Risk Management Definitions

Insurance 101

Following is a listing of common Insurance Terms that may be helpful in your day to day interactions.


Glossary of Common Insurance Terms

Actual Cash Value - "Actual Cash Value" is the replacement cost of property damaged or destroyed at the time of loss, with deduction for depreciation.

Additional Insured - An individual or entity that is not automatically included as an insured under the policy of another, but for whom the named insured's policy provides a certain degree of protection. An endorsement is typically required to effect additional insured status.

Additional Named Insured - An individual or entity who is added to a policy with the status of named insured after the policy is written. Such an individual or entity would have the same rights and responsibilities as an individual or entity named as an insured in the policy declarations (other than those rights and responsibilities reserved to the first named insured). In this sense the term can be contrasted with additional insured, an individual or entity added to a policy as an insured but not as a named insured.

Adjuster - An individual representing the insurance company in discussions to reach agreement on the amount of a loss and the company's liability. Adjusters may be employees of adjusting organizations, third party administrators, insurance companies, or self-employed.

Aggregate - A limit in an insurance policy stipulating the most it will pay for all covered losses sustained during a specified period of time, usually one year.

All Risk Versus Named Perils - In an "All Risk" policy, the insured is protected from direct loss arising from any fortuitous cause other than those perils or causes specifically excluded by name. In a "Named Perils" policy the insured is only covered for perils specifically listed in the policy.

Audit - An examination of the insured's books and records to determine actual exposures for the purpose of premium compensation, manufacturer's and contractor's liability, product liability, and reporting form lines and on automobile fleet, gross receipts, and garage payroll policies, where premium is based on such items as the insured's payroll, gross receipts, values on hand, owned automobiles, or units handled or sold.

Automobile Insurance - The insurance of automobiles involves two basic types of coverage: (1) Comprehensive - liability insurance - coverage for losses caused by injuries to persons and legal liability imposed on the insured for such injury or for damage to property of others; and (2) Collision - physical damage insurance - coverage for losses caused by damage to or loss of insured automobile.

Hired Automobiles - Covers liability for the use of hired automobiles in your business.

No-Fault Automobile Insurance - In general terms, this is an automobile insurance system whereby economic loss benefits are paid directly to injured individuals without regard to who is at fault in an accident.

Non-Owned Automobiles - Covers liability for the use of non-owned automobiles in your business. An example would be an employee using his/her own car on an errand for you.

Uninsured Motorists - Protects insureds who are not contributorily negligent against bodily injury caused by negligent uninsured motorists.

Binder - A binder is a legal agreement that serves to effect insurance coverage for a specified period of time until the actual insurance policy can be issued. A binder can be issued by either an insurance agent or company.

Blanket Insurance - Blanket insurance provides coverage under a single limit for the following, two or more items (e.g., Building and/or Contents), two or more locations (e.g.. Location A and/or Location B), or a combination of items and/or locations.

Boiler and Machinery Coverage - This form of insurance provides important mechanical breakdown coverage generally not available under any other insurance policy. A Boiler and Machinery policy can protect an insured against the effects of catastrophic property loss, such as steam boiler explosion or an expensive breakdown of machinery and equipment.

Bonds - A contract that guarantees the performance of an obligation or protects against dishonesty of employees.

Bid Bond - A guarantee that the contractor will enter into a contract if it is awarded to the firm. The contractor must also furnish the contract bond (sometimes called a "performance bond") that is required by the terms of the bid bond.

Contract Bond - A guarantee of the faithful performance of a construction contract and the payment of all labor and material bills related to it.

Fidelity Bond - A bond that will reimburse an employer the insured for loss sustained by firm because of any dishonest act by an employee covered by the bond. Blanket fidelity bonds cover groups of employees.

License And Permit Bonds - Bonds required by various municipalities or public authorities to indemnify them against loss in the event of violation of the regulations or ordinances under which the permit is required.

Surety Bond - A 3-party agreement involving a principal, who undertakes to perform its contractual obligations, a surety, who will compensate the other party(ies) the obligor(s)) to the contract for losses suffered that result from the principal's failure to perform.

