an insured against loss from legal liability for damage by his automobile to the property of another. The term includes damage to other automobiles, buildings, utility poles and other types of real and personal property (third party coverage).
Towing: Insures against charges for towing and road service at the place of disablement, with a maximum amount stipulated for each occurrence.
Uninsured Motorist Coverage: Protects the insured against financial loss resulting from bodily injury carelessly inflicted by an uninsured motorist, including a hit and run driver, who is legally liable. (bodily injury benefit).
Additional Living Expense: The purpose of this coverage is to pay for increased expense of living while the insured’s residence is being rebuilt or repaired after damage from an insured peril. Examples are the extra cost of housing the insured’s family in a hotel, dining in restaurants, etc.
All Physical Loss Form: This coverage protects against loss from “all risks of physical loss” for dwellings subject to certain exclusions contained in the form.
Broad Form: Can be written on dwelling and contents. Fire forms to include Extended Coverage perils, plus such additional perils as falling objects, weight of ice, snow or sleet, collapse of buildings, accidental discharge, leakage or overflow of water or steam from plumbing, heating, or air conditioning systems, sudden and accidental tearing asunder, burning, or bulging of appliances for heating water, freezing of plumbing, heating or air conditioning systems, and domestic appliances, glass breakage, and breakage of building glass.
Builder’s Risk Insurance: Insurance against loss resulting from damage to buildings and to materials incidental to construction, including machinery and equipment, while the buildings are under construction.
Extended Coverage: An extension of the fire policy to cover the additional perils of windstorm, hail, explosion, or riot, riot attending a strike, civil commotion, aircraft, vehicle and smoke.
Homeowner’s Policy: A policy in which Fire and Extended or broad coverage for dwelling and contents, residents’ theft insurance, additional living expense, and personal liability insurance are combined.
Rents or Rental Value: Insurance against loss of the rental value of a property; protects against loss of rents resulting from an insured peril.
Replacement Cost: Insurance under which the amount payable is the current replacement cost of the property new, rather than the depreciated value. Applies only to the building items and covers loss from all insured perils.
Fire: Coverage is provided to protect the insured property from the perils of fire, lightening and transportation.
CONVERTIBLE TERM: Some term life insurance policies provide that they may be converted to permanent forms of insurance without medical examination if the conversions are made within a limited period as specified in the contracts. Usually the conversion may be made as of the original date of issue, provided the insured pays the difference in reserves, or as of the attained age of the insured at the time of conversion.
CREDIT DISABILITY INSURANCE: Disability insurance on the borrower, payable to the creditor while the borrower is disabled to cover the loan payment (usually small loans repayable in installments).
CREDIT LIFE INSURANCE: Life insurance issued by a life insurance company on the lives of borrowers, payable to the creditors, to cover payment of loans (usually small loans repayable in installments) in case of death. It is usually handled through a lending office and is written on either a group or an individual basis.
DAMAGES: In a technical sense, damages refer to the money or compensation recoverable in a lawsuit by a party who has been injured in person or property or rights by the negligence of another.
DEATH CLAIM: When a policyholder dies, the person entitled to the proceeds must complete certain forms giving due proof of the death and establishing the claimant’s right to such proceeds. When filed with the company, the company is said to have received a death claim.
DEBIT: The specific territory assigned to a home service life insurance agent. (See HOME SERVICE, MDO, or WDO.)
DECREASING TERM LIFE INSURANCE: Term insurance, the face value of which decreases each year over a stated period. Family income and usually mortgage cancellation are decreasing term insurance.
DEDUCTIBLE: A provision in an insurance contract stating that the insurer will pay only that amount of any loss that is in excess of a specified amount. The specified amount is the deductible.
DEDUCTIBLE COLLISION AND DEDUCTIBLE COMPREHENSIVE AUTO COVERAGES: Forms of collision or comprehensive auto insurance coverages which specify that an insurance company will pay the damage less a specified amount under the particular coverage. For example: for $100 deductible collision coverage, the company would deduct $100 from the total damage under the collision coverage, and be liable for the amount in excess of $100. Rates are reduced as the amount of the deductible is increased.
DEPRECIATION: A decrease in the value of property over a period of time due to wear and tear or obsolescence. Depreciation is used to determine the actual cash value of property at time of loss. (See ACTUAL CASH VALUE.)
DIFFERENCE IN LIMITS: A method for determining the limit of uninsured motorist (UM) coverage. The amount of damages collected from the other driver is deducted from the amount available to the motorist under his own UM policy. A motorist with a UM limit of $50,000 would collect only $40,000 from his own insurance company if $10,000 was available from the other driver.
DIRECT LOSS: A loss where an insured peril is the proximate cause. If a windstorm blows the roof off a home, the windstorm is the insured peril causing the direct loss or damage.
DIRECT MAIL: A form of advertising using letters or other printed material designed to secure prospects for insurance. Some direct mail is used to solicit insurance.
DIRECT PREMIUMS WRITTEN: Property and casualty insurance premiums written (less return premiums), without any allowance for premiums for assumed or ceded reinsurance.
DIRECT WRITER: The industry term for a company using its own sales employees to write its policies. Sometimes refers to companies which contract with exclusive agents.
DISABILITY CLAUSE: A benefit provision forming part of a life insurance policy providing for certain benefits in the event of total and permanent disability from accident or sickness. A benefit providing for waiver of premiums only is called a Waiver of Premium Disability Clause. A benefit providing for waiver of premiums plus payment of monthly income is normally called a Disability Income Clause. Disability is normally considered “permanent” after it has continued for six months, while “total” is normally considered as inability to engage in any gainful occupation. The amount of monthly income is usually related to the face amount of the life insurance policy (e.g., $5 or $10 per month per $1,000 of insurance) and current clauses normally provide for continuation of income to a stated age only.
DISABILITY, PARTIAL: Inability to perform a part of one’s duties, often defined as an important daily duty of one’s occupation; a condition resulting in partial loss of earning power.
