Chapter 1 - Insurance Terms and Related Concepts Flashcards
Law of Large Numbers
The larger the sample size the closer you get to a true average
Underwriting
The process insurance companies use to decide whether to accept or reject an application for a policy. Underwriters evaluate the risk and exposures of potential policy holders.Underwriters determine how much cover a policy holder receives, how much the policyholder pays, and whether or not to accept the risk to insure a potential holder.Underwriting involves evaluating risk exposure and determining premiums.
Peril
A cause of property losses within context of insurance contracts i.e. Natural disasters, vandalism, accidental discharge, and theft
Hazard
A situation that poses a level of threat. Usually dormant or potential with only a theoretical risk of harm. Can become “active” and create an emergency situation.
Direct Loss
Direct physical loss to property
Indirect loss
Loss that is not a direct damage of a peril but is a consequence of direct loss.e.x. Loss of business (Indirect loss) due to a fire destroying a storefront (Direct loss)
Principal of Indemnity
An insurance policy stating that the insured may not be compensated more than their economic loss
Property Insurance
Insurance coverage for real and personal property
Insurance Agreement
The section of the insurance policy specifying what the insurance policy will provide coverage for in exchange for a premium
Deductible
Amount paid by the insured before payments are made by the insurance provider, applied per occurrence. Deductibles are typically larger in Texas than other states and are usually a percentage deductible always taken from Coverage A. Specified in the Declaration Page
Cancellation
Termination of insurance agreement by either the insurance company or the insured.
Limit of Liability
The maximum amount an insurance policy will pay. Specified in the Declaration Page
Loss Settlement
The process used to determine the amount of the loss.There are four methods used to determine a loss settlement.
What are the four methods to determine a loss settlment?
- Actual Cash Value (ACV)
- Replacement Cost (RCV)
- Agreed Cost
- Market Value
Actual Cash Value
The value of property, based on the current cost to replace it, minus applicable depreciation.
Replacement Cost
The cost associated with replacing property at current market prices
Agreed Value
Amount agreed upon by the insured and the insurer at the time of the policy inception
Market Value
The amount that the property is worth in a competitive market. This amount is accepted by the buyer and the seller
Casualty Insurance
Protects a person from financial loss arising from bodily injury or property damage to others arising out of:
- Ownership of property
- Operation of motor vehicles
- Personal activities
- Business activities
- Burglary, robbery, and theft
- Worker’s compensation injuries
- Malpractice
Liability
A person is legally liable for an accident if they are found responsible if they are responsible for bodily injury or property damage to another property. Liability is usually a result of negligence.
Negligence
the failure to exercise care that a reasonably prudent person would exercise
Tort
A wrong that involves a breach of a civil duty owed to someone else. This breach will determine negligence. The essential elements to determine negligence are:
- Duty owed
- Duty breached
- Proximate cause
- Damages
-Punitive Damages
The amount awarded by the court in an attempt to reform or deter the defendant from engaging in similar conduct in the future.
Comparative Negligence
A partial legal defense that reduces the amount of damages a person can receive based upon their own negligence contributing to the loss
Contributory Negligence
A law defense where a person’s own negligence contributed to the harm that he or she received.
Assumption of Risk
A defense that prevents a person from recovery against a negligent party if it can be proven that the person was aware of the risks associated with the activity that the person was engaged in.
Accident
An unforeseen, unintended event; something unexpected. The point of insurance is to protect against accidents
Act of God
Natural causes with no human intervention which could not have been prevented by reasonable care or foresight.
Additional Living Expenses
Extra charges covered by Homeowner Policies over and above the policyholder’s customary living expenses due to damages by a covered peril that makes the home temporarily uninhabitable.I.e covering the cost of the hotel in which the policy holder stays at while their house is being repaired.It will not cover normal expenses such as mortgage on the house as that is a normal expense.
Adverse Selection
The tendency of insured’s who present a higher probability of loss to purchase or renew insurance more often than those who present a lower probability.
All Risk Insurance
Coverage providing insurance protection against loss of or damage to property arising from any causes except those causes of loss that are specifically excluded in the Exclusions section of the policy.
