Glossary of Insurance Terms

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"A" (or Judgment) Rates - Rates that are based on the judgment of the underwriter on an individual risk basis and not supported by loss experience.

Abandonment - A term that applies to property and signifies both a relinquishing of it and the letting go of all legal rights to it, as well, with the intent to claim a total loss. Abandonment of property to an insurance company is something insureds are expressly prohibited from doing in most property polices.

Abandonment clause - A property policy provision that stipulates that the insurer need not accept any damaged property that the insured chooses to relinquish.

Absolute liability - The performance of an act so dangerous as to be sufficient to trigger liability regardless of the degree of negligence. Triggering explosives is often used as an example. Sending workers aloft for construction or repair at elevated heights is another. ``Strict liability'' is another term that is sometimes used.

Accident - An unforeseen, unintended, and unexpected event, which occurs suddenly and at a definite place. See Occurrence.

Accident frequency - The rate of occurrence of accidents. Along with accident severity, it is taken into account in ratemaking.

Accident severity - The measure of the seriousness of a claim, measured in, for example, dollars. Along with frequency, it is taken into account in ratemaking.

Accident year experience - Measures premiums and losses relating to accidents which occurred during a 12-month period.

Accommodation line - Normally unacceptable risks that are written as an ``accommodation'' to an agent or broker who has an overall profitable relationship with the insurer. For example: a personal auto risk with a teenage driver of a sports car might be written if the other lines of insurance which it carries for the customer were profitable; or if the agency has had a good

and profitable relationship with the insurer.

Account current - A monthly statement provided by an insurer detailing an agent's premiums, commissions, cancellations, and endorsements.

Account selling - Account selling is trying to handle all of a client's insurance needs, rather than providing for only a portion of those needs.

Accounts receivable insurance - Pays for the cost of reconstructing accounts receivable records that have been damaged or destroyed by a covered peril. Even more important, it covers any payments that cannot be collected because records cannot be reconstructed.

Acquisition cost - The expense undertaken to acquire new business. The concept applies to both agents and companies. The largest portion of an insurer's acquisition cost is agent's or sales representative's commission or bonus.

Act of God - Acts of nature ? the term was once widely used to distinguish between man-made events, i.e., fire, collision, and nature's rampages in wind and flood.

Active malfunction - In products insurance, a defect or malfunction in a product that damages the property of the user.

Actual cash value (ACV) - A method for placing value on property as of the time of its loss or damage. ACV may be determined as replacement cost, new, less depreciation. The market value of an item may be used to help determine actual cash value. Contrast with replacement cost.

Actual cash value appraisal - An appraisal to determine the actual cash value of a building and related personal property.

Actuary - A person highly trained in mathematics and statistics who calculates rates and dividends, and provides other statistical information for an insurance company.

Additional insured - One who qualifies as ``insured'' under the terms of a policy even though not named as insured. Officers of a corporation may be included as insureds under the terms of a policy written in the name of the corporation.

Additional living expense insurance - This coverage, found in homeowners forms, provides payment for extra expenses made necessary by the insured's inability to reside in the insured dwelling because of a covered loss -- for example, restaurant meals and hotel bills. The amount payable is the difference between normal household expenses and the increase.

Adhesion contract - A standardized set of agreements offered by one (usually the stronger) party to another on a ``take it or leave it'' basis. An insurance policy is an example of such a contract. The insurer offers a personal auto policy, for example, that an individual may ``adhere to'' (or not) but in any case the individual may not change any of its terms. Because it has the stronger position, the insurance company has the burden to spell out its terms precisely. Such contracts are interpreted strictly against the author of the contract. Not to be confused with aleatory contract.

Adjuster - A person who may act either on behalf of the insurance company or the insured in settling a claim. Employee adjusters work for an insurer; independent adjusters represent the insurance company on a fee basis; and public adjusters represent the insured on a fee basis.

Admitted assets - The highly liquid assets of an insurer permitted by the state to be taken into account when reporting financial condition.

Admitted company - An insurance company that is licensed (admitted) to conduct business within a given state.

Admitted market - The range of insurance available through admitted companies.

Advance premium - Also called ``deposit premium,'' an advance premium is a downpayment on what will be the final premium, in policies where the final premium is subject to audit.

Adverse selection - The tendency of poorer than average risks to buy and

maintain insurance. Adverse selection occurs when insureds select only those

coverages that are most likely to have losses.