DISABILITY, PERMANENT: Disability that is expected to continue for the lifetime of the disabled person. Disability may be deemed permanent after it has continued for a specified period of time.
DISABILITY THRESHOLD: In no-fault auto insurance states with the disability threshold, it provides that a victim may not sue in tort unless he has been disabled (defined differently in various state plans) from an accident for a specific period of time.
DISABILITY, TOTAL: Inability to perform any of the duties of one’s occupation for wages or profit; a condition resulting in complete loss of earning power. (See DOLLAR or VERBAL THRESHOLD.)
DIVIDENDS: 1) Policyholder Dividend — The return of part of the premium paid for a policy issued on a participating basis by an insurer. Any such dividend is dependent upon premiums collected in excess of losses and expenses for the particular class of business at the end of the policy period. 2) Stockholder Dividend — A portion of the surplus paid to the stockholders of a corporation.
DOLLAR THRESHOLD: In no-fault auto insurance states the dollar threshold prevents individuals from suing, in tort, to recover for pain and suffering unless their medical expenses exceed a certain dollar amount. (See DISABILITY THRESHOLD and VERBAL THRESHOLD.)
DOMESTIC CARRIER: An insurance company organized in a given state is referred to in that state as a domestic carrier.
DOUBLE INDEMNITY: An accidental death benefit providing for an additional payment equal to the face amount of the policy in case of accidental death caused solely through external and violent means, and occurring within a limited period, usually 90 days, after bodily injury. Certain causes are specifically excluded.
EARNED PREMIUM: The part of the total policy premium earned by the insurance company which applies to the expired portion of the policy period.
EMBEZZLEMENT: Fraudulent taking or use of another’s funds or property which has been entrusted to one’s care.
ENDORSEMENTS: An additional piece of paper, not a part of the original contract, which cites certain terms and which, when attached to the original contract, becomes a legal part of that contract. Additions to life insurance contracts are accomplished through the use of riders, which are similar to endorsements.
ENDOWMENT POLICY: Life insurance which provides for payment of the face value in the event of either the policyholder’s death during a specified period of years or his survival to the end of the specified period (as long as the policy is in full force).
EQUITY: The extent of someone’s interest or ownership of property. If you purchased a $15,000 home with a $5,000 payment, your equity in the property is the down payment, or $5,000.
ESCROW FUNDS: Funds set aside with an impartial third party, for a specific purpose. Mortgage companies quite often include insurance premiums as a part of the monthly mortgage payment. Each month the mortgage company collects 1/12 the fire insurance premium for the house. The total funds collected for fire premium are placed in an “escrow account” and cannot be used for any other purpose.
EXCESS UNINSURED MOTORIST (UM): Requires the carrier to pay up to the UM coverage limit in a policy even when the other driver has liability insurance. A motorist with a UM limit of $50,000 could collect $60,000 if $10,000 was available from the other driver’s insurance.
EXCLUSIVE AGENT: An agent who is employed by one and only one insurance company and who solicits business exclusively for that company.
EXPENSE RATIO: The ratio of a company’s operating expenses to premiums.
EXPIRATION DATE: The specified date and time at which the policy terminates.
EXPOSURE: This term in the insurance field may have several meanings: 1) possibility of loss; 2) a loss potential as measured by type of construction, area or values; and 3) a possibility of a loss being communicated to an insurance risk from its surroundings.
EXTENDED COVERAGE PROPERTY INSURANCE: An extension of the fire insurance policy to protect the insured against property damage caused by the additional perils of windstorm, hail, explosion, or riot, riot attending a strike, civil commotion, aircraft, vehicle and smoke.
EXTENDED TERM INSURANCE: The non-forfeiture option which provides that the cash surrender value of a life policy may be used as a net single premium at the attained age of the insured to purchase term insurance for the face amount of the policy, less indebtedness and for as long a period as possible, but not longer than the term of the original policy. If the cash value of an endowment policy is more than sufficient to purchase extended term insurance for the remainder of the endowment period, the excess cash value is used to buy pure endowment payable at the maturity of the policy.
FACE AMOUNT: The amount of the principal sum or basic sum, insured — usually stated on the face or first page of the contract. The actual amount payable by the company may be increased by dividends, decreased by loans, or increased by supplemental term riders (e.g., family income).
FACULTATIVE REINSURANCE: Reinsurance on an individual policy basis wherein each risk which an insurance company wishes to reinsure is reviewed by the reinsurer, which has the “faculty” or option to accept or decline all or part of each risk offered to it.
FAIR PLAN: A facility, operating under a government-insurance industry cooperative program, to make fire insurance and other forms of property insurance readily available to persons who have difficulty obtaining such coverage.
FAMILY AUTO INSURANCE: This is insurance where the head of the household has one master policy on his/her life (usually whole life) and term coverage for spouse and children in lesser amounts. Newborn children are also included, usually at no additional premium. The policies have automatic programming devices that are in the original contract: i.e., the children’s coverage terminates at the head of household’s age 65, etc. There is usually a saving over the same coverage provided by separate policies, since one master policy reduces administrative costs.
FINANCIAL RESPONSIBILITY LAWS: A state law which may require motorists to furnish evidence, either before or after involvement in an auto accident (depending on the individual state’s law), of ability to pay for damages up to certain minimum dollar limits. These requirements commonly are met by carrying auto liability insurance with specified minimum limits or more.
FIRE INSURANCE: Coverage for losses caused by fire and lightning, plus resultant damage caused by smoke and water.
FIRST PARTY COVERAGE: An insurance coverage under which the policyholder collects compensation for his losses from his own insurer rather than from the insurer of the person who caused the accident.
FISCAL YEAR: A certain twelve-month period selected by an organization for its financial accounting period. In insurance companies, this nearly always coincides with the calender year.
FLOOD INSURANCE: Coverage against loss resulting from the flood peril, widely available at low cost under a program developed in 1968 by the private industry and the federal government.