Builder's Risk - Indemnifies for loss of or damage to a building under construction. Insurance is normally written for a specified amount on the building and applies only in the course of construction.

Business Interruption Coverage (BI) - Business Interruption insurance provides loss of income coverage for your business by replacing your operating income during the period when damage to the premises or other property prevents income from being earned. Business Interruption coverage is invoked only after you suffer a loss that is covered by the terms of your Property policy. This form of insurance provides loss of income coverage (i.e., "disability income") for your business by replacing your operating income during the period when damage to the premises or other property prevents income from being earned.

Cancellation - The termination of an insurance policy or bond before its expiration by either the insured or the company. Almost invariably, the contract states the type of notice necessary before such cancellation becomes effective.

Capacity - From a micro-perspective, the total amount of coverage available for a given EXPOSURE from an insurer or reinsurer. From a micro-perspective, the total amount of insurance/REINSURANCE available in the marketplace.

Captive Insurance Company - A closely-held insurance company whose insurance business is primarily supplied by and controlled by its owners and in which the original insureds are the principal beneficiaries. A captive insurance company is an insurance company that has been set up to provide coverage at a lower cost than available by going through the general insurance market. The company's stock is controlled by one interest or a group of related interests so as to provide coverage for their business operations. A captive insurance company may be a nonadmitted, nonresident, or foreign insurer. Sometimes it may provide reinsurance to a self-insurer or a domestic company.

Certificate Of Insurance - Evidence that an insurance policy has been issued, showing the amount and type of insurance provided.

Claim - In reference to insurance, a claim may be a demand by an individual or a corporation to recover, under a policy of insurance, for loss which may come within that policy. Or it may be a demand by an individual or an entity against an insured for damages covered by a policy held by the insured. In the latter case, claims are referred to the insurance company for handling on behalf of the insured, in accordance with the contract terms.

Commission - Insurance agents and brokers are usually compensated by being allowed to retain a certain percentage of the premiums they produce. This allowance is known as "commission."

Credit Life Insurance - Insurance issued through a lender to cover payment of a loan, installment purchase, or other obligation if the debtor dies prior to repayment. Coverage offered is term insurance for less than five years and is generally decreasing as the loan is repaid.

Crime Insurance - Employee dishonesty coverage protects an employer from financial loss due to the fraudulent activities of one or more employees. The coverage includes protection for loss of money, securities, and other property of the insured. The following coverages can be added to the Crime policy for an additional premium.

Deductible - Specifies an amount to be deducted from any loss, or makes the company liable only for the excess of a stated amount. Used largely on risks where many small losses may be expected, e.g., scratches or dents to automobile bodies in "collision insurance."

Per-Loss Deductible - Specifies the amount paid by the insured for each individual loss.

Aggregate Deductible - Specifies the maximum amount the insured can pay as deductible amounts over a specified period of time, typically one year.

Difference In Conditions (DIC) Coverage - DIG insurance provides coverage designed to close specific gaps in standard insurance. It allows coverage to be customized to extend to such exposures as water damage, flood, collapse, earthquake, landslide, etc. DIC coverage may be provided by means of a separate insurance policy or it may be added by endorsement to the basic policy.

Directors And Officers Liability (D&0) - Directors and officers are subject to the duties of diligence, obedience, and loyalty and can be sued (even personally) for negligence in the performance of those duties. D&0 insurance provides coverage for these types of claims. Examples of issues causing claims include:

•  Discrimination
•  Wrongful termination
•  Sexual harassment
•  Promotions and compensation
•  Interference with employment contract
•  Hiring decisions
•  Conflicts of interest
•  Libel, slander, and defamation of character
•  Failure to supervise employees
•  Invasion of privacy
•  Copyright infringement, misrepresentation of ideas, and unauthorized use of logos.
•  Donors who feel that their contributions have not been used to further the expressed aim of the organization.
•  Board members who disagree with a majority decision on the use of funds.
•  Beneficiaries who feel they are entitled to more than they received

Employee Benefits Plan Liability Coverage - Protects the insured employer against claims by employees or former employees resulting from negligent acts or omissions in the administration of the insured's employee benefits programs.