Appraisal
A form of dispute resolution that occurs when there is a dispute between the insured and the insurance agency regarding the amount of the claim. Both parties hire an appraiser to represent them. The two appraisers will attempt to settle the dispute.If unable to settle the dispute an umpire will adjudicate.
Attractive Nuisance
The belief that one who maintains a dangerous condition which is likely to attract children on their property is under duty to post a warning or take affirmative action to protect children from the dangers of that attraction.
Betterment
an improvement to property that puts it in better condition than it was before the occupancy or loss.
Breach of Contract
A failure to comply with terms and conditions of an insurance policy that may result in restricted coverage or void the policy
Bodily Injury
Bodily harm, sickness, or disease
Claimant
The party that makes a claim
Catastrophe
A severe disaster that involves a large population and normally generates a large amount of property damage and/or bodily injury
Coinsurance Policy
A provision requiring a specified amount of insurance based upon the value of the insured property.
an agreement between an insurance company and a business owner to share the cost of a claim
Collision
Coverage that pays for the damage to your car without regard to who caused the accident. Applies to car collisions or collisions with other objects.
Commercial General Liability
Provides commercial general liability coverage, including premise and operations, products and completed operations, and other liability options.
Comprehensive Coverage
Auto coverage that pays for damage or loss from causes other than an accident. I.e. flood, hail, vandalism, fire, and theft
Concealment
The act of purposely not reporting information that would affect the issuance or rate of an insurance contract. Concealment can give the insurer grounds to nullify the contract or not pay out a claim.
Concurrent Causation
The insurance theory stating that if loss or damage is a result of more than one cause, one of which is covered while the other is not, the damages are still likely to be covered by the insurer.
Conditions
The part of the insurance policy that details the rights and duties of the insured and the insurance company in the policy
Damages
The amount claimed by or awarded to an injured party as compensation for liability owing to bodily injury or property damage.
Declarations page
The part of the written insurance policy that states all of the policy’s specifics, including the name of the policy holder, the type of properties insured, the terms, and the term limits for the coverage.
Depreciation
The act of lowering an item’s value due to use or wear and tear, based upon age, condition, and life expectancy.
Endorsement
A specific addition to a policy that alters the coverage and therefore the price of a policy. They can either add or remove specific types of coverage.
Exclusion
Provision in a policy that indicates what is denied coverage. I.e. wear and tear, rust, rot, contamination, and mechanical break down.
Expiration Date
The date at which a policy expires.
Exposure
The measure of probability of loss
Fraud
Any intentional lying or misinformation by the policy holder or claim adjuster in order to inflate a claims payment or receive a claims payment that would otherwise not be paid.
Incurred Expense
Expenses that have already been sustained and that have not yet been paid. An additional living expense claim is a reimbursement of incurred expenses.
Insured
The party to an insurance agreement that has insurable interest in the property that is being insured. A loss payee or lienholder can be considered an insured.
Insurer
The insurance company.
Loss History
The insured history of loss claims with other insurance companies or the company they are currently with. Loss history is an indicator of the propensity of the insured to file a loss claim.
Loss Payee
The party to whom money or insurance proceeds is paid to in the event of a loss. A mortgage company and a lien holder are examples of a loss payee.
Material Misrepresentation
A significant misstatement in an application form. If a company had access to the correct information at the time of the application it may not have agreed to the application.
Monoline Form
Coverage on property only
Non Renewal
The decision by the insurance company to not renew a policy.
Notice of Loss
A notice required by an insurance company immediately after an accident. Part of the standard provisions defining a policy holder’s responsibilities after a loss.
Occurrence
An event that results in an insured loss which results in bodily injury or damages.
Overhead and Profit
The amount of money that is dedicated to a general contractor’s cost of doing business and earning a profit. The insurance standard is 10% overhead and 10% profit. Usually added on a loss that involves at least three trades and the repair process requires coordination by a general contractor.
Personal Lines
Insurance protection for individuals and families, such as homeowners and auto insurance policies.
Policy Period
The period a policy is in force from the beginning of the effective date to the expiration date.
Premiums
Amount of money paid by the insured to obtain or maintain an insurance policy
Reserves
A company’s best estimate as to what it will pay for a claim. The amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.
Salvage
The leftover value of a claim when an insurance company recovers and sells property to reduce its financial loss.