FRANCHISE INSURANCE: Individual life or health insurance policies issued to a small group of people having a common affiliation or interest. Same as wholesale insurance.
FRATERNAL INSURANCE: Life insurance protection provided by fraternal benefit societies, having no capital stock and not organized for profit, and maintaining a lodge system. Practically all fraternals operate on a level rate and legal reserve basis in accordance with special fraternal insurance regulations and under supervision of the state insurance authorities.
FRAUD: Intentional concealment or misrepresentation with the objective of forcing an insurer to provide a benefit (such as paying a claim), which otherwise would not be provided.
FULL COVERAGE: Insurance which covers all losses, with no deductions, up to the amount of the insurance. (See DEDUCTIBLE COLLISION.) FURNITURE AND FIXTURES: A term used in commercial fire insurance. This coverage includes: desks, chairs, bookcases, filing cabinets, typewriters, calculating machines, temporary partitions, etc.
GENERAL DAMAGES: Damages awarded to an injured person for intangible loss which cannot be measured directly by dollars. Popularly known as “pain and suffering.” General damages are distinguished from special damages which are awarded for actual economic loss, such as medical costs, loss of income, etc.
GENERAL LIABILITY INSURANCE: A broad term meaning liability insurance, other than automobile, written to cover personal, professional and commercial risks. As respects commercial liability, it includes the following hazards and coverages: premises and operations, elevators, independent contractors, contractual products and completed operations.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP): A method of accounting used by insurance companies to produce results consistent with those of other industries. This is the method of reporting financial results required by the Securities and Exchange Commission of all industries under its jurisdiction and by the stock exchanges.
GOOD DRIVER PLAN: An auto insurance rating program which reflects the insured’s accident and traffic violation record as a factor in determining the premium.
GRACE PERIOD: Life and health insurance contracts provide that premiums may be paid at any time within a month or 31 days following the premium due date, the policy remaining in full force in the meantime. In life insurance, if death occurs during the grace period, the earned premium is deducted from the proceeds payable. No interest is charged on overdue premiums if paid during the grace period.
GROUP INSURANCE: Insurance written on a group of people under a single master policy, issued to their employer or to an association with which they are affiliated.
GROUP LIFE INSURANCE: A class of life insurance issued to a group of people under a master policy.
GUARANTEED COST INSURANCE: The life insurance sold by some companies, with all cost factors guaranteed at the time of issue. Policies of this type usually have lower premiums than the pre-dividend premiums of comparable participating policies.
GUARANTEED RENEWABLE: A health policy which the company guarantees to renew for life or until the insured reaches a specified age, usually 65. The company may adjust rates only on a class of risks, not on any individual. (See NON-CANCELLABLE.)
HAZARD: The presence of a condition that could cause loss or injury to property or persons. For example, smoking in bed increases the chance for loss of property and life resulting from fire.
HEALTH INSURANCE: Formerly sickness insurance — but now has superseded the term accident and sickness insurance.
HOMEOWNER’S POLICY: A package type of insurance for the homeowner that includes coverages ranging from fire and extended coverage, theft and personal liability to “all risk” coverages.
HOME SERVICE: A method of marketing life insurance, providing for an agent to sell and service policies in the policyholder’s home within a certain territory and includes collection of premium payments on a regular basis. (Sometimes referred to as debit insurance.)
IMPAIRED RISKS: In health insurance, individuals who can reasonably be expected to have an above-average number of claims due to medical history or physical impairment. Most impaired risks can be insured by use of a waiver or waiting period.
IMPROVEMENTS AND BETTERMENTS INSURANCE: Insurance coverage that protects a tenant against loss of improvements made by him to the real property in which he is a tenant, as a result of fire, etc. Some property policies use the term improvements and additions in describing the coverage.
INCONTESTABILITY: Life policies provide that, except for non-payment of premiums and certain other circumstances, the policy shall be incontestable after the policy has been in force for two years during the lifetime of the insured. During the contestable period, misrepresentation of facts material to the risk will permit the company to avoid liability under the policy and refund the premium. Total and permanent disability and accidental death provisions usually are excepted from the operation of the policy incontestable provision, although they may have their own incontestable provisions.
INCURRED LOSSES: Claims actually settled/paid during the reporting period.
INDEMNITY: In general, means reimbursement for loss, but also is used to mean a benefit provided by a policy. In health insurance, it sometimes is used to designate a specified amount paid regardless of actual loss or expense incurred.
INDUSTRIAL LIFE INSURANCE: A class of life insurance that is usually issued with a protection amount of less than $1,000 and premiums usually payable weekly or at most, monthly.
IN FORCE POLICY: A policy which would provide a death benefit if an individual died today if all due premiums have been paid, the full face value would be payable upon death and the policy is said to be in full force.
INLAND MARINE INSURANCE: A broad type of insurance, generally covering articles that may be transported from one place to another as well as bridges, tunnels and other means of transportation. It includes goods in transit (generally excepting trans-ocean) as well as numerous “floater” policies such as personal effects, personal property, jewelry, furs, fine art and others.
INSPECTION REPORT: Filed by an investigator employed by the insurance company or credit agency, giving general information on the health, habits, finances, and reputation of the applicant.
INSURABLE INTEREST (LIFE): One person has an insurable interest in the life of another if the death of the latter would cause actual financial loss to the other person. The purchaser of a life insurance policy must have an insurable interest in the insured life to make the contract legal. For example, each person has an unlimited insurable interest in his own life and the lives of close relatives. This legal requirement arose to avoid the abuses of wagering types of life insurance contracts in the earliest days when the insured person frequently was unaware that his life was the subject of an insurance policy for the benefit of an unknown third party.
INSURANCE: The contractual relationship between the insured and the insurer, the latter agreeing (in return for a premium) to pay losses due to specified causes. Sometimes includes specified services.
INSURED: A person covered by an insurance policy. In life insurance, the person upon whose life an insurance policy is issued.