Employee Dishonesty Coverage - Protects an employer from financial loss due to the fraudulent activities of one or more employees. The coverage includes protection for loss of money, securities, and other property of the insured.

Employment Practices Liability Coverage (EPL) - Protects the corporation, directors and officers and employees for claims resulting from wrongful termination, discrimination, sexual harassment, wrongful discipline and failure to employ or promote.

Errors & Omissions - Coverage for liability resulting from errors or omissions in the performance of professional duties that is often excluded from the General Liability policy. Applicable as a general rule to professional business activities such as banking, accounting, law, insurance and real estate.

Excess Insurance - Coverage provided above the primary policy's limit or the insured's self-insured retention (SIR).

Experience Rating - A kind of cost-plus method of rating insurance, in which the final cost is a function of the insured's losses, or "experience."

Exposure - Refers chiefly to the state of being exposed to loss because of some hazard or contingency, such as an adjoining property from which a fire could spread to the property in question. It is also used as a measure of the rating units or the premium basis of a risk; e.g., a property exposure of 15 vehicles or a payroll exposure of $400,000.

Fiduciary Liability Coverage - Individual fiduciaries, the sponsor organization and the plan can all be held (personally) liable under the Employees Retirement Income Security Act of 1974 (ERISA).

Feasibility Study (For Captives) - A comprehensive analysis of the potential or continued viability of a captive insurance company. Involves the use of financial modeling, business plans and comparison to other alternatives.

Financial Modeling - The preparation of pro forma financial statements created under various loss and financial scenarios.

Fleet Policy - An insurance contract covering a number of automobiles. The automobiles may be specifically designated, or provision may be made for automatic coverage on a reporting basis of all automobiles owned by the insured. To be Fronting (front):

A carrier serving as the FRONT, for a pre-determined price, will issue a policy written on its paper to cover a risk, sometimes only insuring a (small) percentage of it and reinsuring the majority or all of the risk to a captive.

General Liability - This policy will pay on behalf of the Insured amounts the Insured becomes legally liable to pay due to bodily injury, property damage or personal injury to third parties resulting from the Insured's premises liability, contractual liability, products liability and personal or advertising liability. Product Liability may be covered under a separate policy considering the nature of the product. Coverage for Employee Benefits Liability can also be endorsed. Other "special coverages" associated with General Liability include:

•  Products Liability
•  Advertising
•  Liquor
•  Watercraft
•  Aircraft
•  Foreign
•  Medical malpractice
•  Other Professional
•  Errors and Omissions
•  Directors and Officers
•  Employee Benefits
•  Environmental
•  Employment Practices
•  Automobile

Indemnify - Make whole again. To compensate for actual loss sustained. Many insurance policies and all bonds promise to indemnify the insureds. Under such a contract, there can be no recovery until the insured has actually suffered a loss. Insureds are entitled to be compensated for the damage that has occurred, i.e., to be restored to the same financial position they enjoyed immediately before the loss.

Inland Marine Coverage - Inland marine insurance indemnifies loss to moving or moveable property and is an outgrowth of ocean marine insurance. Historically, ocean marine insurance held the transporter responsible for property loss before, during, and after the completion of the voyage. In the 1800's, the non-ocean portion of the journey grew as cargoes were transferred to barge, etc., and the term "inland marine" was coined. Inland marine policies became known as "floaters" since the property to which coverage was originally extended was essentially "floating."

Insured - The person(s) protected under an insurance contract.

Insurer/Insurance Company - An organization charter under state or provincial laws to act as an insurer. In the United States , insurance companies are usually classified as fire and marine, life, casualty, and surety companies and may write only those kinds of insurance specifically authorized in their charters. Many company charters have been broadened to include several types of insurance.

Admitted Insurer - Insurer licensed to do business in the state or country in which the insured exposure is located.

Non-Admitted Insurer - Insured not licensed to do business in the state in which the insured exposure is located.

Domestic Insurer - Insurer that is formed under the laws of and admitted by the state or country in which the insured exposure is located.

Foreign Insurer -A U.S. domiciled insurer, domiciled in a state different from the one in which the insured exposure is located.

