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Glossary of Terms

A

  • Accidental Death. Death resulting directly and solely from an accident injury visible on the surface of the body or disclosed by an autopsy; a disease or infection resulting directly from an accidental injury as described, beginning within 30 days after the date of the injury; or an accidental drowning
  • Activities of Daily Living. Bathing, preparing and eating meals, moving from room to room, getting into and out of beds or chairs, dressing, using a toilet.
  • Actual Cash Value. Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence. For example, a 10-year-old sofa will not be replaced at current full value because of a decade of depreciation.
  • Actuary. A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics.
  • Adjuster. A representative of the insurer who seeks to determine the extent of the insurer’s liability for loss when a claim is submitted.
  • Admitted Assets. Assets permitted by state law to be included in an insurance company’s annual statement. These assets are an important factor when regulators measure insurance company solvency. They include mortgages, stocks, bonds and real estate.
  • Adverse Carrier. Term used to refer to the other party’s insurance company.
  • Aggregate Limit. Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.
  • A.M. Best Rating. A measure of the financial stability of an insurance company, including its ability to pay claims, provided by the A. M. Best Company, an industry accounting provider. A+ is the best; F is the worst (bankrupt).
  • Annuity. An agreement by an insurer to make periodic payments that continue during the survival of the annuitant(s) or for a specified period.
  • Appraisal. Process that determines the value of property, or the extent of damage, usually performed by an impartial expert.
  • Approved for Reinsurance. Indicates the company is approved (or authorized) to write reinsurance on risks in this state. A license to write reinsurance might not be required in all states.
  • Approved or Not Disapproved for Surplus Lines. Indicates the company is approved (or not disapproved) to write excess or surplus lines in this state.
  • Assets. Assets refer to “all the available properties of every kind or possession of an insurance company that might be used to pay its debts.” There are three classifications of assets: invested assets, all other assets, and total admitted assets. Invested assets refer to things such as bonds, stocks, cash and income-producing real estate. All other assets refer to non-income producing possessions such as the building the company occupies, office furniture, and debts owed, usually in the form of deferred and unpaid premiums. Total admitted assets refer to everything a company owns. All other plus invested assets equal total admitted assets. By law, some states don’t permit insurance companies to claim certain goods and possessions, such as deferred and unpaid premiums, in the all other assets category, declaring them “non-admissible .”
  • Automobile Liability Insurance. Coverage if an insured is legally liable for bodily injury or property damage caused by an automobile.

B

  • Broker. Insurance salesperson that searches the marketplace in the interest of clients, not insurance companies.

C

  • Casualty. Liability or loss resulting from an accident.
  • Casualty Insurance. That type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability to third parties imposed upon the insured for such injury or for damage to property of others.
  • Chartered Property and Casualty Underwriter (CPCU). Professional designation earned after the successful completion of five national examinations given by the American Institute for Property and Liability Underwriters. Covers areas such as expertise in insurance, risk management, economics, finance, management, accounting, and law. Three years of work experience also are required in the insurance business or a related area.
  • Claim. A demand made by the insured, or the insured’s beneficiary, for payment of the benefits as provided by the policy.
  • Coinsurance. In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.
  • Collision Insurance. Covers physical damage to the insured’s automobile (other than that covered under comprehensive insurance) resulting from contact with another inanimate object. Typically this means striking an object or overturn.
  • Combined Ratio After Policyholder Dividends. The sum of the loss, expense and policyholder dividend ratios not reflecting investment income or income taxes. This ratio measures the company’s overall underwriting profitability, and a combined ratio of less than 100 indicates an underwriting profit.
  • Commercial Lines. Refers to insurance for businesses, professionals and commercial establishments.
  • Comprehensive Insurance. Auto insurance coverage providing protection in the event of physical damage (other than collision) or theft of the insured car. For example, fire damage or a cracked windshield would be covered under the comprehensive section.
  • Coverage. The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured and the limits of indemnification. In life insurance, living and death benefits are listed.
  • Co-payment. A predetermined, flat fee an individual pays for health-care services, in addition to what insurance covers. For example, some HMOs require a $10 co-payment for each office visit, regardless of the type or level of services provided during the visit. Co-payments are not usually specified by percentages.

D

  • Damages. Money that one party becomes legally obligated to pay to another party.
  • Death Benefit. The limit of insurance or the amount of benefit that will be paid in the event of the death of a covered person.
  • Deductible. Amount of loss that the insured pays before the insurance kicks in.
  • Dividend. The return of part of the policy’s premium for a policy issued on a participating basis by either a mutual or stock insurer. A portion of the surplus paid to the stockholders of a corporation.

