Insurance Terminology

A Glossary of Insurance terms that might sound "foreign" to you! Some of these terms reference corresponding articles that we have provided in the "Articles and Ideas" section of this website for a greater understanding of some complex insurance concepts. NOTE: Examples of the specific terms, where relevant, will appear in italics.
Accident
An incident at a specific time and place in which a loss occurs.
	EXAMPLE: At 3:00 p.m., in front of the shopping center, a car backed into another car. Both parties examined their vehicles and there was no damage, therefore no accident was reported because a loss did not occur.
Actual Cash Value (ACV)
What it will cost to replace an item at the time of loss after subtracting depreciation. Common method of determining the amount of reimbursement for a loss.
	EXAMPLE: Carl's stereo was destroyed by a fire in his home. His insurance company determined Carl's reimbursement amount for the stereo was $60 by taking the current value of a comparable new stereo and subtracting any depreciation factors (wear and tare, age, etc.) Replacement Cost - Depreciation = ACV
Adhesion Contract
A contract where one party has more power than the other in composing and drafting the contract. An insurance policy is an adhesion contract because the insurance agent and company have the power in composing and drafting the contract.
	EXAMPLE: When Jamie decided to purchase an insurance policy, she made sure she took the time to read it carefully because she knew it was an adhesion contract, a contract in which her insurance agent and company wrote all the policy information and rules.
Agent
A state-licensed professional who represents an insurance company in selling and servicing policies. In most states, agents are required to undergo approximately 40 hours of passing classroom instruction for the type of insurance they are qualifying for to be approved to take the state insurance exam. After successfully completing the state exam an agent will need to take continuing education classes to keep her/his license current. Only agents are allowed to sell and service insurance policies and only in the states they are licensed in.
	EXAMPLE: Jim moved to Texas, and called his insurance agent to change his address. Jim's agent put him in contact with an agent in Texas who could help him obtain another policy, because Jim's current agent was not licensed in Texas.
Automobile Insurance Plan
A state sponsored plan for individuals who are not able to obtain insurance under private companies. This coverage is usually very expensive and will have very limited coverage's.
	EXAMPLE: Tina has had 3 at-fault accidents in the past month. Since she is considered such a high risk, she has not been able to find an insurance company that will accept her. Finally she contacted her state commissioner and was able to get enough coverage to drive again.
Binder
Immediate insurance coverage that can be in oral or written form. Usually provides temporary coverage for a specified time until a formal policy is accepted or denied.
	EXAMPLE: Until Joe's credit and past insurance history could be researched, his agent gave him a binder for 10 days. The binder gave Joe all the same coverage's and rights as he would have with a regular insurance policy, but would automatically cease after the 10 days.
Blanket Insurance
An insurance policy that covers more than one piece of property at a specific location or multiple items at multiple locations.
	EXAMPLE: Included in his homeowners policy, John had blanket coverage on his personal property, therefore he was not worried when he sometimes would take his video games over to his friend's house.
Bodily Injury (BI)
In most policies bodily injury means sickness, disease, injury, and death arising from sickness, disease, or injury.
	EXAMPLE: Sandy had received an extreme case of poison ivy when she went to her neighbor's pool party. Sandy's neighbor's insurance company concluded that Sandy's neighbor was liable for Sandy's medical bills due to the poison ivy.
Broker
Someone who represents you with your insurance transactions, unlike an agent, who represents the insurance company.
	EXAMPLE: Since Joe had an insurance broker, he did not deal directly with any insurance companies or agents. When he needed changes to his policy or had questions or concerns, he contacted his broker who in turn would find the information Joe needed.
Burglary
Coverage against loss as a result of forced entry into premises.

Cancellation
The termination of insurance coverage during the policy period. Flat cancellation is the cancellation of a policy as of its effective date, without any premium charge.

Casualty Insurance
The unrelated coverage's of liability, auto, workers compensation, aviation, crime, and surety bonds.
	EXAMPLE: Bobbie wanted to obtain coverage for her home and auto so therefore needed to see an agent licensed in property and casualty insurance.
Claim
A request to an insurance company to pay for a loss. After a claim is requested or filed an evaluation process will begin to determine if the loss is the responsibility of the requested company.
	EXAMPLE: Janice was in an accident and gathered all the necessary information needed. She then returned home and called her insurance company to file a claim.
Claimant
The first or third party. That is any person who asserts right of recovery.

Collision Coverage
Coverage that pays to repair or replace your car after an accident or collision. A deductible can apply depending on the insured's requests at the start of the policy. In most states this is an optional coverage and is not usually a required covarage.
	EXAMPLE: After the auto accident Janice reported it to her insurance agent. Her agent said the claim would be covered by the collision coverage she had requested at the start of her policy.
Comprehensive Coverage
Coverage that helps pay for losses to an insured car due to fire, theft, or other losses that are not the result of a collision as stated in the insured's policy. A deductible can apply depending on the insured's requests at the start of the policy. In most states this is an optional coverage and is not usually a required coverage. (note: Colliding with an animal falls under comprehensive coverage)
	EXAMPLE: Tina's car was hit by a rock while she was driving. She contacted her insurance company and they reassured her the loss would be taken care of by the comprehensive coverage she selected when buying her policy.
Decline
The company refuses to accept the request for insurance coverage.

