Glossary Of Insurance Terms

Transcription

1 Ohio Insurance Institute 172 E. State St., Suite 201, Columbus, Ohio Phone: (614) NOTE: This glossary provides a comprehensive list of the most commonly used terms in property/casualty insurance. Some life and health insurance terms are included. This is not an all-conclusive glossary of terms. A Accidental Death Benefit (Auto or Health Insurance): Provision for payment of a dollar amount usually equal to the face amount of insurance if the insured is killed in an accident. This coverage is available either as a health insurance policy, or as an auto insurance option with some companies. (Also see Accidental Death Benefit [Life Insurance].) Accidental Death Benefit (Life Insurance): Provision under a life insurance policy 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. (Also see Accidental Death Benefit [Auto or Health Insurance].) Accident and Health Insurance: See Health Insurance. Account Receivables: See Receivables. Act of God (Act of Nature): Perils that occur naturally such as tornadoes, earthquakes and hurricanes. Actual Cash Value: Insurance under which the amount payable is the current replacement cost of the property new; reduced by an allowance for depreciation, wear and obsolescence. Actuary: A highly specialized mathematician professionally trained in the risk aspects of insurance, whose functions include the calculations involved in determining proper insurance rates, evaluating reserves, and in various aspects of insurance research. Additional Living Expense: A property coverage which pays for the 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. Adjuster: A person who investigates and settles losses for an insurance carrier. Admitted Assets: Assets recognized and accepted by state insurance laws in determining the solvency of insurers and reinsurers. To make it easier to assess an insurance company s financial position, state statutory accounting rules do not permit certain assets to be included on the balance sheet. Only assets that can be easily sold in the event of liquidation or borrowed against, and receivables for which payment can be reasonably anticipated, are included in admitted assets. (See Assets.) Admitted Company (Carrier): An insurance company licensed and authorized to do business in a particular state. Adverse Selection: The tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk. Insurers react either by charging higher premiums or not insuring at all, as in the case of floods. (Flood insurance is provided by the federal government but sold mostly through the private market.) In the case of natural disasters, such as earthquakes, adverse selection concentrates risk instead of spreading it. Insurance works best when risk is shared among large numbers of policyholders. Affinity Sales: Selling insurance through groups such as professional and business associations. OII Glossary Of Insurance Terms 1

2 A (continued) Aftermarket Parts: See Crash Parts; Generic Auto Parts. Agency Companies: Companies that market and sell products via independent agents. Agent: Laws of all states require all insurance agents to be licensed by the state to sell insurance. Agents may be categorized as: (1) An Exclusive Agent, who is a sales employee or sales representative of one and only one insurance company or its affiliated group of insurance companies, and seeks and services business exclusively for that company or group. (See Direct Writer.) (2) An Independent Agent, who usually represents two or more insurance companies or groups in a sales and service capacity as an independent business person. Alien Insurance Company: An insurance company incorporated under the laws of a foreign country. Allied Lines: Types of insurance associated with property insurance, which may include earthquake, sprinkler leakage, and income and extra expense coverages. Alternative Dispute Resolution (ADR): Alternative to going to court to settle disputes. Methods include arbitration, where disputing parties agree to be bound to the decision of an independent third party, and mediation, where a third party tries to arrange a settlement between the two sides. Alternative Markets: Mechanisms used to fund self-insurance. This includes captives, which are insurers owned by one or more non-insurers to provide owners with coverage. Risk-retention groups, formed by members of similar professions or businesses to obtain liability insurance, are also a form of self-insurance. Annual Policy: Insurance policy written for a term of one year or renewed one year at a time. Annual Statement: A report made by a company at the close of its fiscal year. It is the primary financial report required by state insurance departments to be submitted by insurers annually. 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, a specified number of years, or a combination of the two. Antitrust Laws: Laws that prohibit companies from working as a group to set prices, restrict supplies or stop competition in the marketplace. The insurance industry is subject to state antitrust laws but has a limited exemption from federal antitrust laws. This exemption, set out in the McCarran- Ferguson Act, permits insurers to jointly develop common insurance forms and share loss data to help them price policies. Application: The statement of information that a prospective insured gives when applying for an insurance policy and that an insurance company uses to help decide if it will issue the policy and what premium rate will be charged. Apportionment: The dividing of a loss proportionately among two or more insurers that cover the same loss. Appraisal: A survey to determine a property s insurable value, or the amount of a loss. OII Glossary Of Insurance Terms 2

