Insurance Glossary

Balance Sheet
A snapshot of an insurance company’s financial condition, 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 an insurance company’s equity, known as policyholder surplus. Changes in that surplus are one indicator of an insurer’s financial standing.

Bare Walls Ownership
A type of Condominium ownership in which the Unit Owner individually owns the inside of the unit up to the inside of the bare outside walls, floor, and roof or ceiling. The unit owners in common own the remainder of the buildings and grounds.

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.

Binder
A temporary insurance contract providing coverage until a permanent policy is issued.

Blanket Insurance
Coverage for more than one type of property at a single location or for one type of property at multiple locations, for example, chain stores.

Boiler and Machinery Insurance
Insurance that covers boilers and/or machinery against explosion or breakdown losses normally excluded from property insurance policies.

Boiler and Machinery Time Element Insurance
Insurance that covers loss of profits or earnings when an operation is shut down totally or partially by an accident covered by Boiler & Machinery Insurance, or extra expense incurred following accident to maintain or hasten resumption of operations.

Book of Business
The total amount of insurance listed on an insurer’s books at a particular point in time

Broad Form Insurance
Coverage provided by insurer for numerous perils.

Broker
An intermediary between a customer and an insurance company, Brokers work on commission and usually sell commercial, not personal, insurance.

Building Codes
Laws passed by municipalities, counties, states, or Federal jurisdictions regulating how reconstruction must be accomplished after a property is damaged or destroyed. These codes may require demolition if the loss is over a certain degree or, in extreme cases, prohibit rebuilding if the area has been re-zoned.

Building Code Effectiveness Grading Schedule – BCEGS
A classification of communities by the Insurance Services Office based on how well they have implemented and enforced building codes in their community.

Building Ordinance Exclusion
A standard exclusion found in most property, business income, and boiler & machinery insurance policies that does not cover the added cost of complying with building or zoning laws after an insured loss.

Building Ordinance Insurance
Coverage setting aside the Ordinance or Law exclusion and offering one or more of three coverages: 1) demolition costs; 2) loss of value of the undamaged portion of a damaged building; and 3) increased cost of reconstruction to comply with current law.

Business Income and Extra Expense Insurance (aka Business Interruption Insurance)
Commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time the business must stay closed while the premises are restored/repaired due to damage from a covered peril. In some circumstances, it will also cover financial losses that may occur if civil authorities limit access to an area after a disaster, such as a hurricane or tornado, and their actions prevent customers from reaching the business premises. Depending on the policy, civil authorities’ coverage usually has a prescribed waiting period before coverage is triggered and a set time limit after which coverage terminates.

Business Income from Dependent Properties
A form of business income insurance that covers an insured against loss of income by sustaining a satellite location of the insured that will lose business if the major location shuts down.

Business Income Insurable Value
Generally it is factored by Gross Sales less most (but not all) Items of Cost of Goods Sold. It can also be determined as Profit plus Continuing Expenses. It established the basic amount of business income Insurance that must be carried to satisfy the Coinsurance (Contribution) Clause of the Business Income policy.

Business Income Insurance
Insurance covering loss of business income and continuing expenses following an insured loss.

Businessowners Policy/BOP
An insurance policy, for small- to medium-sized businesses, that provides coverage for property, liability and business interruption. Generally, it is cheaper than if purchased through separate insurance policies.

Calendar Year
Regardless of the contractual dates or effective dates of the policies, the calendar year begins January 1 and calculates the earned premiums and loss transactions that occur from that date until the end of the calendar year on December 31.

Calendar/Accident Year
The total for all loss data on accidents in which the date of occurrence falls within a specified calendar year.

Capacity
Capacity is determined by the amount of insurance surplus available to meet demand. It depends on the insurance industry’s financial ability to accept risk. The adequacy of an insurer’s capital relative to its exposure to loss is an important measure of solvency. For an individual insurer, capacity establishes the maximum amount of risk it can underwrite based on its financial condition; while, for a property/casualty insurer, a certain level of capital and policyholder surplus must be maintained to underwrite risks. Hence, this capital is known as capacity and policyholder surplus is sometimes used as a measure of capacity.

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
These bonds are a 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 an earthquake or major hurricane. They allow insurance risk to be sold to institutional investors in the form of bonds, thus spreading the risk.

Catastrophe Deductible
The portion of the claim loss total that a homeowner or businessowner must pay when a major natural disaster occurs. Usually, the deductible is a percent of the total amount in dwelling/building coverage. By allocating a greater share of the loss to the insured through the use of percentage based deductibles, insurers are able to limit their potential losses in the event of a catastrophe while insuring more properties. An insurer may not be able to purchase reinsurance unless it can demonstrate that its potential maximum losses are kept under a certain level.

Catastrophe Factor
A probability equation used to determine whether a catastrophic loss will impact a specific region by analyzing the total number of catastrophes in that area over a 40-year period.

Catastrophe Model
A method used to unify 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 purchased by insurers for catastrophic losses that enables them to absorb the multibillion dollar losses caused by natural and man-made disasters such as hurricanes, earthquakes and terrorist attacks. With catastrophe reinsurance, losses are spread among thousands of companies who operate on a worldwide basis. After major disasters, 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; thus, increasing the prices for reinsurance, as well as, the overall prices for property insurance.