E

  • Earned Premium. The amount of the premium that has been paid for in advance that has been “earned” by virtue of the fact that time has passed without claim. A three-year policy that has been paid in advance and is one year old would have only partly earned the premium.
  • Elimination Period. The time which must pass after filing a claim before policyholder can collect insurance benefits. Also known as “waiting period.”
  • Employment Practice Liability. Coverage against common law liability of an employer for non-injury claims made by employees due to discrimination, harassment, failure to promote and so forth, as distinguished from liability for injury to employees imposed by a workers’ compensation law.
  • Encumbrance. A claim on property, such as a mortgage, a lien for work and materials, or a right of dower. The interest of the property owner is reduced by the amount of the encumbrance.
  • Exclusions. Items or conditions that are not covered by the general insurance contract.
  • Exposure. Measure of vulnerability to loss, usually expressed in dollars or units.

F

  • Floater. A separate policy available to cover the value of goods beyond the coverage of a standard property insurance policy, including movable property ranging from jewelry to construction equipment.

G

  • Gap Coverage. Coverage specifically designed to fill a gap or gaps that may occur in industry-standard policies when measured against the custom needs of an insured.
  • General Liability Insurance. Insurance designed to protect business owners and operators from a wide variety of liability exposures. Exposures could include liability arising from accidents resulting from the insured’s premises or operations, products sold by the insured, operations completed by the insured and contractual liability.

H

  • Hazard. A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.
  • Hazardous Activity. Bungee jumping, scuba diving, horse riding and other activities not generally covered by standard insurance policies. For insurers that do provide cover for such activities, it is unlikely they will cover liability and personal accident, which should be provided by the company hosting the activity.
  • Hurricane Deductible. Amount you must pay out-of-pocket before hurricane insurance will kick in. Many insurers in hurricane-prone states are selling homeowners insurance policies with percentage deductibles for storm damage, instead of the traditional dollar deductibles used for claims such as fire and theft. Percentage deductibles vary from one percent of a home’s insured value to 15 percent, depending on many factors that differ by state and insurer.

I

  • Impaired Insurer. An insurer which is in financial difficulty to the point where its ability to meet financial obligations or regulatory requirements is in question.
  • Indemnity. Restoration to the “status quo ante”, or condition before the loss occurred, to the victim of a loss by payment, repair or replacement.
  • Inflation Protection. An optional property coverage endorsement offered by some insurers that increases the policy’s limits of insurance during the policy term to keep pace with inflation.
  • Insurable Interest. Interest in property such that loss or destruction of the property could cause a financial loss.
  • Insurance Adjuster. A representative of the insurer who seeks to determine the extent of the insurer’s liability for loss when a claim is submitted. Independent insurance adjusters are hired by insurance companies on an “as needed” basis and might work for several insurance companies at the same time. Independent adjusters charge insurance companies both by the hour and by miles traveled. Public adjusters work for the insured in the settlement of claims and receive a percentage of the claim as their fee. A.M. Best’s Directory of Recommended Insurance Attorneys and Adjusters lists independent adjusters only.
  • Insurance Attorneys. An attorney who practices the law as it relates to insurance matters. Attorneys might be solo practitioners or work as part of a law firm. Insurance companies who retain attorneys to defend them against lawsuits might hire staff attorneys to work for them in-house or they might retain attorneys on an as-needed basis. A.M. Best’s Directory of Recommended Attorneys and Adjusters lists insurance defense attorneys who concentrate their practice in insurance defense such as coverage issues, bad faith, malpractice, products liability, and workers’ compensation.
  • Investment Income. The return received by insurers from their investment portfolios including interest, dividends and realized capital gains on stocks. It doesn’t include the value of any stocks or bonds that the company currently owns.

L

  • Laddering. Purchasing bond investments that mature at different time intervals.
  • Liability. Broadly, any legally enforceable obligation. The term is most commonly used in a pecuniary sense.
  • Liability Insurance. Insurance that pays and renders service on behalf of an insured for loss arising out of his responsibility, due to negligence, to others imposed by law or assumed by contract.
  • Loss Adjustment Expenses. Expenses incurred to investigate and settle losses.
  • Loss Control. All methods taken to reduce the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units and noninsurance transfer of risk. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program. The use of appropriate insurance, avoidance of risk, loss control, risk retention, self insuring and other techniques that minimize the risks of a business, individual or organization.
  • Loss Ratio. The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company’s underwriting profitability, or loss experience, on its total book of business.
  • Loss Reserve. The estimated liability, as it would appear in an insurer’s financial statement, for unpaid insurance claims or losses that have occurred as of a given evaluation date. Usually includes losses incurred but not reported (IBNR), losses due but not yet paid, and amounts not yet due. For individual claims, the loss reserve is the estimate of what will ultimately be paid out on that claim.

M

  • Medical Loss Ratio. Total health benefits divided by total premium.
  • Mortgage Insurance Policy. In life and health insurance, a policy covering a mortgage or with benefits intended to pay off the balance due on a mortgage upon the insured’s death, or to meet the payments due on a mortgage in case of the insured’s death or disability. The lender is usually the beneficiary.

N

  • Named Perils. Perils specifically covered on insured property.
  • Nonstandard Auto (High Risk Auto or Substandard Auto). Insurance for motorists who have poor driving records or have been canceled or refused insurance. The premium is much higher than standard auto due to the additional risks.