Insurable Interest - Any interest in or relation to, property of such a nature that the occurrence of an event/loss insured against would cause financial loss to the insured.

International Insurance Coverages/Exposures - Companies that conduct international business need Foreign Coverage. This includes importers and exporters. This coverage covers the insured goods that are being stored exhibited or transported with foreign countries. The insured will be covered against direct physical loss of his goods.

Letter of Credit - A financial guarantee issued by a bank that ensures that funds will be available if requested.

Limit - The maximum amount that an insurance company agrees to pay in the case of loss.

Aggregate Limit - The insurer's maximum liability for a series of losses over a specified period of time, typically one year. Sometimes called annual aggregate limit.

Loss - Any decrease in quantity, quality, or value of property. With reference to policies of indemnity, this term is often used as an expression of the amount of damage that might or might not be covered in whole or in part depending upon the cause of the loss and the coverage afforded. In its application to liability policies, it refers to payment made in behalf of the insured. (See claim)

Incurred Losses - Losses that occur during a given time period, whether or not adjusted or paid during that period.

Incurred But Not Reported (IBNR) Losses - Losses that have occurred but have not been reported to the insurer as of a particular date. In spite of the precise words attached to those initials, IBNR is also extended to include case reserve deficiencies relating to reported claims.

Paid Losses - Portion of incurred LOSSES actually paid out by the insurer.

Loss Prevention Service - Loss control and inspection work done by insurance companies or independent organizations for the purpose of recommending the change or removal of conditions that would likely cause loss.

Loss Ratio - A percentage arrived at by dividing the amount of the losses by the amount of the premium. Various loss ratios are computed, e.g., earned premium to incurred losses, written premium to paid losses.

Loss Reserve - An insurer's estimate of its liability (including LAE) for all unpaid claims that have occurred as of a given date. This estimate includes not only losses due but not yet paid, but also losses incurred but not reported (IBNR).

Occurrence - This term means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

Package Policies - Combination policies containing several coverages that are included all in one contract. Examples include the storekeepers' burglar and robbery policy, homeowners' policy, blanket crime policy, special multi-peril policy, and comprehensive business policy.

Pollution Legal Liability Coverage - Pays all sums you are legally obligated to pay as a result of emission, discharge, release, or escape of any contaminants, irritants, or pollutants into or on land, the atmosphere, or any water course or body of water, provided this results in "environmental damage." It also pays to reimburse expense for reasonable and necessary cleanup costs incurred in the discharge of a legal obligation validly imposed through governmental action, provided such expense is incurred because of "environmental damage." It pays for defense of any claim or suit that is the subject of this insurance.

Pool - A collection of business underwritten with pre-specified guidelines for which premiums, losses and expenses are shared equally amongst insurers and/or reinsurers.

Premium - The consideration, in insurance and bonding, to be paid for a policy or bond. This term has various meanings in other businesses.

Deposit Premium - The premium deposit required by the company on forms of insurance subject to periodic premium adjustment. Also called "provisional premium."

Earned Premium - the pro rata portion of the written premium covering the part of the policy term included in the period.

Gross Premium - The total premium paid prior to any deduction for commissions, taxes or other expenses.

Minimum Premium - The smallest premium an insurance company may charge under the manual rules for writing a particular policy or bond for a designated period. It is intended to defray the necessary expenses of the insurance transaction and to leave an adequate amount to contribute to the payment of losses.

Net Written Premium - gross premium less deduction for commissions and ceded reinsurance.

Unearned Premium - That portion of the premium equal to the unexpired portion of the period for which the total premium has been paid. It equals the gross premium less the earned premium.

Written Premium - Total amount of premium charged in a particular period for all policies the insurer "writes". Differences between EARNED PREMIUM and WRITTEN PREMIUM arise because WRITTEN PREMIUM is booked immediately; whereas EARNED PREMIUM is booked proportionally over the policy's duration.

Products Liability - The liability for bodily injury or property damage incurred by a merchant or manufacturer as a consequence of some defect in the product sold or manufactured or the liability incurred by a contractor after he has completed a job as a result of improperly performed work. The latter described part of-product liability is called Completed Operations.