Catastrophic Loss
Damage to insured property caused by a catastrophe.

Catastrophic Risk
The potential risk to insurers of an unusually large loss occurring to which a very large number of insured are subject.

CATEX
An exchange where insurers trade “standardized catastrophe units.”

Civil Authority Clause
A clause found in business income policies extending coverage to loss when adjacent or nearby premises are closed down by order of civil authority and occupancy of the insured premises is prohibited. Depending on the policy, civil authorities’ coverage usually has a prescribed waiting period before coverage is triggered and a set time limit after which coverage terminates.

Claim
A formal request for payment related to an event or situation that is covered under an in-force insurance policy.

Claims Adjustment Expense
The cost incurred by the insured or by claim professionals hired by the insured when evaluating and determining the more difficult aspects of a claim investigation.

Coinsurance Clause
A clause found that requires the insured to carry a specified percentage of insurance, usually 80%, to the value being insured. If the insured fails to do so then the recovery of the loss is reduced in proportion to the deficiency.

Combined Business Income (Business Interruption) and Extra Expense Insurance
Insurance that provides coverage for both 1) the loss of earnings following an insured property loss and 2) the extra expense to stay in business or expedite more rapid return to business, beyond the amount that would reduce the loss of earnings covered by Business Income Insurance.

Commercial Lines
Insurance coverage for businesses, commercial institutions, and professional organizations, which may be purchased separately or collectively, and pertain to coverage for boiler and machinery, business income, commercial auto, comprehensive general liability, directors and officers liability, fire and allied lines, inland marine, medical malpractice liability, product liability, professional liability, surety and fidelity, and workers compensation.

Commercial Multiple Peril Policy
An insurance package policy provided to commercial insureds that includes property, boiler and machinery, crime and general liability coverages.

Concurrent Causation
A legal concept that provided that even though a peril, such as a flood, was clearly excluded from coverage, if another peril, e.g., faulty design of a dam, not excluded, could be found, coverage could apply. Thus, to prevent this interpretation of policy, insurers put “concurrent causation” exclusions in their policies which not only solved the concurrent causation problem but in some cases even went so far as to take away coverage formerly offered under “all risk” policies.

Concurrent Causation Exclusions
Exclusions added to various property insurance policies intended to eliminate coverage when a loss occurs that is not covered because of a basic exclusion. They are (in brief): weather conditions; acts or decisions, including failure to act or decide, of any person, group, organization, or governmental body; and faulty, inadequate or defective planning, zoning, development, surveying, sitting, design specifications, etc., materials used, or maintenance. These exclusions do not apply to any loss covered (or not specifically excluded) under the policy, but only to excluded losses.

Condominium
A form of housing tenure and other real property where a specified part of a piece of real estate is individually owned while use of and access to common facilities in the collective piece such as hallways, heating system, elevators, exterior areas is executed under legal rights associated with the individual ownership and controlled by the association of owners that jointly represent ownership of the whole piece.

Condominium Bylaws
The rules set up by the condominium managers that govern how the condominium operates.

Condominium Declarations
The legal document set forth when a condominium is established (equivalent to the title for real property) outlining the exact duties, rights, and privileges, of the unit owners, unit owners in common, and the condominium association and board of directors or managers.

Consequential Damage
Loss other than direct property damage or business income/business interruption/extra expense, usually involving losses such as off premises utilities, spoilage from refrigeration loss, etc.

Contingent Business Interruption Insurance
Insurance coverage provided to an insured against loss of income and continuing expenses for shutdown of a dependent property, a major supplier, a major customer, or a major location where the insured is a satellite and will lose business if the major shuts down.

Continuing Expenses
Expenses that a businessowner must continue to pay even after the suspension of operations, regardless if income is being earned to cover them.

Corrective Order
An order issued by the Commissioner of Insurance for a particular state specifying certain that insurers implement required corrective actions.

Cost of Goods Sold
When used by accountants, it means all costs entering into the price of the goods except for profit; when used in business income insurance, it is a deduction from the amount of insurance needed, but does not include such items as labor and overhead costs. This difference should be in mind when developing insurable business income values from accountants’ figures.

Covered Causes of Loss “Basic, Broad,
Special”
Formerly referred to as “perils insured against,” Condominium the three levels of covered property and business income loss offered by insurers: 1) “basic” providing the absolute minimum coverage, 2) “broad” providing more causes of loss but requiring that the loss be named and identified as covered, and 3) “special” covering any loss not specifically excluded.

Credit Risk
A measure of the default risk on amounts that is due from policyholders, reinsures or creditors.

Debris Removal Insurance
Coverage offered as an additional item under property insurance, with its own limits of insurance, covering the cost of cleaning up and disposing of debris from a covered loss.

Deductible
The amount of loss paid by the policyholder, it is either a specified dollar amount or a percentage of the claim amount. It requires the insured to pay for the first amount of loss, after which the insurance pays the remainder, up to the limit of insurance provided. Clauses that provide for the insured to pay for the first amount of loss stated in the clause, after which the insurance pays the remainder, up to the limit of insurance provided.

Degree of Care
A pre-established minimum care owed by one party for the physical safety of another.

