Term Dictionary
Home Insurance Terms
- Actual Cash Value
A form of insurance that pays damages equal to the replacement value of damaged property minus depreciation.
- Additional Living Expenses
Extra charges covered by homeowners policies over and above the policyholder’s customary living expenses. They kick in when the insured requires temporary shelter due to damage by a covered peril that makes the home temporarily uninhabitable
- 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.
- 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.
- 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, including getting a job, finding a place to live, securing a loan, getting telephone service 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.
- Deductible
The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.
- 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.
- Escrow Account
Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes.
- Extended Replacement Cost Coverage
Pays a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent. 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.
- 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.
- Guaranteed Replacement Cost Coverage
Homeowners policy that pays the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit.
- Guaranty Fund
The mechanism by which solvent insurers ensure that some of the policyholder and third-party claims against insurance companies that fail are paid. Such funds are required in all 50 states, the District of Columbia and Puerto Rico, but the type and amount of claim covered by the fund varies from state to state. Some states pay policyholders’ unearned premiums—the portion of the premium for which no coverage was provided because the company was insolvent. Some have deductibles. Most states have no limits on workers compensation payments. Guaranty funds are supported by assessments on insurers doing business in the state.
- Homeowners Insurance Policy
The typical homeowners insurance policy covers 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. 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 covers additional living expenses. Known as Loss of Use, this provision in the policy reimburses the policyholder for the extra cost of living elsewhere while the house is being restored after a disaster. 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.
- Identity Theft Insurance
Coverage for expenses incurred as the result of an identity theft. Can include costs for notarizing fraud affidavits and certified mail, lost income from time taken off from work to meet with law-enforcement personnel or credit agencies, fees for reapplying for loans and attorney’s fees to defend against lawsuits and remove criminal or civil judgments.
- Inflation Guard Clause
A provision added to a homeowners insurance policy that automatically adjusts the coverage limit on the dwelling each time the policy is renewed to reflect current construction costs.
- Inland Marine Insurance
This broad type of coverage was developed for shipments that do not involve ocean transport. 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.
- Insurance Score
Insurance scores are confidential rankings based on credit information. This 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. And people who manage their money responsibly also tend to handle driving a car responsibly. Some insurance companies use insurance scores as an insurance underwriting and rating tool.
- Insurance-To-Value
Insurance coverage written in an amount approximate to the replacement value of the insured property.
- Kidnap / Ransom Insurance
Coverage up to specific limits for the cost of ransom or extortion payments and related expenses. Often bought by international corporations to cover employees. Most policies have large deductibles and may exclude certain geographic areas. Some policies require that the policyholder not reveal the existence of the coverage.
- Named Peril
Peril specifically mentioned as covered in an insurance policy.
- Ordinance or Law Coverage
Endorsement to a property policy, including homeowners, that pays for the extra expense of rebuilding to comply with ordinances or laws, often building codes, that did not exist 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.
- 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.
- Renter's Insurance
A form of 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. It also provides additional living expenses, known as loss-of-use coverage, if a policyholder must move while his or her dwelling is repaired. It also can include coverage for property improvements. Possessions can be covered for their replacement cost or the actual cash value that includes depreciation.
- Replacement Cost
Insurance that pays the dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation but limited by the maximum dollar amount shown on the declarations page of the policy.
- Schedule
A list of individual items or groups of items that are covered under one policy or a listing of specific benefits, charges, credits, assets or other defined items.
- Sewer Back-Up Coverage
An optional part of homeowners insurance that covers sewers.
- Umbrella Policy
Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.
- Water-Damage Insurance Coverage
Protection provided in most homeowners insurance policies against sudden and accidental water damage, from burst pipes for example. Does not cover damage from problems resulting from a lack of proper maintenance such as dripping air conditioners. Water damage from floods is covered under separate flood insurance policies issued by the federal government.
Life Insurance Terms
- Accelerated Death Benefits
A life insurance policy option that provides policy proceeds to insured individuals over their lifetimes, in the event of a terminal illness. This is in lieu of a traditional policy that pays beneficiaries after the insured’s death. Such benefits kick in if the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries
- Beneficiary
The person or legal entity the owner of an insurance policy names to receive the policy benefit if the event insured against occurs.
- Cash Surrender Value
For life insurance, the amount, before adjustments for factors such as policy loans, that the owner of a permanent life insurance policy is entitled to receive if the policy does not remain in force until the insured’s death.
For annuities, the amount of a deferred annuity’s accumulated value, less any surrender charges, that the contract holder is entitled to receive if the policy is surrendered during its accumulation period. Also known as cash value and surrender value.
- Contingent Beneficiary
The party designated to receive the proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured. Also known as secondary beneficiary and successor beneficiary.
- Death Benefit
For a life insurance contract, the amount of money paid by an insurer to a beneficiary when a person insured under the life insurance policy dies.