3 A (continued) Appraiser: In insurance, a specialist that evaluates the size and cost of an object, such as jewelry or art; or the extent of damage based on a claim. Often works with a claims adjuster. Appurtenant Structures: Buildings on the same premises as the main building insured under a property insurance policy. Arbitration: Procedure in which an insurance company and the insured or a vendor agree to settle a claim dispute by accepting a decision made by a third party. Arson: The deliberate setting of a fire. Asset-Backed Securities: Bonds that represent pools of loans of similar types, duration and interest rates. Almost any loan with regular repayments of principal and interest can be securitized, from auto loans and equipment leases to credit card receivables and mortgages. Assessment: The extra premium a mutual or reciprocal insurer s policyholder may be required to pay in the event the insurer s losses are greater than anticipated. Assets: (1) All of the property owned by a carrier. (2) The items on the balance sheet of the insurer that show the book value of property owned. Under state regulations, not all property or other resources can be admitted on the statement of the insurer. This gives rise to the term nonadmitted assets. (Examples would be furniture, fixtures, agents debt balances and accounts receivable that are over 90 days old.) Assigned Risk Plan (Automobile Insurance Plans): A mechanism used in some states to insure people who cannot obtain insurance in the voluntary market. There is one rate level and the individual policies are assigned to specific companies according to the percentage of the market they insure. 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, vouchers or other records of a person, corporation, firm or other organization for the purpose of ascertaining the accuracy or inaccuracy of the record. 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. OII Glossary Of Insurance Terms 3

4 A (continued) 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 Coverages, Medical Payments Automobile Insurance, Personal Injury Protection Automobile Insurance (PIP), Property Damage Liability Insurance, Towing Coverage, Underinsured Motorists Coverage, Uninsured Motorists Coverage and Uninsured Motorists Property Damage Coverage. Auto Insurance Premium: The price an insurance company charges for coverage, based on the frequency and cost of potential accidents, theft and other losses. Prices vary from company to company, as with any product or service. Premiums also vary depending on the amount and type of coverage purchased; the make and model of the car; and the insured s driving record, years of driving and the number of miles the car is driven per year. Other factors taken into account include the driver s age and gender, where the car is most likely to be driven and the times of day rush hour in an urban neighborhood or leisure-time driving in rural areas, for example. Some insurance companies may also use credit history-related information. (See Insurance Score.) Automobile Liability Insurance: Protection for the insured against loss arising out of legal liability when his or her car injures others or damages their property. (Includes Bodily Injury Liability and Property Damage Liability Coverages.) 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. OII Glossary Of Insurance Terms 4

5 B Bailee: One who has temporary possession of property belonging to another. Balance Sheet: Provides a snapshot of a company s financial condition at one point in time. It shows assets, including investments and reinsurance, and liabilities, such as loss reserves to pay claims in the future, as of a certain date. It also states a company s equity, known as policyholder surplus. Changes in that surplus are one indicator of an insurer s financial standing. Basic Form: A package insurance policy providing coverage against a limited number of specified perils. Beach and Windstorm Plans: State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX) offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Georgia and New York provide this kind of coverage for windstorm and hail in certain coastal communities through other property pools. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses. (See Fair Access to Insurance Requirements Plan FAIR Plan; Residual Market.) Beneficiary: Any person, institution, trust, etc., named in a life policy to receive the policy benefits upon the death of the insured. Binder: A written or oral contract issued temporarily to place insurance in force immediately prior to issuance of a new policy or endorsement of an existing one. A binder is subject to payment of the premium and provides coverage under the terms of the policy to be issued, unless otherwise specified. Blanket Coverage: A blanket form is one under which property is insured under a single amount applying to several different pieces of property rather than a specific amount of insurance on each property. Block Policy: An inland marine policy covering all property on or off a merchant s premises, including property of others in the care, custody or control of the policyholder. Bodily Injury Liability Insurance: This coverage protects an insured against legal liability for injury to another person arising from an accident. Boiler and Machinery Insurance: A form of property coverage for loss arising out of the operation of pressure, mechanical and electrical equipment. It may cover loss to the boiler and machinery itself and business interruption losses. Bond: A security that obligates the issuer to pay interest at specified intervals and to repay the principal amount of the loan at maturity. In insurance, a form of suretyship. Bonds of various types guarantee a payment or a reimbursement for financial losses resulting from dishonesty, failure to perform and other acts. Bond Rating: An evaluation of a bond s financial strength, conducted by such major ratings agencies as Standard & Poor s and Moody s Investors Service. Book of Business: Total amount of insurance on an insurer s books at a particular point in time. Broad Form: A package policy providing coverage for the same perils covered in the basic form, plus specified additional perils. OII Glossary Of Insurance Terms 5