See “Business Defined”
Demolition Insurance

One of the three Ordinance or Law coverages that covers the cost of demolition and site clearance of the undamaged portions of a damaged building when demolition is required by ordinance or law.
One of the three Ordinance or Law coverages, insuring the cost of demolition and site clearance of the undamaged portions of a damaged building when demolition is required by ordinance or law.

Depreciation
The reduction in value of “used” property from its original “new” cost taking into account, the course of time, wear and tear, and obsolescence.

Difference in Conditions Policy
A policy specifically designed and tailored to fill in gaps in a business’s commercial property insurance coverage. There is no standard policy.

Direct Incurred Loss
The property loss in which the insured peril is the proximate cause of damage or destruction.

Direct Premiums
Premiums collected by the insurer from property or casualty policyholders before reinsurance premiums are deducted.

Direct Sales/ Direct Response
A sales method used to sell insurance directly to the insured through an insurance company’s own employees, through the mail, by telephone or via the Internet. This is in lieu of using captive or exclusive agents.

Direct Writers
In reinsurance, denotes reinsurers that deal directly with the insurance companies they reinsure without using a broker.

Direct Written Premium
The total premiums received by a property and liability insurance company without any adjustments for the relinquishing of any portion of these premiums to the reinsures.

Directors and Officer Liability
Usually excluded from general liability insurance (thus, requiring separate specialized insurance), it provides coverage for the alleged damages arising out of the activities of an organization’s officers or directors.

Disaster
A natural or man-made event that negatively impacts life, property, livelihood or industry.

Liability incurred by officers or directors of organizations for alleged damages arising out of their activities as officers or directors; this liability is usually excluded from the general liability insurance of the organization, requiring separate specialized insurance.

Domestic Insurance Company
Term used by a state to refer to any company incorporated within their borders.

Earned Exposure
The portion of the total amount of risk corresponding to the coverage provided during a given time period.

Earned Premiums
The portion of the total premium amount corresponding to the coverage provided during a given time period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.

Earthquake Insurance
Insurance specifically insuring against loss by earthquake; it can be added by endorsement to property insurance policies or provided separately, in either case with much higher deductibles than other property insurance.

Endorsement
Sometimes called a “rider,” it is a written form attached to an insurance policy that alters the policy’s coverage, terms, or conditions.

Evidence of Insurability
Proof that a person is an insurable risk.

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.

Exclusions
Clauses in an insurance contract that exclude coverage for certain perils, persons, property or locations.

Expected or Intended Injury
Injury which the insured can reasonably expect to happen or intends to have happen from a chosen course of action; not insurable in most circumstances.

Expense to Reduce Loss
Expense incurred by an insured to reduce the amount of a business income loss that would otherwise happen. With business income insurance this type of expense is covered only to the extent that the loss is thereby reduced; however, with extra expense or combined business income and extra expense insurance the expense is covered even if more than the loss is thereby reduced.

Experience Rating
A method to determine a certain groups’ insurance premium rates by which the insurer considers the particular group’s prior claims and expense experience.

Explosion Exclusion
An exclusion in boiler & machinery policy that limits coverage to pressure explosions but excludes fire box explosions or combustible gas explosions. Property policies generally exclude explosions covered by the boiler & machinery policy.

Extended Period of Indemnity
To allow for the financial recovery of business to pre-loss conditions, business income insurance can be extended by endorsement to continue to provide coverage beyond the time when operations are resumed.

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 Replacement Cost Coverage
Although most homeowner policy limits track inflation in building costs, this specific coverage is designed to protect the policyholder after a major disaster when the high demand for building contractors and materials cause the normal cost of reconstruction to skyrocket. It provides for a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent.

Extra Expense Insurance
Insurance covering the additional cost to maintain operations or get back in operation more quickly, following property loss; it can be written alone or in conjunction with business income insurance.

Facultative Reinsurance
A reinsurance policy that provides an insurer with coverage for specific individual risks that are unusual or so large that they aren’t covered in the insurance company’s reinsurance treaties. This can include policies for jumbo jets or oil rigs.

Fair Access to Insurance Requirement Plans – FAIR Plans
Insurance pools that sell property insurance to people who can’t buy it in the voluntary market because of high risk over which they may have no control. FAIR Plans, which exist in 28 states and the District of Columbia, insure fire, vandalism, riot and windstorm losses, and some sell homeowners insurance which includes liability. Plans vary by state, but all require property insurers licensed in a state to participate in the pool and share in the profits and losses.

Federal Emergency Management Agency – FEMA
A former independent agency that became part of the new Department of Homeland Security in March 2003, it is tasked with responding to, planning for, recovering from and mitigating against disasters

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.

Fire Exclusion
An exclusion in boiler & machinery policy that puts loss by fire, though involving a boiler or machinery, under the property insurance.

Firebox Explosion Exclusion
An exclusion in boiler & machinery policy that limits the insurance to steam pressure explosion but not to other explosions involving boilers.

Floater
Attached to a homeowners policy, a floater insures movable property, covering losses wherever they may occur. Among the items often insured with a floater are expensive jewelry, musical instruments and furs. It provides broader coverage than a regular homeowners policy for these items.

Flood Exclusion
An exclusion common to most property policies that requires an insured to purchase separate flood insurance.

Flood Insurance
Coverage, principally through a federal insurance program, protecting against flood and similar water damage, excluded from most property insurance policies.

Floodplain
An area of land that is adjacent to a water body that is historically subject to flooding.