For an annuity contract, the amount of money paid to a beneficiary if the contract owner dies before the annuity payments begin.
- Guaranteed Insurability (GI) Benefit
A supplementary life insurance policy benefit often provided through a policy rider that gives the policy owner the right to purchase additional insurance of the same type as the life insurance policy that provides the GI benefit on specified option dates. Also known as guaranteed insurability option
- Key Person Insurance
Insurance on the life or health of a key individual whose services are essential to the continuing success of a business and whose death or disability could cause the firm a substantial financial loss.
- Primary Beneficiary
The party designated to receive the proceeds of a life insurance policy following the death of the insured. Also known as first beneficiary.
- Term Life Insurance
A form of life insurance that covers the insured person for a certain period of time, the “term” that is specified in the policy. It pays a benefit to a designated beneficiary only when the insured dies within that specified period which can be one, five, 10 or even 20 years. Term life policies are renewable but premiums increase with age.
- Universal Life Insurance
A flexible premium policy that combines protection against premature death with a type of savings vehicle, known as a cash value account, that typically earns a money market rate of interest. Death benefits can be changed during the life of the policy within limits, generally subject to a medical examination. Once funds accumulate in the cash value account, the premium can be paid at any time but the policy will lapse if there isn’t enough money to cover annual mortality charges and administrative costs.
- Variable Life Insurance
A policy that combines protection against premature death with a savings account that can be invested in stocks, bonds, and money market mutual funds at the policyholder’s discretion.
Health Insurance Terms
- Accident and Health Insurance
Coverage for accidental injury, accidental death, and related health expenses. Benefits will pay for preventative services, medical expenses and catastrophic care, with limits.
- Coinsurance
In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.
- 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.
- MIB, Inc.
A nonprofit organization established to provide information to insurers about impairments that applicants have admitted to, or that other insurers have detected, in connection with previous applications for insurance. Formerly known as Medical Information Bureau.
- Point-Of-Service Plan
Health insurance policy that allows the employee to choose between in-network and out-of-network care each time medical treatment is needed.
- Pre-existing Condition
(1) According to most group health insurance policies, a condition for which an individual received medical care during the three months immediately prior to the effective date of her coverage. (2) According to most individual health insurance policies, an injury that occurred or a sickness that first appeared or manifested itself within a specified period—usually two years—before the policy was issued and that was not disclosed on the application for insurance.
- Preferred Provider Organization
Network of medical providers which charge on a fee-for-service basis, but are paid on a negotiated, discounted fee schedule.
Auto Insurance Terms
- Auto Insurance Policy
There are basically six different types of coverages. Some may be required by law. Others are optional. They are:
Bodily injury liability, for injuries the policyholder causes to someone else.
Medical payments or Personal Injury Protection (PIP) for treatment of injuries to the driver and passengers of the policyholder’s car.
Property damage liability, for damage the policyholder causes to someone else’s property.
Collision, for damage to the policyholder’s car from a collision.
Comprehensive, for damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods, and riots), and theft.
Uninsured motorists coverage, for costs resulting from an accident involving a hit-and-run driver or a driver who does not have insurance.
- 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.
- Bodily Injury Liability Coverage
Portion of an auto insurance policy that covers injuries the policyholder causes to someone else.
- Comprehensive Coverage
Portion of an auto insurance policy that covers damage to the policyholder’s car not involving a collision with another car (including damage from fire, explosions, earthquakes, floods and riots), and theft.
- 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, including getting a job, finding a place to live, securing a loan, getting telephone service 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.
- Deductible
The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.
- 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.
- 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.
- Guaranty Fund
The mechanism by which solvent insurers ensure that some of the policyholder and third-party claims against insurance companies that fail are paid. Such funds are required in all 50 states, the District of Columbia and Puerto Rico, but the type and amount of claim covered by the fund varies from state to state. Some states pay policyholders’ unearned premiums—the portion of the premium for which no coverage was provided because the company was insolvent. Some have deductibles. Most states have no limits on workers compensation payments. Guaranty funds are supported by assessments on insurers doing business in the state.
- Insurance Score
Insurance scores are confidential rankings based on credit information. This 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. And people who manage their money responsibly also tend to handle driving a car responsibly. Some insurance companies use insurance scores as an insurance underwriting and rating tool.
- Liability Insurance
Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.
- Original Equipment Manufacturer Parts (OEM)
Sheet metal auto parts made by the manufacturer of the vehicle.
- Personal Injury Protection Coverage (PIP)
Portion of an auto insurance policy that covers the treatment of injuries to the driver and passengers of the policyholder’s car.
- 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.
- Subrogation
The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is legally liable for it.
- Total Loss
The condition of an automobile or other property when damage is so extensive that repair costs would exceed the value of the vehicle or property.
- Umbrella Policy
Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.