INSURED, NAMED: The person with whom an insurance contract is made, and who is named specifically for protection against loss under the terms of the policy. Any person or corporation, or any member thereof, such as the spouse of the specifically mentioned as named insured in a policy, as distinguished from others who, though unnamed, are protected under some circumstances. (The most common application of this principle is in connection with the “omnibus clause” in automobile insurance policies.)
INSURER: The insurance carrier. The insurance company or other organization which assumes the risk.
INVESTMENT INCOME: The income generated by a company’s portfolio of investments (such as in bonds, stocks, or other financial ventures).
JOINT TENANCY: Ownership of property by two or more in such a way that when one of the joint owners dies, his share goes to the surviving joint owner(s) rather than the heir(s).
JOINT UNDERWRITING ASSOCIATION (JUA): A device used to provide insurance to those who cannot obtain insurance in the voluntary market. Certain companies (called carriers) issue policies at one rate level and handle claims, but the ultimate costs are borne by all companies writing insurance in that state.
JUDGMENT: Official decision of a court upon the respective rights and claims of the parties to a lawsuit submitted to its determination.
JUVENILE INSURANCE: Life insurance policies written on the lives of children within specified age limits.
KEY MAN INSURANCE: Insurance used for a business purpose, usually to reimburse a corporation for the loss it sustains when an important member of the firm dies.
KIDNAP AND RANSOM INSURANCE: Written for financial institutions and other corporations, this insurance covers named employees for individual or aggregate amounts paid as ransom, with deductibles requiring the insured to participate in approximately 10% of any loss.
LAPSE: The termination or discontinuance of a policy due to non-payment of a premium.
LITIGATION: The process of a lawsuit.
LARCENY: The unlawful taking and carrying away of the personal property of another without consent and with intent to deprive that person of ownership or use.
LEGAL FAULT: The quality of conduct judged to be substandard for which some adverse legal consequence can be imposed. Legal fault includes both intentional wrongdoing and negligence.
LEGAL LIABILITY: An obligation which can be enforced by law.
LEVEL PREMIUM INSURANCE: Insurance for which the cost is distributed evenly over the period during which premiums are paid. The premium remains the same from year to year, and is more than the actual cost of protection in the earlier years of the policy and less than the actual cost in the later years. The excess paid in the early years builds up the reserve.
LEGAL RESERVE: In life insurance, the sum which, accumulated at an assumed rate of interest and taken together with future specifications, is defined by the state insurance code.
LIABILITIES: An insurance company’s liabilities consist of its immediate or contingent policy obligations and unpaid claims as well as the usual obligations arising out of doing business such as taxes, payroll, etc.
LIABILITY INSURANCE: Provides protection for the insured against loss arising out of his legal liability to third parties.
LIABILITY LIMIT: The stipulated amount or amount beyond which an insurance company is not liable to protect the insured.
LICENSE—AGENT OR BROKER: Certification, issued by the Department of Insurance that an individual is qualified to solicit insurance applications for the period covered.
LICENSE—COMPANY: Certification, issued by the Department of Insurance, stating that an insurance company is qualified to do business in the state.
LIFE INSURANCE: A contract whereby, for a stipulated premium, the insuring company agrees to pay the insured, or his beneficiary, a fixed sum or its equivalent in income, upon the happening of death or some other specified event.
LIFE INSURANCE COST INDEXES: The measurements used to determine the cost of life insurance protection.
LOSS: Accrued economic detriment from accidental injury consisting of allowable expenses and work loss and, if injury causes death, survivor’s loss.
LOSS EXPENSE-ALLOCATED: Handling expenses, such as legal fees, paid by an insurance company in settling a claim which can be definitely charged to that particular claim. This excludes payments to the claimant.
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: The percent which losses bear to premiums for a given period.
LOSS RESERVE: The amount set up as the estimated cost of an accident at the time the first notice is received.
MALICIOUS MISCHIEF: The willful or intentional damage to or destruction of another’s property. Coverage for malicious mischief is usually combined with the vandalism peril in insurance policies.
MALPRACTICE INSURANCE: Coverage afforded to a professional practitioner, such as a doctor or a lawyer, against liability claims for damages resulting from alleged malpractice in the performance of the insured’s services.
MANUAL: A book published by an insurance company, rating association or bureau, containing its rates, classifications and rules for rating a policy.
MATERIAL DAMAGE: Insurance against damage to a vehicle. It includes automobile comprehensive, collision, fire and theft. Material damage and physical damage are terms that often are used inter-changeably.
MATURITY: The date at which the endowment amount becomes payable.
MATURITY VALUE: The proceeds payable on maturity of the policy. An ordinary life policy matures on the death of the insured and an endowment policy on a specified date or on the prior death of the insured. The maturity value is normally the “face amount” of the policy.
MEDICAL PAYMENTS AUTO INSURANCE: A coverage, available in various insurance liability policies, in which the insurer agrees to reimburse the insured and others, without regard for the insured’s liability, for medical or funeral expenses incurred as the result of bodily injury or death by accident under the conditions specified in the policy.
MONTHLY DEBIT ORDINARY (MDO): Ordinary life insurance which is sold via the home service method with premiums collected within each agent’s debit or territory on a monthly basis. (See also HOME SERVICE or WDO.)
MORTALITY RATE: The proportion of persons of a given age who die during a period of one year.
MORTGAGE INSURANCE: A basic use for life insurance. Family heads buy mortgage insurance for the specific purpose of paying off any mortgage balance outstanding at their death.
MULTI-PERIL POLICY: A package policy which provides protection against a number of separate perils. Multi-peril policies are not necessarily multiple line policies, since the combined perils may be all within one insurance line, such as property. (See Multiple-Line Policy.)
MULTIPLE-LINE COMPANY: A general term referring to fire and casualty insurance in general. A multiple line company writes auto, fire, health, commercial, boat owners, homeowner’s individual fire, and theft insurance.
MULTIPLE-LINE POLICY: A package policy which combines coverages from both the traditional property and liability insurance lines.