Adverse underwriting decision - Any decision made by an underwriter that is not favorable to the insured. Such decisions involve termination, declination, higher rates, or reduction in coverage. Another example is the placing of a risk in a residual market or with an unauthorized insurer.

Advertising injury - Claim arising out of slander, libel, copyright infringement, or misappropriation of advertising ideas. Coverage is provided as part of coverage B of the commercial general liability policy.

Affinity marketing - Targeting marketing efforts toward one group or category of client. Examples include: grocery stores; all the employees of one company; or employees in one industry. Group business is a type of affinity marketing.

Agency company - An insurance company that produces business through an agency network. See direct writer.

Agency contract - The legal agreement between an insurance agency and the in-surer detailing the terms of representation.

Agency plant - The total force of agents representing an insurer.

Agent - One who solicits, negotiates or effects contracts of insurance on be-half of an insurer. His right to exercise various functions, his authority, and his obligations and the obligations of the insurer to the agent are subject to the terms of the agency contract with the insurer, to statutory law, and to common law.

Agent’s appointment - The act by an insurer that grants an agent the authority to act as an agent for the insurer. In most states, agents must be licensed and appointed, prior to being allowed to sell insurance.

Agent’s authority - The authority of an insurance agent to act on behalf of the insurer he or she represents. There are several types including: express authority (authority to act on specific instructions only); implied authority (actions taken in accordance with prevailing custom); or apparent authority (actions based on appearances created by the agent and acquiesced to by the principal).

Agents errors and omissions insurance - Insurance obtained by the insurance agent to guard against loss caused by an unintentional failure to properly insure (or recommend insurance to) a client.

Agent’s license - A certificate of authority from the state that permits the agent to conduct business.

Aggregate deductible - A deductible provision in some property insurance contracts where all covered losses during a year are figured together and an insurer pays only when the aggregate deductible amount is exceeded.

Aggregate excess reinsurance - A type of excess reinsurance treaty that sometimes is called stop loss or excess of loss ratio reinsurance. The retention in this type of agreement is calculated based on all losses over the period of time that is stated in the treaty. The reinsurer is responsible for the amount of losses between the retention and the limit on the treaty.

Aggregate limit - The maximum amount an insurer will pay under a policy in any one policy period.

Agreed amount clause - An agreement between underwriter and insured whereby, in exchange for the purchase of coverage in an amount specified by the underwriter, the insured is protected from a coinsurance penalty. Agreed value clause - Though rare, some policies cover for a value agreed upon at the time of writing; if the property is lost because of an insured peril, the amount stated in the policy will be paid. Fine arts insured under a personal articles floater or homeowners scheduled personal property endorsement are examples.

Aircraft coverages - Though aircraft have long been an important element in the lives of most Americans, insurance of aircraft exposures has remained outside the mainstream of property and liability insurance markets. Aircraft hull and liability insurance is the counterpart of personal or commercial auto policies coverage. Aircraft products insurance is the counterpart of products liability coverage. Air cargo insurance is mirrored in motor truck cargo. Hangarkeepers liability is akin to garagekeepers coverage. As with any specialty line of insurance, the absence of standardized forms limits practice to specialists in the line.

Alcoholic Beverage Control (ABC) laws, see Dram shop laws.

Aleatory contract - A contract in which the number of dollars to be given up by each party is not equal. Insurance contracts are of this type, as the policyholder pays a premium and may collect nothing from the insurer or may collect a great deal more than the amount of the premium if a loss occurs. Not to be confused with contract of adhesion.

Alien insurer - An insurance company formed under the laws of a country other than the one it is doing business in.

Alienated premises - Property that has been sold by an insured.

All risks - A property policy expression now out of fashion. It was used to designate contracts that promised coverage against "all risks of direct physical loss" in contrast to forms that covered for specific, named perils. The word "all" came to be perceived as open to broader interpretation than insurers intended and it was dropped in favor of the promise to cover "risks of physical loss." See Named perils and also Open perils.

Allied lines - Lines of insurance that cover for perils other than fire, that are usually sold with fire insurance, e.g., "fire and allied lines."

Alternative dispute resolution (ADR) - Methods other than lawsuits that are designed to resolve legal disputes. Examples are arbitration and mediation.