Forensic Investigation
A program, involving highly trained investigators to determine the causes of losses.

Friendly Fire
Fire intentionally set in a fireplace, stove, furnace or other containment that has not spread beyond it.

General Liability Insurance
A term, common to earlier business interruption insurance, used to define the amount of insurance required; it meant total sales (or for manufacturers, sales value of production) less cost of goods sold (or consumed in manufacture) (See also “Cost of Goods Sold.)

Coverage for an insured when negligent acts and/or omissions result in 1) bodily injury and/or property damage on the premises of a business, 2) when someone is injured as the result of using the product manufactured or distributed by a business, or 3) when someone is injured in the general operation of a business.

Grace Period
A specified period of time where a late renewal premium may be paid by the insured to the insurer without penalty.

Gross Earnings
A term used to define the amount of insurance required, it equals the total sales (or for manufacturers, sales value of production) less cost of goods sold (or consumed in manufacture).

Gross Negligence
A reckless action taken without regard to life, limb, and/or property.

Gross Profit
The difference between sales and the cost of goods sold before deductions are made for operating expenses and income taxes.

Hazard
A circumstance that increases the likelihood or probable severity of a loss.

Homeowners insurance policy
Typically, homeowners insurance policies cover the house, the garage and other structures on the property, as well as, personal possessions inside the house, such as, furniture, appliances, and clothing, against a wide variety of perils including windstorms, fire and theft. However, the extent of the perils covered depends on the type of policy. An all-risk policy offers the broadest coverage. This covers all perils except those specifically excluded in the policy. Homeowners insurance also provides coverage for Additional Living Expenses, aka, “Loss of Use”. This provision reimburses the policyholder after a disaster for the extra cost of living elsewhere while the house is being restored. The liability portion of the policy covers the homeowner for accidental injuries caused to third parties and/or their property, such as a guest slipping and falling down improperly maintained stairs. Coverage for flood and earthquake damage is excluded and must be purchased separately.

House Year
Equal to 365 days of insured coverage for a single dwelling, it is the standard measurement for homeowners insurance.

Hurricane Deductible
A percentage or dollar amount added to a homeowner’s insurance policy to limit an insurer’s exposure to loss from a hurricane. Higher deductibles are instituted in higher risk areas, such as coastal regions.

Incontestability Provision
An insurance provision that limits the time where the insurer has the right to avoid the contract on the ground of material misrepresentation in the application for the policy.

Increased Cost of Construction
One of three ordinance or law coverages, it covers to a specified limit the added cost of rebuilding in accordance with current state, county, or city building codes.

Increased Period of Restoration
The additional time needed following a property loss beyond the time when operations can be resumed, to bring the operation back to where it was before the loss; insurance may be purchased to cover this additional time.

Incurred But Not Reported Losses- IBNR
Insured losses that have occurred but have not been reported to a primary insurance company.

Incurred Claims
The total number of claims associated with insured perils occurring during a fixed period.

Incurred Losses
The total dollar amount of losses associated with insured perils occurring during a fixed period, whether or not adjusted or paid during the same period. A portion of incurred claims and incurred losses represent insurers’ estimates of the final costs of pending claims that are still open during the reporting period, as well as, estimates of losses associated with claims that have yet to be reported.

Inland Marine Insurance
A separate branch of property insurance, less heavily regulated and generally more competitively priced than standard property insurance, covers articles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. Floaters that cover expensive personal items such as fine art and jewelry are included in this category.

Insurable Interest
The requirement with property insurance that an insured, after a loss, in order to receive payment must show some kind of interest in the property, whether ownership, loss of use, a contractual requirement with the owner to insure the property; insuring property with no insurable interest is a gambling contract and contrary to public policy. A person exhibits an insurable interest in a potential loss if that person will suffer a genuine economic loss if the event insured against occurs. Without the presence of insurable interest, an insurance contract is not formed for a lawful purpose and, thus, is not a valid contract.

Insurable Risk
Risks for which it is relatively easy to get insurance and that meet certain criteria. These include being definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable.

Insurance
A system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium.

Insurance Pool
A group of insurance companies that pool assets, enabling them to provide an amount of insurance substantially more than can be provided by individual companies to ensure large risks such as nuclear power stations. Pools may be formed voluntarily or mandated by the state to cover risks that can’t obtain coverage in the voluntary market such as coastal properties subject to hurricanes.

Insurance Regulatory Information System – IRIS
Developed by the National Association of Insurance Commissioners, IRIS uses financial ratios to measure insurers’ financial strength. Each individual state insurance department chooses how to use IRIS.

Insurance Score
Confidential rankings based on credit information, includes whether the consumer has made timely payments on loans, the number of open credit card accounts and whether a bankruptcy filing has been made. An insurance score is a measure of how well consumers manage their financial affairs, not of their financial assets. It does not include information about income or race. Studies have shown that people who manage their money well tend also to manage their most important asset, their home, well. Some insurance companies use insurance scores as an insurance underwriting and rating tool.

Insurance-to-Value
The amount of insurance written on property is approximately equal to its value.

Joint Loss Agreement
An agreement between a boiler & machinery and a property insurer, both covering the identical property but for different risks, to share in the initial payment of any loss until the adjusters can sort out which insurer owes for what amount of the loss. The insurer owing the greater portion then reimburses the other insurer for the difference.