O

  • Occurrence. An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn’t have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected not intended by the insured.
  • Out-of-Pocket Limit. A predetermined amount of money that an individual must pay before insurance will pay 100 percent for an individual’s health-care expenses.

P

  • Peril. The cause of a possible loss.
  • Personal Injury Protection. Pays basic expenses for an insured and his or her family in states with no-fault auto insurance. No-fault laws generally require drivers to carry both liability insurance and personal injury protection coverage to pay for basic needs of the insured, such as medical expenses, in the event of an accident.
  • Personal Lines. Insurance for individuals and families, such as private-passenger auto and homeowners insurance.
  • Point-of-Service Plan. Health insurance policy that allows the employee to choose between in-network and out-of-network care each time medical treatment is needed.
  • Policy. The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clause, riders, endorsements, and papers attached thereto and made a part thereof.
  • Pre-Existing Condition. A coverage limitation included in many health policies which states that certain physical or mental conditions, either previously diagnosed or which would normally be expected to require treatment prior to issue, will not be covered under the new policy for a specified period of time.
  • Preferred Auto. Auto coverage for drivers who have never had an accident and operates vehicles according to law. Drivers are not a risk for any insurance company that writes auto insurance, and no insurance company would be afraid to take them on as risk.
  • Preferred Provider Organization. Network of medical providers who charge on a fee-for-service basis, but are paid on a negotiated, discounted fee schedule.
  • Premium. The price of insurance protection for a specified risk for a specified period of time.
  • Premium Unearned. That part of the premium applicable to the unexpired part of the policy period.
  • Professional Liability. The exposure to loss incurred by professional people because of their peculiar expertise. If errors or omissions occur in the professional services provided by them, they may become liable for damages. Also called Errors & Omissions Liability.

Q

  • Qualifying Event. An occurrence that triggers an insured’s protection.

R

  • Reciprocal Insurance Exchange. An unincorporated group of individuals, firms or corporations, commonly termed subscribers, who mutually insure one another, each separately assuming his or her share of each risk. Its chief administrator is an attorney-in-fact.
  • Re-Entry. Re-entry, which is the allowance for level-premium term policy owners to qualify for another level-premium period, generally with new evidence of insurability.
  • Regulatory Compliance. Insurance is a highly regulated industry. Any one of a number of agencies may require actions of insurance companies or agents. Those companies or agents are required by law to comply with these regulations. When they have done so, they are said to be in Regulatory Compliance.
  • Reinsurance. In effect, insurance that an insurance company buys for its own protection. The risk of loss is spread so a disproportionately large loss under a single policy doesn’t fall on one company. Reinsurance enables an insurance company to expand its capacity; stabilize its underwriting results; finance its expanding volume; secure catastrophe protection against shock losses; withdraw from a line of business or a geographical area within a specified time period.
  • Renewal. The automatic re-establishment of in-force status effected by the payment of another premium.
  • Replacement Cost. The dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation but limited by the maximum dollar amount shown on the declarations page of the policy.
  • Reserve. An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.
  • Risk Management. Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through practices such as avoiding the risk, retaining the risk, reducing the risk, or transferring the risk, usually by insurance.

S

  • Safety Engineering. Efforts and resources expended by businesses and individuals to reduce the likelihood of losses by improving safety practices.
  • Standard Auto. Auto insurance for average drivers with relatively few accidents during lifetime.
  • Subrogation. The right of an insurer who has paid another’s loss also to take over the other person’s right to pursue remedies against a third party.

T

  • Theft. The unlawful taking of another’s property with the intent to permanently deprive the owner of its use or possession.
  • Third Party. Person or entity not party to an agreement but with an interest in the agreement.
  • Third Party Claim. Claims for injury or damage to the person or the property of a third party alleged to have been caused by the insured.
  • Tort. A private wrong, independent of contract and committed against an individual, which gives rise to a legal liability and is adjudicated in a civil court. A tort can be either intentional or unintentional, and liability insurance is mainly purchased to cover unintentional torts.
  • Total Cost of Risk. A risk management concept which involves analysis of not only the cost of insurance coverages, but also lost opportunity costs, compliance costs, indirect loss costs (e.g. productivity, down time, effects on employees after a loss, etc.). Cost of insurance coverage is only one element of this analysis.
  • Total Loss. A loss of sufficient size that it can be said no value is left. The complete destruction of the property. The term also is used to mean a loss requiring the maximum amount a policy will pay.

U

  • Umbrella Policy. Coverage for third party liability losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.
  • Underwriter. The individual trained in evaluating risks and determining rates and coverages for them. Also, an insurer.
  • Underwriting. The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.
  • Uninsured Motorist Coverage. Endorsement to an automobile policy that covers an insured for injury sustained in a collision with a driver who does not have liability insurance.

W

  • Workers’ Compensation. A conceptual term which refers to the statutory obligation of employers to both fund injuries to employees and to provide compensation for missed work due to those injuries, as well as the methods of funding those benefits. Any employer who has employees if affected by these statutes, which vary by state. The predominant method of funding the benefits is through the purchase of a Worker’s Compensation insurance policy.