6 B (continued) Broker: A representative of the buyer of property and liability insurance who deals with either agents or companies in arranging for the coverage required by the customer. A broker is paid a commission by the company or its agent. Burglary: The loss of property due to theft when there is visible evidence of forcible entry to the exterior of the building. Burglary and Theft Insurance: Insurance for the loss of property due to burglary, robbery or larceny. It is provided in a standard homeowners policy and in a business multiple peril policy. Business Income Insurance (Business Interruption Insurance): Commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time that a business must stay closed while the premises are being restored because of physical damage from a covered peril, such as a fire. Business interruption insurance also may cover financial losses that may occur if civil authorities limit access to an area after a disaster and their actions prevent customers from reaching the business premises. Depending on the policy, civil authorities coverage may start after a waiting period and last for two or more weeks. Businessowners Policy (BOP): A policy that combines property, liability and business interruption coverages for small- to medium-sized businesses. Coverage is generally cheaper than if purchased through separate insurance policies. Business Interruption Insurance: See Business Income Insurance. Buy-Out Policy: A professional liability policy covering future claims resulting from incidents which occurred during the period that an expired claims-made policy was in force. OII Glossary Of Insurance Terms 6

7 C Cancellable Policy: A policy which may be cancelled by the company at any time by giving advance notice in compliance with state requirements to the insured citing the reasons such insurance is being cancelled and refunding any unearned premium. (Term is not usually applicable to life or health insurance.) Cancellation: The discontinuance of an insurance policy before its normal expiration date. Capacity: The supply of insurance available to meet demand. Capacity depends on the industry s financial ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite based on its financial condition. The adequacy of an insurer s capital relative to its exposure to loss is an important measure of solvency. A property/casualty insurer must maintain a certain level of capital and policyholder surplus to underwrite risks. This capital is known as capacity. When the industry is hit by high losses, such as after the World Trade Center terrorist attack, capacity is diminished. It can be restored by increases in net income, favorable investment returns, reinsuring more risk and or raising additional capital. When there is excess capacity, usually because of a high return on investments, premiums tend to decline as insurers compete for market share. As premiums decline, underwriting losses are likely to grow, reducing capacity and causing insurers to raise rates and tighten conditions and limits in an effort to increase profitability. Policyholder surplus is sometimes used as a measure of capacity. Capital: Shareholder s equity (for publicly-traded insurance companies) and retained earnings (for mutual insurance companies). There is no general measure of capital adequacy for property/casualty insurers. Capital adequacy is linked to the riskiness of an insurer s business. (See Risk- Based Capital; Surplus; Solvency.) Capital Markets: The markets in which equities and debt are traded. (See Securitization of Insurance Risk.) Capital Stock Insurance Company: An insurance company which is owned and controlled by stockholders or investors. Captive Agent: A person who represents only one insurance company and is restricted by agreement from submitting business to any other company, unless it is first rejected by the agent s captive company. (See Exclusive Agent.) Captive Insurer: Insurers that are created and wholly-owned by one or more non-insurers, to provide owners with coverage. A form of self-insurance. Cargo Insurance: A broad classification of marine insurance providing coverage on cargo, as opposed to hulls, to protect shippers by sea from loss or damage to goods for which they would be unlikely to collect from the carriers themselves. Whether cargoes are insured for a particular voyage or under open policies which are in the nature of reporting-form policies depends upon the volume and regularity with which a shipper uses ocean transit. Cargo insurance also can cover goods transported by train or truck. Carrier: The insurance company or the one who agrees to pay the losses. The carrier may be organized as a stock or mutual company, a reciprocal exchange, as an association of underwriters or as a state fund. Car Year: Equal to 365 days of insured coverage for a single vehicle. It is the standard measurement for automobile insurance. Cash Value: The cash fund which a life policy develops usually after the first or second year the policy has been in force. It is available when the policy is surrendered or may be borrowed earlier as a policy loan. OII Glossary Of Insurance Terms 7