There are no terms for K

Lapse
The termination of an insurance policy when a renewal premium is not paid at the end of the grace period.

Liability Insurance
Insurance for what the policyholder is legally obligated to pay because the policyholder’s negligence or inappropriate action resulted in bodily injury or property damage to another person.

Limits
The maximum amount of insurance that an insurer has to pay to an insured for a covered loss.

Lloyds
Corporation formed to market services of a group of underwriters. Does not issue insurance policies or provide insurance protection. Insurance is written by individual underwriters, with each assuming a part of every risk. Has no connection to Lloyd’s of London, and is found primarily in Texas.

Lloyd’s of London
Established in the 1600s, Lloyd’s was originally a London coffee house patronized by ship-owners who insured each other’s hulls and cargoes. As Lloyd’s developed, wealthy individuals, referred to as “Names,” placed their personal assets behind insurance risks as a business venture. Since the 1990s, most of the capital comes from corporations. Today, the Lloyd’s market is a major player in the international reinsurance market, as well as, a primary market for marine insurance and large risks. It serves as a marketplace where underwriting syndicates, or mini-insurers, gather to sell insurance policies and reinsurance. Each syndicate is managed by an underwriter who decides whether or not to accept the risk.

Loss
The dollar amount associated with a claim. It is a reduction in the quality or value of a property, or a legal liability.

Loss Adjustment Expense
The cost involved in an insurance company’s adjustment of losses under a policy. It is the total sum insurers pay for investigating and settling insurance claims, including the cost of defending a lawsuit in court.

Loss Cost
The portion of an insurance rate used to cover claims and the costs of adjusting claims. Insurance companies typically determine their rates by estimating their future loss costs and adding a provision for expenses, profit, and contingencies.

Loss of Use
A provision in insurance policies that reimburses policyholders for any extra living expenses incurred due to having to live elsewhere while their home is being repaired following a disaster.

Loss Payable Clause
A policy condition that enables an insured to direct the company to pay any loss that may be due to a third party.

Loss Ratio
Percentage of each premium dollar an insurer spends on claims. It is the relationship of incurred losses plus loss adjustment expense to earned premiums.

Loss Reserves
The company’s best estimate of what it will pay for claims, which is periodically readjusted. They represent a liability on the insurer’s balance sheet.

Manufacturer Selling Price Clause
Applicable to goods manufactured by the insured but not yet sold (less incurred costs and customary discounts), it is needed because the Business Income policy is based on property manufactured rather than sold by the insured.

Marine Insurance
Coverage for goods in transit, and for the commercial vehicles that transport them, on water and over land. Although it may apply to inland marine, it is more generally applies to ocean marine insurance and covers damage or destruction of a ship’s hull and cargo and perils include collision, sinking, capsizing, being stranded, fire, piracy, and jettisoning cargo to save other property. Wear and tear, dampness, mold, and war are not included.

Market Value Clause
A clause that establishes the market value of merchandise for sale rather than purchase price, thus including the profit from sale in the recovery following a covered loss.

Material Misrepresentation
A misrepresentation that would adversely affect the insurance company’s evaluation of a proposed insured. In insurance sales, a false or misleading statement made by a sales agent to induce a customer to purchase insurance is a prohibited sales practice. In insurance underwriting, a false or misleading statement by an insurance applicant may provide a basis for the insurer to avoid the policy.

Mechanical Failure Exclusion
Exclusion in property policies that does not cover loss to property by mechanical failure; however, subsequent loss resulting from damage by the mechanical failure, if by a covered cause of loss is covered.

Mediation
A non-binding procedure for claim dispute resolution where the parties negotiate a structured settlement with the guidance of a neutral expert. Unlike Arbitration, the mediator does not have the authority to impose a settlement nor are the parties bound to reach a settlement.

Moral Hazard
The possibility that a person may act dishonestly in an insurance transaction.

Mortgage Insurance
Insurance that covers the lender against loss caused by a mortgagor’s default on a government mortgage or conventional mortgage.

Mortgagee Clause
A clause in an insurance policy that makes a claim jointly payable to the policyholder and the party that holds a mortgage on the property.

Multi-Peril Insurance
A package insurance policy that provides coverage against several different perils in one policy. It also refers to the combination of property and liability coverage, which used to have to be purchased separately, in one policy.

Mutual Insurance Company
Unlike investor-owned insurance companies, a mutual insurance company is owned by its policyholders. The company returns, as dividends, part of its year-end profits to the policyholders and keeps the rest as a surplus cushion in case of large and unexpected losses.

Named Peril Policy
A named-peril policy covers the policyholder only for the risks named in the policy in contrast to an all-risk policy, which covers all causes of loss except those specifically excluded. Upon he named-peril occurrence, damages associated with the named peril to the policyholder’s property are covered by the insurer. However, if an unlisted peril occurs, no benefits are paid.

National Flood Insurance Program – NFIP
Federal government-sponsored program providing floodplain management and flood insurance coverage through private insurers to homeowners and businesses. The program is administered under the Act and applicable Federal regulations promulgated in Title 44 of the Code of Federal Regulations, Subchapter B.

Natural and Probable Consequences
Consequences from a given act that a reasonable person could foresee.

Negligence
Failure to act with the legally required degree of care for others, resulting in harm to them.