MUTUAL INSURANCE COMPANIES: Insurance companies, without capital stock, owned by the policyholders for the purpose of sharing in the profits through dividends at the end of the policy year.
NAMED INSURED: The person with whom an insurance contract is made, and who is named specifically for protection against loss under the policy terms.
NAMED PERILS: Coverage in a property policy that provides protection against loss from only the perils specifically listed in the policy rather than protection from physical loss. Examples of named perils are fire, windstorm, theft, smoke, etc.
NATIONAL ASSOCIATION OF LIFE UNDERWRITERS (NALU): An organization of life insurance men and women formed for the sole purpose of benefiting the agent in the field. Membership in the association gives the agent an opportunity to meet others in the same work, exchange ideas and experience, and an opportunity to listen to successful leaders in the business.
NEGLIGENCE: The failure to use the care that a reasonable and prudent person would have used under the same or similar circumstances.
NET COST: This term ordinarily refers to the actual cost of life insurance in a mutual or participating company after deducting the the policy dividends from the premiums deposited. Since there are no dividends on non-participating policies, the net cost of such policies is equal to the total premiums paid. In determining the true net cost of a policy over a period of years, allowance also should be made for the cash surrender value at the end of the given period.
NET PREMIUMS WRITTEN: Property and casualty gross premiums written less returned premiums, plus reinsurance assumed premiums less reinsurance ceded premiums.
NO-FAULT AUTO INSURANCE: An auto insurance plan in which each driver/owner accepts financial responsibility for some or all losses sustained by himself/herself, pedestrians hit by him/her, and occupants of his/her own vehicle in return for which he/she enjoys immunity from liability for losses to third-party persons. The need to establish fault before reparation is made is eliminated. (See DISABILITY, DOLLAR, VERBAL THRESHOLDS.)
NON-FORFEITURE OPTIONS: The choices available to an insured as to how the cash value of a life insurance policy will be received–either as a lump sum payment, as extended term insurance, or as reduced paid-up life insurance. These options guarantee that the cash value will not be forfeited by the insured.
NON-PARTICIPATING INSURANCE: (See GUARANTEED COST INSURANCE.)
NON-RENEWAL: Non-renewal is the failure to renew a policy by the insurer because of significant changes in the risk covered or because: 1) the insurer no longer offers the specific coverage; 2) no longer serves the specific territory; or 3) if the consumer decides not to accept the premium offered.
NOTIFICATION OF LOSS: Notification to an insurance company by an insured or claimant that a loss has occurred. Written notice may be required, although many companies accept notice by telephone.
OCCUPANCY: This refers to the use of property. A home, for example, may have a real estate office in it. This dwelling would then have a “business occupancy.” Occupancy plays a very important part in computing rates and determining the acceptance or rejection of risks.
OCCUPATIONAL HAZARD: The danger of suffering a sickness or injury due to the hazards of an occupation.
OCCURRENCE: Any incident or happening. Usually used by insurance carriers in connection with accidents involving the policyholders. The word “occurrence” is used because of the precise legal meaning of the word “accident,” which an “occurrence” may or may not be.
OCEAN MARINE INSURANCE: Coverage on all types of vessels, including liabilities connected with them, and on their cargoes.
OMNIBUS CLAUSE: An automobile policy provision which covers persons driving the named insured’s auto with the named insured’s permission.
OPTIONAL SETTLEMENTS: Most policies offer several optional modes of settlement of the proceeds in lieu of a single payment at the death of the insured or at the maturity of a policy, or within certain limits, upon the surrender of a policy. The usual options are: a) interest only; b) limited installments certain; c) equal installments until proceeds are exhausted; or d) life income with period certain.
ORDINARY LIFE: SYNONYMOUS WITH WHOLE LIFE AND STRAIGHT LIFE: The three terms are applied to the type of policy which continues during the whole of the insured’s life and provides for the payment of amount insured at this death (or at age 96 on basis of American Experience Table of Mortality; or at age 100 on the CSO Table, if he/she is still living at that age).
OWNER: The person who can legally exercise all rights and privileges in the life policy. This will usually be the insured, but may be any other party to whom proper transfer of these rights and privileges has been made.
PACKAGE POLICY: A combination of two or more individual policies or coverages into a single policy. A homeowner’s policy, for example, is a package combining property, liability and theft coverages for the homeowner.
PAID-UP ADDITIONS: Additional life insurance purchased by policy dividends on a net single premium basis at the insured’s attained insurance age at the time the dividend is allotted.
PAIN AND SUFFERING: Disagreeable mental or emotional experience, in contrast with harm to one’s physical condition. Also known as “general damages.”
PARTIAL DISABILITY: An injury which prevents the insured from performing one or more, but not all, important duties of his job.
PARTICIPATING INSURANCE: The life insurance, sold by some life companies, on which dividends may be payable to policy owners. The amount and timing of the dividend payments are determined by the company board of directors.
PAY-AT-THE-PUMP: A concept where the cost of automobile insurance is added to the cost of a gallon of gasoline. Therefore, each time a driver purchases fuel a portion of the money collected “at the pump” is used to offset the cost of automobile insurance. The money, collected by the state, is routed to the driver’s insurance company either through a bidding process or a voucher system.
PERIL: The cause of a possible loss, such as fire, windstorm, theft, explosion or riot.
PERMANENT LIFE INSURANCE: The type of life insurance which develops cash value and includes whole life and endowment insurance.
PERSISTENCY: A term used to refer to the length of time insurance remains continuously in force.
PERSONAL ARTICLES FLOATER: A form of coverage designed to meet the needs for insurance on property of a moveable nature. The coverage usually protects against all physical loss, subject to special exclusions and conditions. Examples of property covered include jewelry, furs, silverware, fine arts.
“PERSONAL INJURY” LIABILITY INSURANCE: Protects against liability for damages other than physical injury arising out of false arrest, detention, imprisonment, or malicious prosecution; libel, slander or defamation of character; invasion of privacy, wrongful eviction or wrongful entry.