8 C (continued) Casualty Insurance: Insurance primarily concerned with the legal liability for losses caused by injury to persons or damage to property of others. Also includes, among other coverages: automobile, Workers Compensation, employers liability, general liability, plate glass, theft and personal liability. It excludes life, fire and marine insurance. Catastrophe: Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million. Catastrophe Bonds: Risk-based securities that pay high interest rates and provide insurance companies with a form of reinsurance to pay losses from a catastrophe such as those caused by a major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk. (See Securitization of Insurance Risk.) Catastrophe Deductible: A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level. Catastrophe Factor: Probability of catastrophic loss, based on the total number of catastrophes in a state over a 40-year period. Catastrophe Model: Using computers, a method to mesh long-term disaster information with current demographic, building and other data to determine the potential cost of natural disasters and other catastrophic losses for a given geographic area. Catastrophe Reinsurance: Reinsurance (insurance for insurers) for catastrophic losses. The insurance industry is able to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks because losses are spread among thousands of companies including catastrophe reinsurers who operate on a global basis. Insurers ability and willingness to sell insurance fluctuates with the availability and cost of catastrophe reinsurance. After major disasters, such as Hurricane Andrew and the World Trade Center terrorist attack, the availability of catastrophe reinsurance becomes extremely limited. Claims deplete reinsurers capital and, as a result, companies are more selective in the type and amount of risks they assume. In addition, with available supply limited, prices for reinsurance rise. This contributes to an overall increase in prices for property insurance. Cede: To transfer all or part of a risk written by an insurer (the ceding, or primary company) to a reinsurer. Cell Phone Insurance: Separate insurance provided to cover cell phones for damage or theft. Policies are often sold with the cell phones themselves. Cession: The unit of insurance passed to the reinsurer by the ceding company. The unit (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 uses of life insurance to satisfy the financial needs of the insured in light of current tax and other laws. A Chartered Life Underwriter is normally an agent or someone responsible for sales or marketing activities. Chartered Property Casualty Underwriter (CPCU): A designation conferred in recognition of the attainment of certain standards of education and proficiency in the art and science of property and casualty insurance underwriting. OII Glossary Of Insurance Terms 8

9 C (continued) Claim: A request for payment for 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 for reimbursement by his or her company. A third-party claim is one by a person against a policyholder of another company and the payment, if any, will be made by that company. Claim Frequency: The number of claims occurring 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 auto 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. Claims-Made Form: A type of liability policy which covers claims which occur and are reported while the policy is in effect. Classification: The combining of policyholders or properties into groups with the same general characteristics so that the various groups inherent differences in exposure to loss can be recognized for rating or underwriting purposes. Coinsurance (Health Insurance): A provision in a medical-expense insurance policy which requires that the insured person pay part of the expense and the insurance company will pay the remaining part. (Also see Coinsurance [Property Insurance].) Coinsurance (Property Insurance): A provision in a property insurance policy which requires the insured to carry insurance equal to a certain specified percentage of the value of the property for the insured to receive full payment on a loss up to the amount of the policy. Otherwise, payment would be only a percentage of the actual loss, that percentage determined by the amount of insurance carried relative to the amount that is required to be carried by the policy for full protection up to policy limits. (Also see Coinsurance [Health Insurance].) Collateral: Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security.) Collateral Source Rule: Bars the introduction of information that indicates a person has been compensated or reimbursed by a source other than the defendant in civil actions related to negligence or other liability. 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/her own willful act). This does not cover other people s property. (See Deductible Collision.) Combined Ratio: The sum of the ratio of losses incurred to premiums earned and the ratio of commissions and expenses incurred to premiums written. Combined Single Limit: A liability coverage limit that combines both bodily injury and property damage into one aggregate amount. Commercial Blanket Bond: A fidelity bond for operators of commercial establishments, etc. (See Fidelity Bond.) Commercial Credit Insurance: A guarantee to manufacturers, wholesalers and service organizations that they will be paid for goods shipped or services rendered. It is a guarantee of that part of their working capital that is represented by accounts receivable. OII Glossary Of Insurance Terms 9