Notice of Loss
A written notice required by insurance companies immediately after an accident or other loss. Part of the standard provisions defining a policyholder’s responsibilities after a loss.

100 Year Flood
A flooding condition that has a one percent chance of occurring within a given year, it is used as the base planning level for floodplain management in the National Flood Insurance Program.

Occurrence
Slightly broader interpretation than “accident,” as it includes continuous or repeated loss from the same event.

Occurrence Policy
Also referred to as Claims-Made Policy, it is insurance that pays claims arising out of incidents that occur during the policy term, even if they are filed many years later.

Ocean Marine Insurance
Coverage for marine-related liabilities, it insures all types of vessels and watercraft against loss for property damage to the vessel and cargo, including such risks as piracy and the jettisoning of cargo to save the property of others. War is specifically excluded from basic policies, but can be added as an addendum.

Off-Balance Sheet Risk
A measure of risk due to excessive rates of growth, contingent liabilities or other items not reflected on the balance sheet.

Off Premises Utilities
A loss on insured property that results from the failure of off-premises utilities is generally excluded from property and boiler & machinery policies and, if coverage is desired, requires separate insurance.

Open Competition States
States where insurance companies can set new rates without prior approval from the insurance commissioner. The state’s insurance commissioner can disallow them if they are not reasonable and adequate or are discriminatory.

Operating Expenses
The cost of maintaining a business’s property, includes insurance, property taxes, utilities and rent, but excludes income tax, depreciation and other financing expenses.

Ordinance or Law Coverage
Endorsement that pays for the extra expense of rebuilding property damaged by a covered cause of loss in compliance with current ordinances or laws, often building codes, that may not have existed when the building was originally built. For example, a building severely damaged in a hurricane may have to be elevated above the flood line when it is rebuilt. This endorsement would cover part of the additional cost.

Ordinary Payroll
Wages of employees who are deemed non-essential to ongoing operation and are either excluded from the business income or business interruption coverages or limited to short time coverage.

Peril
A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy in contrast to an all-risk policy, which covers all causes of loss except those specifically excluded.

Personal Articles Floater
A policy or an addition to a policy used to cover personal valuables, like jewelry or furs.

Personal Lines Insurance
Property/casualty insurance that is designed for and bought by individuals, including homeowners and automobile policies.

Policy
A written contract for insurance between an insurance company and policyholder stating details of coverage.

Policy Anniversary
The date on which coverage under an insurance policy became effective.

Policyholder Surplus
The excess amount of an insurance company’s assets above its legal obligations to meet the benefits (liabilities) payable to its policyholders. Also, the net worth in an insurance company adjusted for the overstatement of liabilities.

Policy Rider
An amendment to an insurance policy that becomes part of the insurance contract and either expands or limits the benefits payable under the contract.

Pooling
Method by which each member of an insurance pool shares in each and every risk written by the other members of the pool.

Pre-existing Damages
Damages sustained to the insured property that are considered by the insurer to pre-date the date of loss for a claim and may either negate the value of the claim or reduce the total amount of the loss.

Preferred Risk
A proposed insured who presents a significantly less than average likelihood of loss and who is charged a lower than standard premium rate.

Premises
The location of the property or a portion of it as designated in the declaration’s page of an insurance policy.

Premium
The dollar amount paid for an insurance policy, typically charged annually or semiannually.

Primary Insurance
The first layer of property or liability coverage carried by the insured that provides benefits up to the limits of a policy, regardless of other insurance policies in effect.

Proof of Loss
Documents prepared by the insured showing the insurance company that a loss occurred and the believed amount of the loss.

Property/Casualty Insurance
Covers damage to or loss of policyholders’ property and legal liability for damages caused to other people or their property. Property/casualty insurance, which includes auto, homeowners and commercial insurance, is one segment of the insurance industry. The other sector is life/health. Outside the United States, property/casualty insurance is referred to as nonlife or general insurance.

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Rate
The cost of a unit of insurance, usually per $1,000. Rates are based on historical loss experience for similar risks and may be regulated by state insurance offices.

Rate Regulation
The process by which states monitor insurance companies’ rate changes, done either through prior approval or open competition models.

Rated Policy
An insurance policy that is classified as having a greater-than-average likelihood of loss, usually issued with special exclusions, a premium rate that is higher than the rate for a standard policy, a reduced face amount, or any combination of these.

Rating Agencies
There are six major credit agencies that determine insurers’ financial strength and viability to meet claims obligations: A.M. Best Co.; Duff & Phelps Inc.; Fitch, Inc.; Moody’s Investors Services; Standard & Poor’s Corp.; and Weiss Ratings, Inc. In their determination, they use several factors including company earnings, capital adequacy, operating leverage, liquidity, investment performance, reinsurance programs, and management ability, integrity and experience. A high financial rating is not the same as a high consumer satisfaction rating.

Rating Bureau
The insurance business is based on the spread of risk. The more widely risk is spread, the more accurately loss can be estimated. An insurance company can more accurately estimate the probability of loss on 100,000 homes than on ten. Years ago, insurers were required to use standardized forms and rates developed by rating agencies. Today, large insurers use their own statistical loss data to develop rates. But small insurers, or insurers focusing on special lines of business, with insufficiently broad loss data to make them actuarially reliable depend on pooled industry data collected by such organizations as the Insurance Services Office (ISO) which provides information to help develop rates such as estimates of future losses and loss adjustment expenses like legal defense costs.