PERSONAL INJURY PROTECTION (PIP) AUTO INSURANCE: First party no-fault coverage in which an insurer pays, within the specified limits, the medical, hospital and funeral expenses of the insured, others in his/her vehicle and pedestrians struck by him/her.
PERSONAL LINES: Insurance written for individuals or families, rather than for businesses.
PERSONAL PROPERTY: This type of property is usually movable and easily transportable. On the other hand, real property generally is considered to be immovable such as land and things affixed to it. A rule of thumb definition for personal property is “everything other than real property.”
PHYSICAL DAMAGE: Damage to or loss of the auto resulting from collision, fire, theft or other perils.
PHYSICAL HAZARD: This refers to the material, structural or operational features of the risk itself, apart from the persons owning or managing it. Electrical wiring, building construction, and certain heating systems, are a few examples of physical hazards.
POLICIES IN FORCE: Policies written and recorded on the books of the carrier which are unexpired as of a given date.
POLICY: The name generally used to mean the written contract of insurance.
POLICY FEE: An amount charged by some companies in addition to the first regular premium. Also called “joiner’s fee.”
POLICYHOLDER: One who owns an insurance policy. A mortgagee often is issued a copy of an insurance policy, or a certificate of insurance, at the request of the insured, but he is not a policyholder.
POLICYHOLDER PROTECTION FUNDS (ALSO CALLED POLICYHOLDER’S SURPLUS): The sum an insurance company has remaining after all liabilities are deducted from all assets. Sums such as paid-in capital and special voluntary reserves are also included in this term. This surplus is one form of financial protection to policyholders in the event a company suffers unexpected or catastrophic losses.
POLICYHOLDER’S SURPLUS: (See above.)
POLICY LOAN (LIFE): A loan made by an insurance company to a policy holder on the security of the cash value of his policy.
POLICY RESERVES: The funds an insurance company is required to keep on hand specifically for future payment of benefits and policy obligations.
PRE-EXISTING CONDITION: A physical condition which existed prior to the issuance of a health policy.
PREFERRED RISK: The designation of a risk selected by a company on a voluntary basis.
PRELIMINARY CLAIM NOTICE: Notice to the company that the insured wants to make a claim.
PREMIUM: Predetermined payment due from the policyholder on a regular basis to keep his/her insurance policy in full force. (Also see: DIRECT PREMIUMS WRITTEN; EARNED PREMIUMS; NET PREMIUMS WRITTEN; UNEARNED PREMIUM.)
PREMIUMS IN FORCE: Premium dollars which have been written and are unexpired on the books of the insurance carrier.
PREMIUM TAX: A tax assessed at the state level usually on gross premiums written. The tax rate varies from state to state.
PRICE-GROUP SYMBOL: Designates the original list-price grouping of the private passenger car covered in the current period.
PRIMARY INSURANCE: Insurance that pays compensation for a loss ahead of any other insurance coverages the policyholder may have. Only after the policyholder has collected up to the policy limit on his primary insurance can he turn to the other insurance policies to collect for the remainder of his loss. There can be more than one primary source of recovery.
PROCEEDS: The net amount of money payable by the company at the death of an insured or at the maturity of a policy.
PRODUCT LIABILITY INSURANCE: Protection against financial loss arising out of the legal liability incurred by a manufacturer, merchant or distributor because of injury or damage resulting from the use of a covered product, or out of the liability incurred by a contractor (as a result of improperly performed work) after he has completed a job.
PROFIT: Those funds remaining after all obligations including claims, expenses, overhead, dividends, taxes and fees have been paid.
PROOF OF LOSS: Documentation presented to the insurance company by the insured in support of a claim so that the insurer can determine its liability under the policy.
PROPERTY DAMAGE LIABILITY INSURANCE: An agreement by an insurance carrier to protect an insured against legal liability for damage by his/her automobile to the property of another.
PROPERTY INSURANCE: Provides financial protection against loss or damage to the insured’s property caused by such perils as fire, windstorm, hail, explosion, aircraft, motor vehicles, vandalism, malicious mischief, riot and civil commotion and smoke.
PROTECTION: A promise to reimburse for losses or specified sums by an insurer.
PROXIMATE CAUSE: The dominating cause of loss or damage; an unbroken chain of events between the occurrence of an insured peril and damage to property. As an illustration, water damage occurring from fire fighting activities is covered under the fire policy because fire was the proximate cause of the loss.
PUBLIC LIABILITY INSURANCE: A broad term meaning insurance to cover professional and commercial risks against liability exposures other than those involving employees or arising out of ownership of use of autos or airplanes.
PURE NO-FAULT: A no-fault system which permits no recourse to the tort liability system whatsoever in exchange for first party protection.
RATE: A charge per unit in determining insurance premiums.
RATING BUREAU: An organization that gathers statistics, makes rates, and/or creates policy forms and provides other services for the property and casualty insurers affiliated with the bureau.
RATING TERRITORY: A geographical grouping in which like hazards tend to equalize and permit the establishment of an equitable rate for the territory.
REDLINING: The illegal practice of excluding individuals or groups of persons from purchasing the insurance product for reasons other than risk based underwriting decisions. The term also applies to the practice of identifying neighborhoods or geographic areas where a company will not sell.
REINSTATEMENT: The restoration of a lapsed policy to its original premium-paying status — usually after evidence of good health has been submitted and past-due premiums have been paid.
REINSURANCE: The purchase of insurance by an insurance company from another insurance company (reinsurer) to provide it protection against large losses on cases it has already insured.
REINSURANCE FACILITY: An alternative mechanism to service those insureds that cannot obtain insurance in the voluntary market. Premiums and losses for the business that is ceded to the facility are pooled and all insurers share according to their proportion of the voluntary market.
REJECTION: The discontinuance of an insurance policy by the policyholder.
RENTER’S POLICY: A package type of insurance that includes coverage similar to a homeowner’s policy to cover the personal property of a renter or tenant in a building.