- Uninsured Motorists Coverage
Portion of an auto insurance policy that protects a policyholder from uninsured and hit-and-run drivers.
Commercial Insurance Terms
- Blanket Insurance
Coverage for more than one type of property at one location or one type of property at more than one location. Example: chain store
- Boiler and Machinery Insurance
Often called Equipment Breakdown, or Systems Breakdown insurance. Commercial insurance that covers damage caused by the malfunction or breakdown of boilers, and a vast array of other equipment including air conditioners, heating, electrical, telephone and computer systems.
- 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.
- 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
(Also known as 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 income 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. Also known as business interruption insurance. - Business Owners 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.
- Claims Made Policy
A form of insurance that pays claims presented to the insurer during the term of the policy or within a specific term after its expiration. It limits liability insurers’ exposure to unknown future liabilities.
- Coinsurance
In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20 percent health insurance coinsurance clause, the policyholder pays for the deductible plus 20 percent of his covered losses. After paying 80 percent of losses up to a specified ceiling, the insurer starts paying 100 percent of losses.
- Commercial General Liability Insurance (CGL)
A broad commercial policy that covers all liability exposures of a business that are not specifically excluded. Coverage includes product liability, completed operations, premises and operations, and independent contractors.
- 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.
- Contingent Liability
Liability of individuals, corporations, or partnerships for accidents caused by people other than employees for whose acts or omissions the corporations or partnerships are responsible.
- Directors and Officers Liability Insurance (D&O)
Directors and officers liability insurance (D&O) covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in suits against the company. There are a variety of D&O coverages. Corporate reimbursement coverage indemnifies directors and officers of the organization. Side-A coverage provides D&O coverage for personal liability when directors and officers are not indemnified by the firm. Entity coverage, for claims made specifically against the company, is also available. D&O policies may be broadened to include coverage for employment practices liability.
- Earned Premium
The portion of premium that applies to the expired part of the policy period. Insurance premiums are payable in advance but the insurance company does not fully earn them until the policy period expires.
- 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.
- Employee Dishonesty Coverage
Covers direct losses and damage to businesses resulting from the dishonest acts of employees.
- Employer's Liability
Part B of the workers compensation policy that provides coverage for lawsuits filed by injured employees who, under certain circumstances, can sue under common law.
- Employment Practices Liability Coverage
Liability insurance for employers that covers wrongful termination, discrimination and other violations of employees’ legal rights.
- Environmental Impairment Liability Coverage
A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.
- Errors and Omissions Coverage (E&O)
A professional liability policy covering the policyholder for negligent acts and omissions that may harm his or her clients.
- 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 nonadmitted carrier.
- 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.
- Inland Marine Insurance
This broad type of coverage was developed for shipments that do not involve ocean transport. 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.
- Liability Insurance
Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.
- Occurrence Policy
Insurance that pays claims arising out of incidents that occur during the policy term, even if they are filed many years later.
- Pollution Insurance
Policies that cover property loss and liability arising from pollution-related damages, for sites that have been inspected and found uncontaminated. It is usually written on a claims-made basis so policies pay only claims presented during the term of the policy or within a specified time frame after the policy expires.
- Product Liability
A section of tort law that determines who may sue and who may be sued for damages when a defective product injures someone. No uniform federal laws guide manufacturer’s liability, but under strict liability, the injured party can hold the manufacturer responsible for damages without the need to prove negligence or fault.
- Product Liability Insurance
Protects manufacturers’ and distributors’ exposure to lawsuits by people who have sustained bodily injury or property damage through the use of the product.
- Professional Liability Insurance
Covers professionals for negligence and errors or omissions that injure their clients.
- 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.
- Risk Retention Groups
Insurance companies that band together as self-insurers and form an organization that is chartered and licensed as an insurer in at least one state to handle liability insurance.
- Surety Bond
A contract guaranteeing the performance of a specific obligation. Simply put, it is a three-party agreement under which one party, the surety company, answers to a second party, the owner, creditor or “obligee,” for a third party’s debts, default or nonperformance. Contractors are often required to purchase surety bonds if they are working on public projects. The surety company becomes responsible for carrying out the work or paying for the loss up to the bond “penalty” if the contractor fails to perform.
- 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.
- Umbrella Policy
Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.
- Unearned Premium
The portion of a premium already received by the insurer under which protection has not yet been provided. The entire premium is not earned until the policy period expires, even though premiums are typically paid in advance.
- Workers Compensation
Insurance that pays for medical care and physical rehabilitation of injured workers and helps to replace lost wages while they are unable to work. State laws, which vary significantly, govern the amount of benefits paid and other compensation provisions.
- Wrap-Up Insurance
Broad policy coordinated to cover liability exposures for a large group of businesses that have something in common. Might be used to insure all businesses working on a large construction project, such as an apartment complex.