RBC Ratio
The measurement of the amount of capital (assets minus liabilities) an insurance company has as a basis of support for the degree of risk associated with company operations and investments. This ratio identifies the companies that are inadequately capitalized by dividing the company’s by the minimum amount of capital that the regulatory authorities feel is necessary to support the insurance operations.

RBC Statistic
The ratio of authorized control level risked based capital of an insurance company to its total adjusted capital. This statistic determines regulatory action taken by the state’s insurance commissioner

Receivables
Amounts owed to a business for goods or services provided.

Reinsurance
A type of insurance that insurance companies buy to limit their loss exposure. An insurer (the reinsured) reduces its possible maximum loss on either an individual risk or a large number of risks by giving (ceding) a portion of liability to another insurance company (the reinsurer).

Reinsurer
An insurance company that assumes all or part of an Insurance or Reinsurance policy written by a primary insurance company.;A reinsurer assumes part of the risk and part of the premium originally taken by the insurer, known as the primary company. Reinsurance effectively increases an insurer’s capital and therefore its capacity to sell more coverage. The business is global and some of the largest reinsurers are based abroad. Reinsurers have their own reinsurers, called retrocessionaires. Reinsurers don’t pay policyholder claims. Instead, they reimburse insurers for claims paid.

Renter’s Insurance
Similar to homeowners insurance, except that it does not cover the structure, it is insurance that covers a policyholder’s belongings against perils such as fire, theft, windstorm, hail, explosion, vandalism, riots, and others. It also provides personal liability coverage for damage the policyholder or dependents cause to third parties; additional living expenses, known as loss-of-use coverage, if a policyholder must move while his or her dwelling is repaired; and can include coverage for property improvements. Possessions can be covered for their replacement cost or the actual cash value that includes depreciation.

Replacement Cost
The cost to repair or replace lost or damaged property with like, kind, and quality, without deductions for depreciation or obsolescence. It pays the dollar amount needed to replace damaged personal property or dwelling property but is limited by the maximum dollar amount shown on the declarations page of the policy.

Reporting Form Insurance
Coverage, generally used when property or earnings values fluctuate substantially over time, under which the policyholder reports to the insurer the total values on hand as of the reporting date, with premium paid based on the values reported.

Reserves
The company’s best estimate of what it will pay for claims, which is periodically readjusted. They represent a liability on the insurer’s balance sheet.

Residual Market
Facilities, such as assigned risk plans and FAIR Plans, that provide coverage for insurance consumers unable to obtain coverage in the voluntary market. Insurers doing business in a given state generally must participate in these pools. For this reason the residual market is also known as the shared market.

Retention
The amount of risk retained by an insurance company that is not reinsured.

Retrocession
The reinsurance bought by reinsurers to protect their financial stability.

Retrospective Rating
A method available to large commercial insurance buyers permitting the final premium for a risk to be adjusted, subject to an agreed-upon maximum and minimum limit based on actual loss experience.

Rider
An attachment to an insurance policy that alters the policy’s coverage or terms.

Risk
Designates an insured or a peril insured against.

Risk Based Capital – RBC
The amount of required capital that the insurance company must maintain based on the inherent risks of the type of insurance they sell. Higher-risk types of insurance generally necessitate higher levels of capital.

Risk Management
Management of the varied risks to which a business firm or association might be subject. It includes analyzing all exposures to gauge the likelihood of loss and choosing options to better manage or minimize loss. These options typically include reducing and eliminating the risk with safety measures, buying insurance, and self-insurance.

Saffir Simpson Scale
A 1-5 rating based on a hurricane’s present intensity. This is used to give an estimate of the potential property damage and flooding expected along the coast from a hurricane landfall. Wind speed is the determining factor in the scale.

Salvage
Damaged property an insurer takes over to reduce its loss after paying a claim. Insurers receive salvage rights over property on which they have paid claims, such as badly-damaged cars. Insurers that paid claims on cargoes lost at sea now have the right to recover sunken treasures. Salvage charges are the costs associated with recovering that property.

Scheduled Property
A list of individual items or groups of items that are covered under one policy for a stated insured value or a listing of specific benefits, charges, credits, assets or other defined items.

Self-Insurance
The concept of assuming a financial risk oneself, instead of paying an insurance company to take it on. Every policyholder is a self-insurer in terms of paying a deductible and co-payments.

Selling Price Clauses
Clauses that allow the insured to recover loss of finished goods at selling price, including the loss of profit.

Severity
One of the criteria used in calculating the size of a loss and subsequent premiums rates.

Specific Insurance
1) Insurance covering one item of property at one insurable location, as opposed to blanket insurance; or 2) Insurance placed as an underlying amount under reporting form insurance.

Spread of Risk
The selling of insurance in multiple areas to different groups o policyholders to minimize the danger that all policyholders will have losses at the same time. Companies are more likely to insure perils that offer a good spread of risk. Flood insurance is an example of a poor spread of risk because the people most likely to buy it are the people close to rivers and other bodies of water that flood.

Subrogation
The legal process by which an insurance company, having paid a property loss for an insured, to take the place of an insured in bringing a liability suit against a third party who caused injury to the insured.