10 C (continued) Commercial General Liability Policy: Often referred to as the CGL, this policy provides broad protection against situations in which a business must defend itself against lawsuits or pay damages for personal injury or property damage to third parties. Commercial Insurance (Coverages): Definitions of many commercial coverages are listed alphabetically throughout the Glossary. Among these coverages are Aviation Insurance, Cargo Insurance, Commercial Credit Insurance, Commercial Multiple-Line Policy, Crop-Hail Insurance, Employers Liability Insurance, General Liability Insurance, Kidnap and Ransom Insurance, Marine Insurance, Products Liability Insurance, Professional Liability Insurance, Public Liability Insurance, Rain Insurance, Surplus Lines, Title Insurance and Workers Compensation. Commercial Lines: The various kinds of insurance which are written for businesses. (Also see Commercial Insurance [Coverages].) Commercial Multiple-Line Policy: Package type of policy that includes a wide range of essential property and liability coverages for businesses. Commission: A percentage of an insurance premium paid to an agent or broker for producing and servicing the business. Commissioner of Insurance: Title of the head of the state insurance department who is responsible for the enforcement of insurance laws and for promulgating regulations dealing with the insurance industry. Comparative Negligence: Under this concept a plaintiff (the person bringing suit) may recover damages even though guilty of some negligence. His or 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 or she is not solely at fault; Less Than, in which the plaintiff recovers so long as his or her negligence is less than that of the defendant; and Not Greater Than, in which the plaintiff recovers so long as his or her negligence is not greater than the defendant s. Competitive Replacement Parts: See Crash Parts; Generic Auto Parts. Competitive State Fund: A facility established by a state to sell workers compensation in competition with private insurers. Complaint Ratio: A measure used by some state insurance departments to track consumer complaints against insurance companies. Generally, it is written as the number of complaints upheld against an insurance company, as a percentage of premiums written. In some states, complaints from medical providers over the promptness of payments may also be included. Completed Operations Coverage: Pays for bodily injury or property damage caused by a completed project or job. Protects a business that sells a service against liability claims. Comprehensive Automobile Insurance: Protection against loss resulting from damage to the insured auto, commonly referred to as other than collision coverage. 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 or her legal liability to pay money for damage or injury he or she has caused to others. This does not include automobile liability, but includes almost every activity of the insured except personal injury and his or her business operations. (See Personal Injury Liability Insurance.) 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. OII Glossary Of Insurance Terms 10

11 C (continued) Concealment: Normally means the willful withholding of material fact which could affect an insurer s issuance of a policy or processing of a claim. Conditions: Provisions of an insurance policy which state the rights and duties of the insured and insurer. Condominium Insurance: A policy designed for the special needs of condominium unit owner-occupants to cover personal property and liability, to complement the insurance normally purchased by the condominium association for the building, structures and liability. Additional coverages are offered unit owners by many insurers. Consequential Loss: A loss resulting from, but not caused directly by, another insured loss. A consequential loss (spoilage of meat stored in a refrigerated building, for example) usually arises out of a change in temperature resulting from damage to the building (but not directly to the meat) by a covered peril such as fire. Consequential Loss coverages are available to protect the insured against this specific indirect loss. 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 consent 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. An insurance policy qualifies as a contract under the above definition. Contract Bond: A bond which guarantees faithful performance of a construction contract and payment of all material and labor bills related to that contract. A Performance Bond covers faithful performance only; a Payment Bond guarantees payment of material and labor expenses. 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 cause the accident in which he or she was injured. Some states bar recovery to the plaintiff if the plaintiff was contributorily negligent. Coverage: The scope of the protection provided under a contract of insurance; any of several risks covered by a policy. Covered/Insured Peril: The perils of loss you are protected against by an insurance policy. Examples of perils include fire, lightning, theft, vandalism and the threat of a lawsuit. Crash Parts: Sheet metal parts that are most often damaged in a car crash. (See Generic Auto Parts.) Credit: The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt. Credit Derivatives: A contract that enables a user, such as a bank, to better manage its credit risk. A way of transferring credit risk to another party. OII Glossary Of Insurance Terms 11

12 C (continued) 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). This insurance is usually issued through the creditor (a lender or lending agency) and is provided by an insurance company under a group credit disability policy. Credit disability insurance also can be purchased by an individual directly from an insurance company. (Also see Credit Life Insurance.) Credit Enhancement: A technique to lower the interest payments on a bond by raising the issue s credit rating, often through insurance in the form of a financial guarantee or with standby letters of credit issued by a bank. Credit Insurance (Commercial): See Commercial Credit Insurance. Credit Life Insurance: Term life insurance on the life of a borrower, payable to the creditor, to repay a loan (usually small loans repayable in installments) in case of death. This insurance is usually issued through the creditor (a lender or lending agency) and is provided by a life insurance company under a group credit life insurance policy to insure the lives of those who borrow from the creditor. Credit life insurance also can be purchased by an individual directly from a life insurance company. (Also see Credit Disability Insurance.) Credit Rating: See Bond Rating. Credit Score: The number produced by an analysis of an individual s credit history. The use of credit information affects all consumers in many ways, from getting a job, finding a place to live, securing a loan, getting a telephone, and buying insurance. Credit history is routinely reviewed by insurers before issuing a commercial policy because businesses in poor financial condition tend to cut back on safety which can lead to more accidents and more claims. Auto and home insurers may use information in a credit history to produce an insurance score. Insurance scores may be used in underwriting and rating insurance policies. (See Insurance Score.) Crime Insurance: Term referring to property coverages for the perils of burglary, theft and robbery. Crop-Hail Insurance: Protection against hail damage to growing crops. Coverage is often afforded under such policies for crop damage due to fire, windstorm, drought, frost, snow, etc. Customer Service Representative: The assistant that supports the sales efforts of the sales agent or producer. Other titles include administrative assistant, agency underwriter and marketing specialist. CSR is also a designation for a certified customer service representative. OII Glossary Of Insurance Terms 12