RENTS OR RENTAL VALUE COVERAGES: Insurance against loss of the rental value of a property; protects against loss of rents resulting from an insured peril.
REPLACEMENT COST: The cost to repair or replace property at construction costs prevailing at time of loss; the cost to repair or rebuild property without considering depreciation. (See ACTUAL CASH VALUE.)
Statutory Reserves (SURPLUS and CAPITAL): These are amounts, set by law, that a company must maintain in order to meet tests of solvency and licensing in this state.
Loss Reserves: An amount set aside as each claim is reported to a company. This amount represents the projection of the total cost each claim will be for the company. Once this amount is set aside it is in “escrow” for that particular claim and will be kept in that circumstance until the claim is settled regardless of the length of time it takes. Because of this method and the time involved in settling claims loss reserves tend to be low estimates and generally have to be raised or added to at the time of settlement.
Incurred But Not Reported Reserves: (IBNR Reserves): History has shown that there are always some claims filed after the end of the policy year. Since these injuries occurred during a specific policy year, they must be paid from the earned premium collected during that same time period. IBNR reserves must be set aside for just such an eventuality. (The IBNR claim is much the same as your spouse charging something to your credit card and you not knowing about it until the bill comes. The obligation to pay is not lessened because you were unaware of the charge.) IBNR reserves function the same as reported claims loss reserves and have a direct effect on the financial picture of the insurance company in the year in which the injury occurred.
RESIDUAL MARKET: A market of insurance available to applicants who are in good faith entitled to insurance, but who are unable to obtain insurance through ordinary methods in the voluntary market.
RETALIATORY LAWS: State statutes that provide that a company or citizen of a foreign state will be taxed in proportion to what the foreign state taxes a company or citizen of the first state. Laws by which state “A” provides for imposing requirements on insurers or producers of any other state doing business in state “A” to the same extent that the other state imposes requirements on insurers or producers of state “A.”
RETENTION: The net amount of risk retained by an insurance company for its own account or that of specified others, and not reinsured.
RETIREMENT INCOME OR INCOME ENDOWMENT (LIFE): Such a policy provides retirement income from a stated date and insurance protection in the meantime. On death, before the first income payment, the death benefit is normally the stated initial sum assured or the cash surrender value of the policy at date of death, whichever is greater.
RETROSPECTIVE RATING: Rating procedure which allows adjustment of an insured’s final rate on the basis of the insured’s own loss experience.
RIDER: Endorsement. Special provision added to an original policy contract.
RISK: Chance of loss with respect to person, liability, or the property of the insured. Also used to mean “the insured.”
ROBBERY: The loss of property due to theft when a person is threatened with physical harm or injury.
SALES EXPENSE: Compensation of agents, advertising expense, and other costs related to selling insurance policies.
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.
SCHEDULE: A list describing the property or items insured under the policy.
SELF-INSURANCE: A form of risk financing through which a firm assumes all or a part of its own losses.
SETTLEMENT OPTIONS: Nearly all life insurance policies now issued provide for several optional modes of settlement in lieu of payment in a single cash sum. The usual options are: 1) interest certain; 2) installments for a period certain; 3) life income with number of years (usually 10 or 20) payment certain; and 4) fixed income as long as proceeds will last.
SPECIAL CLASS: Policies on which an extra premium rate is charged because an extra risk is presented.
SPECIAL DAMAGES: Compensation awarded for actual economic losses, such as medical expenses and lost wages.
STACKED UNINSURED MOTORIST: Another definition of limits that increases the cap on coverage. If a policyholder has an UM provision with a limit of $100,000 but has two vehicles insured under the same policy, the actual cap becomes $200,000 for a single accident claim. If the policy covers three vehicles, the cap becomes $300,000. Companies usually offer non-stacked coverage at considerable savings for the consumer.
STANDARD PROVISIONS: Policy provisions required by law or supervisory regulations — such as provisions relating to grace period and incontestability.
STANDARD RISK: A person who, according to a company’s underwriting standards, is entitled to insurance protection without extra rating or special restrictions.
STATUTORY ACCOUNTING PRINCIPLES (SAP): Those principles required by statute which must be followed by an insurance company when submitting its financial statements to the various state insurance departments. Such principles differ from the Generally Accepted Accounting Principles (GAAP) in some important respects. For example, SAP requires that expenses must be recorded immediately and cannot be deferred to track with premiums as they are earned and taken into revenue.
STATUTORY UNDERWRITING PROFIT OR LOSS: Earnings or losses as shown by an insurer on its Statutory Income Statement (convention blank) as required by state insurance departments. More specifically: 1) the profit or loss realized from insurance operations as distinct from that realized from investments; and 2) the excess of premiums over losses and expenses over premiums (loss).
STOCK COMPANY: A company organized and owned by stockholders, as distinguished from the mutual form of company which is owned by its policyholders.
SUBROGATION: Process by which one insurance company seeks reimbursement from another company or person for a claim it has already paid.
SUBSTANDARD RISK: A person who is considered an under-average risk because of his physical condition, family or personal history of disease, occupation, residence in unhealthy climate, or dangerous habits.
SUBSTITUTE SERVICES BENEFITS: Payment made in reimbursement of expenses incurred in providing essential services ordinarily performed by the injured non-wage earner for care and maintenance of the family and household, i.e., housework, child care.
SURETY BOND: An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period. The surety company, for example, becomes responsible for fulfillment of a contract if the contractor defaults.
SURPLUS: A stock company’s surplus is the amount by which its admitted assets exceed its liabilities and capital stock. In both stock and mutual companies, the term surplus to policyholders means the excess of admitted assets over liabilities.
SURPLUS LINES: A property insurance term, used to describe any risk or part thereof for which insurance is not available through a company licensed in the applicant’s state (an “admitted” insurer). The business, therefore, is placed with “non-admitted” insurers (insurers not licensed in the state) in accordance with surplus or excess lines provisions of state insurance laws. These provisions generally allow operations on a relatively unregulated basis, that is, the non-admitted insurer is not subject to the same rate or coverage requirements which apply to an admitted insurer.