Deductible
The amount the insured is required and obligated to pay by the insurance policy. The deductible is chosen by the insured and is usually applied to coverage's such as comprehensive and collision. Generally the lower the deductible, the higher the insurance premium.
	EXAMPLE: After Pat filed her claim her agent said that they would cover the entire cost of replacing the hood of her car after she contributed her deductible of $500.
Disability Insurance
Health insurance that provides income payments to the insured wage earner when income is interrupted or terminated because of illness, sickness, or accident.

Endorsement
Amendment to the policy used to add or delete coverage. Also referred to as a "rider."

Exclusion
Certain causes and conditions, listed in the policy, which are not covered.

Expiration Date
The date on which the policy ends.

Face Amount
The dollar amount to be paid to the beneficiary when the insured dies. It does not include other amounts that may be paid from insurance purchased with dividends or any policy riders.

Financial Guarantee Insurance
A surety bond, insurance policy or, when issued by an insurer, an indemnity contract and any guaranty similar to the foregoing types,

Fire Insurance
Coverage for loss of or damage to a building and/or contents due to fire.

Grace Period
A period (usually 31 days) after the premium due date, during which an overdue premium may be paid without penalty. The policy remains in force throughout this period.

Guaranteed Insurability
An option that permits the policy holder to buy additional stated amounts of life insurance at stated times in the future without evidence of insurability.

Health Insurance
A policy that will pay specifies sums for medical expenses or treatments. Health policies can offer many options and vary in their approaches to coverage.

Homeowner Insurance
An elective combination of coverages for the risks of owning a home. Can include losses due to fire, burglary, vandalism, earthquake, and other perils.

Incontestable Clause
A policy provision in which the company agrees not to contest the validity of the contract after it has been in force for a certain period of time, usually two years.

Insured Person
All who are covered and listed by the insurance policy. Most insurance companies require every licensed driver living with you must be listed on your insurance policy unless they have a completely separate policy of their own. Examples: After Pat filed her claim her agent said that they would cover the entire cost of replacing the hood of her car after she contributed her deductible of $500.
	EXAMPLE: Although Pam's son went to college for 2 semesters out of the year, he still had to be listed as a insured person on her insurance policy since he still used his home address as his residence and visited almost every weekend.
Insurer
The insurance company.

Legal Insurance
Prepaid legal insurance coverage plan sold on a group basis.

Liability
One's legal responsibility to pay for damages due to an accident or loss. Liability coverage for automobile insurance is the one coverage that is required in all states.
	EXAMPLE: It was determined by the police officer that Dana was at fault for the automobile accident she was involved in, therefore Dana's liability coverage paid for the other party's medical expenses and repairs to their car.
Life Insurance
A policy that will pay a specified sum to beneficiaries upon the death of the insured.

Limits
The maximum amount of money an insurance company will pay for each coverage. For additional coverage some choose umbrella insurance to go above and beyond their home and auto liability limits. Each state sets different limits on required minimum coverage for automobile insurance.
	EXAMPLE: Jason decided to go with the minimum policy limits required by law when he bought his policy. Unfortunately he got into an accident that was his fault and he found, like many others, that his minimum limits did not cover the entire cost required and he had to pay a large amount of his own money to cover his legal liability responsibility.
Loan Value
The amount which can be borrowed at a specified rate of interest from the issuing company by the policyholder, using the value of the policy as collateral. In the event the policyholder dies with the debt partially or fully unpaid, then the amount borrowed plus any interest is deducted from the amount payable.

Loss
A loss is any type of damage to property due to numerous reasons including fire, theft, and flood. It also includes harms suffered by persons.
	EXAMPLE: Micky's loss was his home theater system, which was damaged in his small house fire.
Marine Insurance
Coverage for goods in transit and the vehicles of transportation on waterways, land, and air.

Material Misrepresentation
The policyholder/applicant makes a false statement of any material (important) fact on his/her application. For instance, the policyholder provides false information regarding the location where the vehicle is garaged.

Medical Payments Coverage
This type of coverage provides payments for medical treatments for bodily injury due to a covered accident and up to the coverage limit. It is generally for the people in your vehicle and has no deductible. This should be used promptly and is encouraged by insurance companies to do so. One reason for this coverage is to help remedy the injured person immediately so they will not feel anguished by what happened and want to sue the at fault driver.
	EXAMPLE: Sandy was in her friends car when there was an accident and she hit her head on the dash. Sandy's friend's medical payments coverage reimbursed Sandy for the few stitches she received at the hospital.
Misquote
An incorrect estimate of the insurance premium.

Mortgage Insurance
Life insurance that pays the balance of a mortgage if the mortgagor (insured) dies.