Supplemental Coverage
An amount of coverage that adds to the amount of coverage specified in a basic insurance policy.

Surplus
The remainder after an insurer’s liabilities are subtracted from its assets it serves as a financial cushion that protects policyholders in case of unexpectedly high claims.

Surplus Lines
Property/casualty insurance coverage that isn’t available from insurers licensed in the state, called admitted companies, and must be purchased from a non-admitted carrier. Examples include risks of an unusual nature that require greater flexibility in policy terms and conditions than exist in standard forms or where the highest rates allowed by state regulators are considered inadequate by admitted companies. Laws governing surplus lines vary by state.

Tenant’s Insurance
Similar to homeowners insurance, except that it does not cover the structure, it is insurance that covers a policyholder’s belongings against perils such as fire, theft, windstorm, hail, explosion, vandalism, riots, and others. It also provides personal liability coverage for damage the policyholder or dependents cause to third parties; additional living expenses, known as loss-of-use coverage, if a policyholder must move while his or her dwelling is repaired; and can include coverage for property improvements. Possessions can be covered for their replacement cost or the actual cash value that includes depreciation.

Terrorism Coverage
Prior to September 11, 2001, it was included as a part of the package in standard commercial insurance policies. Since September 11, terrorism coverage prices have increased substantially to reflect the current risk.

Third-Party Administrator
Outside group that performs clerical functions for an insurance company.

Third-Party Coverage
Liability coverage purchased by the policyholder as a protection against possible lawsuits filed by a third party. The insured and the insurer are the first and second parties to the insurance contract.

Total Adjusted Capital
Including shareholders’ funds and adjustments on equity, asset values and reserves, it is commonly referred to as ann insurance company’s capital base under Standard & Poor’s capital adequacy model.

Total Loss
The condition when damage is so extensive that repair costs are greater than the cost to replace the property. Usually, when damages are determined to be a total loss, policy limits are paid on the claim.

Umbrella Liability Insurance/ Umbrella Policy

A liability insurance policy that protects the assets and future income of the name insured in addition to his or her primary policies. It is distinguished from excess insurance in that excess coverage goes into effect only when all underlying policies are totally exhausted, while umbrella is able to “drop down” to fill coverage gaps in underlying policies. Therefore, an umbrella policy can become the primary policy “on the risk” in certain situations. Typically, an umbrella policy is pure liability coverage over and above the coverage afforded by the regular policy, and is sold in increments of one million dollars. The term “umbrella” is used because it covers liability claims from all policies underneath it, such as auto insurance and homeowners insurance policies

Insurance covering over the top of primary general or personal liability insurance, usually on a broader basis and often with a “drop-down” to a more nominal deductible for coverage not included in the primary coverage.

Underinsurance
The result of the policyholder’s failure to buy sufficient insurance. An underinsured policyholder may only receive part of the cost of replacing or repairing damaged items covered in the policy and could be subject to a coinsurance penalty.

Underwriting
The process of identifying and classifying the degree of risk represented by a proposed insured by examining, accepting, or rejecting insurance risks and classifying the ones that are accepted, in order to charge appropriate premiums for them.

Underwriting Risk
The insurer’s profit on the insurance sale after all expenses and losses have been paid. When premiums aren’t sufficient to cover claims and expenses, the result is an underwriting loss. Underwriting losses are typically offset by investment income.

Unearned Premium
The portion of a premium already received by the insurer for which coverage protection has not yet been provided; even though premiums are typically paid in advance, the entire premium is not earned until the policy period expires.

Unfriendly Fire
A fire that escapes from its normal contained area, for example, fire in the fireplace leaps onto the sofa.

Uninsurable Risk
Risks for which it is difficult for someone to get insurance.

Valued Insurance
Insurance that covers property for specific value, if totally lost or damaged, regardless of its perceived value.

Valued Policy
A policy under which the insurer pays a specified amount of money to or on behalf of the insured upon the occurrence of a defined loss. The money amount is not related to the extent of the loss. Life insurance policies are an example.

Valued Policy Laws
Laws in a number of states in which, when a loss is deemed “total” or sometimes a “constructive total” loss, the insurer must pay the full limit of the policy, whether the amount of the loss reaches the policy limit or not.

Voluntary Market
Comprised of insurance consumers that insurers select to be provided coverage, using underwriting guidelines that are not unfairly discriminatory. The voluntary market is also called the normal or regular market.

Water-Damage Insurance
Coverage provided against sudden and accidental water damage. However, it does not cover damage from problems resulting from a lack of proper maintenance or floods. Water damage from floods is covered under separate flood insurance policies issued by the federal government.

Weather Insurance
A specialized type of business interruption insurance that compensates for financial losses caused by adverse weather conditions, such as constant rain on the day scheduled for a major outdoor concert.

Workers Compensation
(Originally called Workmans Compensation.) Laws Exposures & Insurance – passed in all states requiring employers above a certain size, to cover workers’ injuries “arising out of and in the course of their employment” regardless of the employer’s fault or the employee’s negligence. Except for the larger employers, who can self-insure under any of a variety of plans, most employers elect to buy workers compensation insurance for this exposure.

Written Exposure
The total number of exposures of all policies issued during a given time period.

Written Premiums
The total premiums generated from all policies written by an insurance company within a given period of time.

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