SYNDICATE:A group of insurers or underwriters which join TOGETHER to insure certain property that may be of such value or high hazard or so expensive to underwrite that it can be covered more safely or efficiently on a cooperative basis.
TENANT’S POLICY: (See RENTER’S POLICY.)
TERMINATION: The recording of a cancellation of an insurance policy. In some instances, cancellations may not be recorded for many weeks due to the pressure of other work. Many policies cancelled for non-payment are reinstated without either cancellation or termination being recorded. (See also CANCELLATION.)
TERM INSURANCE: Life or health insurance protection during a limited number of years but expiring without value if the insured survives the stated period.
THEFT: This is the common word for “acts of stealing.” There is no precise meaning in law.
THEFT INSURANCE: Protection for loss of property due to stealing, including burglary, robbery, and larceny.
THIRD PARTY: The claimant under a liability policy. So called because he/she is not one of the two parties, insured and insurer, to the insurance contract. THRESHOLD (NO-FAULT): The point, measured in money, time or other ways, beyond which tort liability can be established. Until that point is reached, reparations must be paid within the provisions of the no-fault plan, with no recourse to the courts.
TORT: A civil wrong, other than a breach of contract, for which a court of law will afford legal relief, i.e., harming another by an act of negligence while driving an auto.
TORT EXEMPTION: An immunity or freedom from tort liability.
TORTFEASOR: One who commits a tort.
TORT LIABILITY: Legal obligation to pay damages by one judged to have committed a tort.
TOTAL DISABILITY: Disability which prevents a person from performing: a) any of his/her occupational duties; b) any duties of any occupation; or c) any duties for which he/she is reasonably qualified. Definitions vary within policies.
TOWING COVERAGE: Insures against charges for towing and road service at the place of disablement, with a maximum amount stipulated for each occurrence.
TREATY REINSURANCE: A general reinsurance agreement between the ceding or primary company and the reinsurer containing the contractual terms under which a portion or all of the primary company’s business of a particular class is passed on the reinsurer.
TWISTING: The practice of inducing by misrepresentation, or inaccurate or incomplete comparison, a policyholder in one company to lapse, forfeit or surrender his/her insurance for the purpose of taking out a policy in another company.
UMBRELLA LIABILITY: A form of insurance protection against losses in excess of amounts covered by other liability insurance policies; also protects the insured in many situations not covered by the usual liability policies.
UNDERINSURED MOTORIST COVERAGE: Coverage is intended to cover you and passengers in your car for losses unpaid because sufficient bodily injury liability limits are not available from the policy of an at-fault driver. How and under what circumstances the coverage becomes operative varies in different states.
UNDERWRITE: To determine whether an individual is insurable under the policy for which he has applied and at what premium rate. UNDERWRITER: Originally meant an individual who, together with other individuals, assumed a proportionate part of the risk, the signatures of all such individual insurers being written under the basic promise to pay. In effect, this is still the insurance principle under marine and certain general types of insurance (e.g., Lloyd’s). In the life insurance industry, “underwriter” has three different meanings: 1) an insurer; 2) an officer, medical adviser or technician who reviews applications for insurance, selects risks for acceptance, and determines the amount and the terms of such acceptance; and 3) an agent or other field representative who unavoidably “selects risks” when selecting his prospects for solicitation.
UNDERWRITING PROFIT AND LOSS: The profit or loss experienced deducting from earned premiums the incurred losses and expenses of doing business, but before provision for federal income tax. It excludes investment transactions.
UNEARNED PREMIUM: The portion of a property/casualty insurance premium that applies to the unexpired portion of the policy period.
UNINSURED MOTORIST COVERAGE: Pays the policyholder and passengers in his car for losses sustained by the reason of bodily injury, sickness, disease or death caused by the owner or operator of an uninsured automobile or a “hit-and-run” driver.
UNREPORTED CLAIMS: Accidents which have occurred but which have not been reported or recorded.
VALUATION: The process of determining a company’s liabilities under its policy obligations is known as policy valuation. The process of determining the value of a company’s investments is known as asset valuation. Minimum valuation standards are prescribed by state laws.
VALUED POLICY: An insurance policy under which the insurance company is obligated to pay the full amount of the policy written to insure real property against loss by fire (and sometimes other perils), when the property insured is totally destroyed. Several states have laws which are known as valued policy laws.
VANDALISM: Willful, intentional, often random destruction or defacement of private or public property. Insurance against the vandalism peril is usually combined with the malicious-mischief peril.
VERBAL THRESHOLD: In no-fault auto insurance states with the verbal threshold, victims are allowed to sue in tort only if their injuries meet certain verbal descriptions of the types of injuries that should, as a matter of policy, render one eligible to seek to recover for pain and suffering in a cause of action in tort. (See DISABILITY THRESHOLD AND DOLLAR THRESHOLD).
VOLUNTARY MARKET: The market where one seeking insurance obtains insurance on his own with no help from the state, through an insurer of his/her own selection.
WAGE LOSS CONCEPT: Under this concept, the amount of benefits paid to the injured worker after he returns to work is based on the actual wages lost as a result of the injury rather than other, more subjective, criteria. Medical expenses and lost wages incurred during the recovery from the injury are also covered under this concept.
WEEKLY DEBIT ORDINARY (WDO): Ordinary insurance which is sold via the home service method with premiums collected from within each agent’s debit or territory on a weekly basis. (See also: HOME SERVICE, or MDO.)
WHOLE LIFE INSURANCE: A plan of insurance for the whole of life. It includes straight life on which premiums are payable until death.
WORK LOSS: Loss of income from work the injured person would have performed had he not been injured, and reasonable expenses incurred in obtaining ordinary and necessary services which the injured person would have performed, not for income, but for the benefit of himself/herself or others, had he/she not been injured.
WORKERS’ COMPENSATION: A system (established under state law) which provides payments to employees who are injured in the course of imployment, irrespective of fault.