13 D Declarations: That part of the policy describing the named insured, address, effective date, term of the policy, applicable coverages, the amount of insurance and the premium. Decreasing Term Life Insurance: Term insurance, the face value of which decreases each year over a stated period. Family income and mortgage cancellation are common types of decreasing term insurance. Deductible: A provision in an insurance contract stating that the insurer will pay that amount of any insured loss that is in excess of a specified amount. The specified amount is the deductible. Deductible Collision and Deductible Comprehensive 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. Demutualization: The conversion of insurance companies from mutual companies owned by their policyholders into publicly-traded stock companies. Depreciation: A decrease in the value of property due to age, wear and tear. Deregulation: In insurance, reducing regulatory control over insurance rates and forms. Commercial insurance for businesses of a certain size has been deregulated in many states. Diminution of Value: The idea that a vehicle loses value after it has been damaged in an accident and repaired. Directors and Officers Liability Insurance (D&O): Coverage for directors and officers of firms or organizations against liability claims arising out of alleged errors in judgment, breaches of duty, and wrongful acts related to their organizational activities. Direct Premiums Written: Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their reinsurers. Direct Sales/Direct Response: Method of selling insurance directly to the insured through an insurance company s own employees, through the mail, or via the Internet. This is in lieu of using captive or exclusive agents. Direct Writer: An insurer whose distribution mechanism is either the direct selling system or the exclusive agent system. (See Agent.) Disability Threshold: In no-fault insurance states with the disability threshold, it provides that a victim may not sue in tort unless he/she has been disabled (defined differently in various state plans) from an accident for a specific period of time. 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. OII Glossary Of Insurance Terms 13

14 D (continued) Dollar Threshold: In no-fault auto insurance states with the dollar threshold, it prevents individuals from suing in tort to recover for pain and suffering unless their medical expenses exceed a certain dollar amount. Domestic Insurance Company: An insurance company organized or domiciled in a given state is referred to in that state as a domestic carrier. Double Indemnity: See Accidental Death Benefit (Life Insurance). OII Glossary Of Insurance Terms 14

15 E Early Warning System: A system of measuring insurers financial stability set up by insurance industry regulators. An example is the Insurance Regulatory Information System (IRIS), which uses financial ratios to identify insurers in need of regulatory attention. Earned Premium: The part of the total property/casualty policy premium earned by the insurance company which applies to the expired portion of the policy period. Earthquake Insurance: Covers a building and its contents, but includes a large percentage deductible on each. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies. Economic Loss: Total financial loss resulting from the death or disability of a wage earner, or from the destruction of property. Includes the loss of earnings, medical expenses, funeral expenses, the cost of restoring or replacing property, and legal expenses. It does not include non economic losses, such as pain caused by an injury. Electronic Commerce (E-Commerce): The sale of products such as insurance over the Internet. Elimination Period: A kind of deductible or waiting period usually found in disability policies. It is counted in days from the beginning of the illness or injury. Employee Dishonesty Coverage: Covers direct losses and damage to businesses resulting from the dishonest acts of employees. (See Fidelity Bond.) Employers Liability Insurance: Provides protection for the employer for those injuries arising out of and in the course of employment which were not covered under the workers compensation law. Endorsement: An additional piece of paper, not a part of the original contract, which cites certain terms and which becomes a legal part of that insurance contract. Additions to life insurance contracts are accomplished through the use of riders, which are similar to endorsements. Environmental Impairment Insurance: A form of insurance designed to cover losses and liabilities arising from damages to property by pollution. Equipment Breakdown Insurance: See Boiler and Machinery Insurance. Equity: In investments, the ownership interest of shareholders. In a corporation, stocks as opposed to bonds. Errors and Omissions Insurance (E&O): A type of professional liability insurance which indemnifies insured professionals who include, but are not limited to, lawyers, insurance agents and brokers, accountants, real estate agents, appraisers, abstracters, title insurance agents, architects and engineers, advertising agents, adjusters, directors and trustees, fiduciaries, travel agents and data processing firms for losses sustained because of their errors or oversights. Escrow Account: Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes. Excess and Surplus Lines: Property/casualty coverage that isn t available from insurers licensed by the state (called admitted insurers) and must be purchased from a non-admitted carrier. OII Glossary Of Insurance Terms 15