Property Insurance - Property insurance covers your property of every description against loss caused by any covered peril such as fire, windstorm or lightning. Property policies typically define the covered perils by first insuring all perils then specifically excluding the perils that do not apply. The following are examples of "special" Property coverages:

•  Accounts Receivable
•  Valuable Papers
•  EDP
•  Fine Arts
•  Plate Glass
•  Course of Construction
•  Contractors Equipment
•  Boiler and Machinery
•  Difference in Conditions
•  Inland Transit
•  Ocean Marine
•  Product Contamination / Recall
•  Crime
•  Political Risk

Reinsurance - Insurance in which one insurer, the reinsurer, assumes all or part of the exposures covered by another insurer. It's like an insurance company buying insurance for the losses it may have to pay out.

Replacement Cost Coverage - This form of insurance provides coverage on the basis of what it would cost to replace, instead of the value of an item. There is no deduction for depreciation on any loss sustained, subject to the terms of the co-insurance clause. This coverage applies to both building and contents items as specified on the face of the policy.

Retention - Method of financing an organization's losses through the use of self-insurance, deductibles, or non-insurance agreements. This can be active/intentional or passive/unintentional. It is the amount of liability retained by the company on a given risk.

Self-Insurance - A system whereby a firm sets aside an amount of monies to provide for any losses that occur - losses that could ordinarily be covered under an insurance program. The monies that would normally be used for premium payments are added to this special fund for payment of losses incurred.

Self-Insured Retention (SIR) - The amount of each loss the insured pays out of its own pocket before the insurer participates in a loss. Similar to a deductible, SIR is a term usually used in liability, or casualty insurance.

Stop-Loss Reinsurance - Agreement whereby a reinsurer assumes on a per-loss basis all loss amounts of the reinsured, subject to the policy limit, in excess of a stated amount.

Subrogation - An insurance carrier may reserve the "right of subrogation" in the event of a loss. This means that the company may choose to take action to recover the amount of a claim paid to a covered insured if a third party caused the loss. After expenses, the amount recovered must be divided proportionately with the insured to cover any deductible for which the insured was responsible.

Third Party Administrator (TPA) - Need definition.

Tort - A tort is an unintentional violation of another person's rights, usually due to negligence. It is different than a crime, which generally is an intentional violation of another's rights. A tort is subject to civil action and subsequent judgement for damages payable to the wronged party, whereas a crime is subject to criminal action and subsequent penalty.

Transit Coverage - Coverage of the insured's property while in transit over land from one location to another. Property insurance policies typically provide coverage only at locations identified in the policy.

Umbrella Policy - A liability policy designed to provide an excess layer of limits (usually in amounts of at least $5 million), typically over a firm's primary commercial general liability, auto and employer's liability policies. Coverage is provided for those same exposures covered in the underlying policies, subject to the same exclusions if it is "following form". In addition, the umbrella usually provides broader coverage than the underlying policies, with a substantial SIR (often $10,000 or more) which applies to losses, which are covered under the umbrella but are not covered by the primary policies.

Unbundled Costs - The separation of the services (i.e. - claims administration) and charges ancillary to the purchase of insurance, that are typically lumped together with the purchase of the insurance. Often, these services can be obtained from an organization separate from the insurer, sometimes at overall savings to the program.

Underwriting - The process of determining whether to accept a risk and, if so, what amount of insurance the company will write on the acceptable risk, and at what rate. Underwriters are companies, individuals or insurance companies who carry on this critical activity for their own account, or for the account of others.

Unfunded Self-Insurance - System in which a company creates a "paper" reserve figure. It does not specifically segregate funds to match the reserve it has set, but utilizes the money for other purposes.

Workers' Compensation and Employer's Liability - Workers' Compensation provides protection to the employer against liability imposed by law to pay benefits to any worker injured in the course of and arising out of employment, without regard to fault or negligence on the employer's part or any other person.

In addition to providing for payment of benefits to covered employees as prescribed by law, workers' compensation insurance provides employer's liability coverage to protect the employer against claims for damages brought by employees or others when the loss is not covered under workers' compensation.