Peril
The cause of a possible loss. For example, fire, theft, or hail.
	EXAMPLE: Perils that are usually automatically covered under a basic homeowners policy are fire, lightning, and internal explosion.
Personal Injury Protection Coverage
Optional coverage for things not usually covered in general policies such as lost wages and childcare expenses. The coverage would be effective due to bodily injury caused by a covered accident.
	John's personal injury protection coverage supplied a portion of his job salary while he was not able to work due to injuries in his auto accident.
Policy
The written contract of insurance.

Policy Limit
The maximum amount a policy will pay, either overall or under a particular coverage.

Premium
The amount of payment due to the insurance company in exchange for the insurance policy. Depending on the length of the policy term, the premium is sometimes paid at the beginning or in monthly payments. Regardless of the payment method one is insured to the full value of the policy at any time during the policy period as long as payments are on time as stated in the insurance policy.
	EXAMPLE: Although John just bought his insurance policy yesterday and the insurance company did not require a payment until next month, the accident he had today will be covered to the full extent of the policy.
Premium Financing
A policyholder contracts with a lender to pay the insurance premium on his/her behalf. The policyholder agrees to repay the lender for the cost of the premium, plus interest and fees.

Property Damage
Damage to another person's property. The purpose of liability insurance is to cover property damage to a third party resulting from the negligent or intentional acts of an insured.

Pro-rata Cancellation
When the policy is terminated midterm by the insurance company, the earned premium is calculated only for the period coverage was provided. For example: an annual policy with premium of $1,000 is cancelled after 40 days of coverage at the company's election. The earned premium would be calculated as follows: 40/365 days X $1,000=.110 X $1,000=$110.

Quote
An estimate of the cost of insurance, based on information supplied to the insurance company by the applicant.

Rating Factors
Facts including insurance history, loss history, credit rating, age, and demographic area that help determine a customers cost of insurance.
	EXAMPLE: Katy was upset when she found out moving was going to raise her insurance costs because her new demographic area was rated differently than her present address.
Reinstatement
The restoring of a lapsed policy to full force and effect. The reinstatement may be effective after the cancellation date, creating a lapse of coverage. Some companies require evidence of insurability and payment of past due premiums plus interest.

Replacement Cost
The cost to repair or replace an insured item. Some insurance only pays the actual cash or market value of the item at the time of the loss, not what it would cost to fix or replace it. If you have personal property replacement cost coverage, your insurance will pay the full cost to repair an item or buy a new one once the repairs or purchases have been made.

Replacement Value
The full cost to repair or replace the damaged property with no deduction for depreciation, subject to policy limits and contract provisions.

Rider
Usually known as an endorsement, a rider is an amendment to the policy used to add or delete coverage.

Settlement
The amount the insurance company pays to the party that was injured by a covered loss. The payment amount can be in other forms besides money such as replacements.
	EXAMPLE: When Micky's home theater system was ruined in his small house fire his insurance company paid a settlement to Micky by replacing the system with a comparable model.
Short-rate Cancellation
When the policy is terminated prior to the expiration date at the policyholder's request. Earned premium charged would be more than the pro-rata earned premium. Generally, the return premium would be approximately 90 percent of the pro-rata return premium. However, the company may also establish its own short-rate schedule.

Solicitor
A licensed employee of a fire and casualty agent or broker who may act for the agent or broker in some circumstances.

Sprinkler Insurance
Coverage for property damage caused by untimely discharge from an automatic sprinkler system.

Surcharge
An extra charge applied by the insurer. For automobile insurance, a surcharge is usually for accidents or moving violations.

Surrender
To terminate or cancel a life insurance policy before the maturity date. In the case of a cash value policy, the policyholder may exercise one of the nonforfeiture options at the time of surrender.

Title Insurance
Coverage for losses if a land title is not free and clear of defects that were unknown when the title insurance was written.

Underwriting
The process of selecting applicants for insurance and classifying them according to their degrees of insurability so that the appropriate premium rates may be charged. The process includes rejection of unacceptable risks.

Uninsured Motorist Bodily Injury
Will pay you and your passengers for BODILY INJURY cause by a negligent uninsured motorist, a hit-and-run driver, or by a driver whose insurer is insolvent.

Uninsured Motorist Property Damage
Will pay for damages to your automobile, set up to a limit, when caused by a negligent unisured motorist.

Waiting Period
A period of time set forth in a policy which must pass before some or all coverages begin.
	EXAMPLE: Sometimes, after an agent prepares a quote for a customer the customer may decide to complete an application to begin insurance. When the customer has completed the application for insurance there may be a waiting period before the policy is in force or begins. If an accident happens within this waiting period, the customer may not be covered for a loss.
Workers Compensation Insurance
Coverage typically providing four types of benefits (medical care, death, disability, and rehabilitation) for employee job-related injuries or diseases as a matter of right (without regard to fault).
	EXAMPLE: When John got injured while working at his job, his employer had to pay for John's medical care due to John's job-related injury because of the Workers Compensation Law in his employer's state.