16 E (continued) Excess of Loss Reinsurance: A contract between an insurer and a reinsurer, whereby the insurer agrees to pay a specified portion of a claim and the reinsurer to pay all or a part of the claim above that amount. Excess Limits: Coverage against losses in excess of a specified dollar limit. Exclusion: A provision in an insurance policy that eliminates coverage for certain risks, people, property classes, or locations. Exclusive Agent: A captive agent, or a person who represents only one insurance company and is restricted by agreement from submitting business to any other company unless it is first rejected by the agent s company. (See Captive Agent.) Exclusive Remedy: Part of the social contract that forms the basis for workers compensation statutes under which employers are responsible for work-related injury and disease, regardless of whether is was the employee s fault and in return the injured employee gives up the right to sue when the employer s negligence causes the harm. Expense Ratio: The ratio of a company s operating expenses to premiums written. (Expenses include losses and loss adjustment expenses.) Experience: The loss record of an insured or of a particular class of coverage. Expiration Date: The date shown on the declarations page of the policy when coverage will stop. It may be a specific date or a statement that coverage is continuous until cancelled. 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; (3) a possibility of a loss being communicated to an insurance risk from its surroundings; or (4) a unit of measure of the amount of risk a company assumes (for example, one car insured for one year). Extended Coverage: An endorsement added to an insurance policy, or clause within a policy, that provides additional coverage for risks other than those in a basic policy. 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, civil commotion, aircraft, vehicle and smoke. Extended Replacement Cost Coverage: Pays a certain amount above the policy limit to replace a damaged home, generally 120% or 125%. Similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction. (See Replacement Cost Coverage.) OII Glossary Of Insurance Terms 16

17 F Face Amount: See Protection Amount. 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 (Fair Access to Insurance Requirements) 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: The automobile policy (most common in the industry) which provides protection for the insured and resident relatives in the same household. Family Plan Insurance: This is insurance in which the head of the household has one master policy on his/her life (usually whole life) and term coverage for wife/husband and children in lesser amounts. Farm-Ranchowners Insurance: Package policy that protects the policyholder against named perils and liabilities and usually covers homes and their contents, along with barns, stables, and other structures. Federal Crime Insurance: Insurance against burglary, larceny and robbery losses offered by the federal government where the Federal Insurance Administration has determined that such insurance is not otherwise readily available. Federal Insurance Administration: Federal agency in charge of administering the National Flood Insurance Program. It does not regulate the insurance industry. Federal Reserve Board: Seven-member board that supervises the banking system by issuing regulations controlling bank holding companies and federal laws over the banking industry. It also controls and oversees the U.S. monetary system and credit supply. Fee For Service (FFS): Formerly a standard health insurance policy. Now a form of health insurance that allows the insured to go to any doctor, hospital or other provider which would bill for each service given, and the insurer and the patient share in the cost of the services provided. Fidelity Bond: A form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees. Fiduciary Bond: A type of surety bond, sometimes called a probate bond, which is required of certain fiduciaries, such as executors and trustees, that guarantees the performance of their responsibilities. Fiduciary Liability: Legal responsibility of a fiduciary to safeguard assets of beneficiaries. A fiduciary, for example a pension fund manager, is required to manage investments held in trust in the best interest of beneficiaries. Fiduciary liability insurance covers breaches of fiduciary duty such as misstatements or misleading statements, errors and omissions. File-and-Use States: States where insurers must file rate changes with their regulators, but don t have to wait for approval to put them into effect. OII Glossary Of Insurance Terms 17