Ambiguity - A standard policy provision that proves to be ambiguous may be interpreted in the light most favorable to the insured.

American Agency System - The system of selling insurance through agents who receive omissions in lieu of salary.

American Association of Insurance Services (AAIS) - An association of insurance companies providing filing and various technical services on behalf of its member companies.

Americans with Disabilities Act (ADA) - Passed by Congress in 1990, this act requires that "reasonable accommodation" be made in public accommodations, including the workplace, for those with physical or mental disability.

American College, The - An educational institute conferring the Chartered Life Underwriter (CLU) designation.

American Lloyds - Unincorporated associations of individual underwriters who assume specified portions of liability under each policy issued. There is no connection with Lloyd’s of London.

Anniversary date - The anniversary of the original date of issue of a policy as shown in the declarations.

Annual aggregate deductible - A deductible applied annually to the total amount paid in claims during a policy period. Claims are generally subject to a per-occurrence deductible; the aggregate is the limit beyond which no further deductibles are applied.

Anti-coercion laws - Usually contained in a section of the state code entitled "Unfair Trade Practices," these provisions define the use of coercion as an unfair practice and, hence, a violation of the state law.

Anti-rebating laws - Laws found in all but two states which prohibit an agent’s refunding part of a commission to an applicant as an inducement for placing insurance through the agent. California and Florida allow rebating of commissions on a limited basis.

Apparent authority - The perceived ability of an agent to bind an insurance contract to an insurance company. If an agent or agency holds themselves out as representing a particular company it is reasonable for the public to assume that such authority is established contractually, even if it is not. Apportionment - The method of dividing a loss between multiple insurers that cover the same loss.

Appraisal - A determination of the value of property for the purposes of determining the proper amount of insurance to be bought or in adjusting a loss.

Appurtenant structure - Another structure on the same premises as the principal structure. A detached garage on a dwelling premises is "appurtenant" to the dwelling. Older homeowners forms refer to the "other structures" protected under the HO Coverage B as "appurtenant structures."

Arbitration clause - The clause in an insurance policy that spells out how disagreements over a claim are settled.

Arson - The intentional setting afire of property.

Assigned risk - A risk not be generally acceptable to any insurance company but for which the law says that insurance must be acquired. Personal auto liability is one such necessary coverage. Insurance companies doing personal auto business in a state can be required to accept assignment of a portion of the state’s unacceptable drivers as insureds.

Assigned risk plan, see Auto insurance plan.

Association captive - A captive insurer owned by the members of a sponsoring organization or group, such as a trade association.

Assumed liability - Liability assumed under contract or agreement. More commonly known as contractual liability.

Assured - A party who is a potential beneficiary of an insurance contract. The synonym "insured" is more commonly used.

Attorney-in-fact - An individual who is given authority to execute legal documents, including bonds; or the manager of a reciprocal exchange, which is an insurance arrangement whereby risk is transferred to other members. The attorney-in-fact need not be a lawyer.

Attractive nuisance - Condition that can attract and injure children. The occupants of land on which such a condition exists are liable for injuries to children. Examples of attractive nuisance: swimming pools; earth moving equipment; playground equipment.

Audit - Some policies (such as workers compensation) are written subject to an audit. Since workers compensation premium is based on the insured’s payroll, the insurer is entitled to audit the insured’s records at the end of the policy to verify that it has collected an adequate premium for the amount of payroll to which it was exposed.

Authorized insurer - An insurer granted permission by a state to sell specific lines of insurance within that state.

Auto insurance plan - Program set up by various states to ensure that everyone with a valid driver’s license will be able to purchase auto insurance. All auto insurers operating within a state are assigned insureds in proportion to the amount of auto premium written.

Automobile liability insurance - Insurance in which the insurer agrees to pay all sums for which the insured is legally obligated because of bodily injury or property damage arising from the ownership, maintenance, or use of an auto.

Automobile medical payments - Insurance applying to the medical, hospital, or funeral expenses of anyone injured while on or in an insured automobile. The coverage is not dependent on liability, being triggered simply by an accident. It may be included in either the Business Auto Policy or the Personal Auto Policy. See also Premises medical payments.

Auto physical damage insurance - Insurance on the vehicle, itself. This usually is broken down into collision and other than collision coverages.

Automobile shared market - A program in which all automobile insurers in each state make coverage available to car owners who are unable to obtain auto insurance in the voluntary market.