18 F (continued) Financial Guarantee Insurance: Covers losses from specific financial transactions and guarantees that investors in debt instruments, such as municipal bonds, receive timely payment of principal and interest if there is a default. Raises the credit rating of debt to which the guarantee is attached. Investment bankers who sell asset-backed securities, securities backed by loan portfolios, use this insurance to enhance marketability. (See Municipal Bond Insurance.) Financial Responsibility Law: 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. Finite Risk Reinsurance: Contract under which the ultimate liability of the reinsurer is capped and on which anticipated investment income is expressly acknowledged as an underwriting component. Also known as Financial Reinsurance because this type of coverage is often bought to improve the balance sheet effects of statutory accounting principles. Fire Insurance: Coverage protecting property against losses caused by a fire or lightning that is usually included in homeowners or commercial multiple peril policies. First-Party Coverage: Coverage for the policyholder s own property or person. In no-fault auto insurance it pays for the cost of injuries. In no-fault states with the broadest coverage, the personal injury protection (PIP) part of the policy pays for medical care, lost income, funeral expenses and, where the injured person is not able to provide services such as child care, for substitute services. (See No-Fault; Third-Party Coverage.) Fleet Policy: An auto policy covering a number of vehicles owned by a single insured. Floater: A form of insurance that applies to movable property, whatever its location, within the territorial limits imposed by the contract. The coverage floats with the property. Flood Insurance: Coverage against loss resulting from the flood peril, widely available under a program developed in 1968 by the private insurance industry and the federal government. Forced Place Insurance: Insurance purchased by a bank or creditor on an uninsured debtor s behalf so if the property is damaged, funding is available to repair it. Foreign Insurance Company: In a given state, an insurer domiciled in another state. Fraternal Benefit Society: An organization that exists to provide social and insurance benefits to its members. In such a society, members often share a common religious, ethnic or vocational background, although some fraternals are open to the general public. 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. Frequency: Number of times a loss occurs. One of the criteria used in calculating premium rates. OII Glossary Of Insurance Terms 18

19 F (continued) Fronting: A procedure in which a primary insurer acts as the insurer of record by issuing a policy, but then passes the entire risk to a reinsurer in exchange for a commission. Often, the fronting insurer is licensed to do business in a state or country where the risk is located, but the reinsurer is not. The reinsurer in this scenario is often a captive or an independent insurance company that cannot sell insurance directly in a particular country. Funded Reserve: Bookkeeping account of sums set aside periodically by a business for the purpose of paying for losses as they occur. Usually, the sums are invested conservatively. OII Glossary Of Insurance Terms 19

20 G Gap Insurance: An automobile insurance option, available in some states, that covers the difference between a car s actual cash value when it is stolen or wrecked and the amount the consumer owes the leasing or finance company. Mainly used for leased cars. (See Actual Cash Value.) General Average: In ocean marine insurance, a concept which provides that, where a portion of a vessel or cargo is jettisoned to save the entire venture from peril at sea, the resulting loss is shared by all parties involved. The owners of property that is saved contribute in proportion to the interests suffering loss, provided the latter are free of fault in the danger and the venture ultimately is successful. (Distinct from Particular Average.) General Damages: In auto insurance, typically refers to awards for pain and suffering. General Liability Insurance: A broad term meaning liability insurance, other than automobile liability or employers liability, written to cover professional and commercial risks. In respect to commercial liability, various available coverages could cover such risks as premises and operations, contractual liability, products and completed operations. Generally Accepted Accounting Principles (GAAP): Generally accepted accounting principles (GAAP) accounting is used in financial statements that publicly-held companies prepare for the Securities and Exchange Commission. (See Statutory Accounting Principles SAP.) Generic Auto Parts: Auto crash parts produced by firms that are not associated with car manufacturers. Insurers consider these parts, when certified, at least as good as those that come from the original equipment manufacturer (OEM). They are often cheaper than the identical part produced by the OEM. (See Crash Parts; Aftermarket Parts; Competitive Replacement Parts; Original Equipment Manufacturer Parts OEM.) Glass Insurance: Coverage for glass breakage caused by all risks; fire and war are sometimes excluded. Insurance can be bought for windows, structural glass, leaded glass, and mirrors. Available with or without a deductible. Good Driver Plan: An auto insurance rating program that reflects the insured s accident and traffic violation record as a factor in determining the premium. Grace Period: The number of days (31 in most cases) a life insurance policy will remain in force when a payment is overdue. Graduated Drivers License: Licenses for younger drivers that allow them to improve their skills. Regulations vary by state, but often restrict night time driving. Young drivers receive a learner s permit, followed by a provisional license, before they can receive a standard drivers license. Gramm-Leach-Bliley Act: Financial services legislation, passed by Congress in 1999, that removed Depression-era prohibitions against the combination of commercial banking and investment-banking activities. It allows insurance companies, banks, and securities firms to engage in each others activities and own one another. Group Insurance: A single policy covering a group of individuals, usually employees of the same company or members of the same association and their dependents. Coverage occurs under a master policy issued to the employer or association. Guarantee Period: Period during which the level of interest specified under a fixed annuity is guaranteed. 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-divided premiums of comparable participating policies. OII Glossary Of Insurance Terms 20