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 found to be legally liable for the loss.
Total Loss
A situation in which property is damaged and the cost of repair and salvage exceeds the value of the property.
Umbrella Insurance
Refers to a liability insurance policy that protects the assets and future income of the name insured in addition to his or her primary policies.
Umpire
A person hired by two appraisers during the appraisal process to make the final determination as to the value of or extent of damage of the property in question.
Underinsurance
Inadequate insurance coverage by the policyholder.
Uninsured Motorist Coverage
An automobile policy option which covers one for property damage and bodily injury caused by another motorist who does not carry liability insurance.
Vacancy
The condition of a property that is not being occupied or containing furnishings.
Vandalism
willful intent to cause damage or destruction to property
4 Elements of a Legal Contract required for a contract to be legal and enforceable
- Offer and Acceptance
- Competent Parties
- Legal Object
- Consideration
Offer and acceptance
1 of 4 requirements for a contract to be legal and enforceable.
An offer must be made by one party and communicated to the other party. With an insurance contract, the offer typically comes from the applicant (insured) with a submission of an application for coverage. The insurer then accepts, rejects, or makes a counter offer (by modifying the terms of the policy). When the offer has been accepted an agreement has been reached.
Competent Parties
1 of 4 requirements for a contract to be legal and enforceable.
For a contract to be legal and enforceable, it must involve competent parties.
Legal Object
1 of 4 requirements for a contract to be legal and enforceable.
To be legal, a contract must be drawn for a legal purpose and not against public policy.
Consideration
1 of 4 requirements for a contract to be legal and enforceable.
Each contract must be characterized by a mutual giving and taking of something by each party. A valuable consideration is required to bind insurance coverage. Within insurance terms the insured’s consideration is the premium paid for coverage and the insurer’s consideration is the promise to pay for a loss caused by a covered peril.
Special Features of the Insurance Contract -Unilateral Contract
The insurance policy is unilateral in that it can be enforced by only one party. The company cannot force premium payments, but the insured can enforce the contract if all premiums are paid and a valid claim is presented.
Special Features of the Insurance Contract -Adhesion Contract
The insurance contract is an adhesion contract and must be accepted by the insured as written by the company.
- The courts interpret any ambiguities in favor of the insured, the one who did not write the contract
- The doctrine of Reasonable Expectations states that a policy must be interpreted in the way that an average person would reasonably expect it to be interpreted
Special Features of the Insurance Contract - Aleatory Contract
As an aleatory contract, the contract is valid even though they are unequal exchanges. For example the insured might pay $100 for $100,000 of coverage.
Special Features of the Insurance Contract - Valued Contract
A valued contract states the amount to be paid in the event of a covered loss.
Special Features of the Insurance Contract - Personal Contract
This type of contract insures the person who owns the property, not the property itself.
Special Features of the Insurance Contract - Conditional Contract
The conditional contract includes a number of conditions with which both the insured and the insurer must comply.
Four parts of an Insurance Contract
- Declarations
- Insuring Agreement
- Conditions
- Exclusions
Declarations
1 of 4 parts of an Insurance Contract
This section personalizes the policy for the insured. It consists of the information to identify the insured and the risk(s) to be covered. The personalized part of the policy includes:
Named Insured Insurer Policy number Policy term Coverage limits Premium amount Object, Property, or Person Insured
Insuring agreement
1 of 4 parts of an Insurance Contract
This section describes the coverage provided by the insurer.It may also specify the perils covered by the policy.
Conditions
1 of 4 parts of and Insurance Contract
The obligations or duties of each party to the contract. Failure to comply with these conditions may prevent or delay payment of a loss.
Exclusions
1 of 4 parts of an Insurance Contract
Exclusions modify the policy insurance agreement to eliminate uninsurable perils or other coverages not contemplated by the TOC (terms of contract). Exclusions also prevent duplication of coverage and tailor the coverage to meet the unique insured’s needs. Coverage excluded in most property contracts involve losses due to war, flood, and earth movement.
Endorsements
Endorsements are attached to policies to amend coverage (usually to add or remove coverage) The availability of endorsements permits the insured and insurers to effect changes in coverage.
Policy Definitions
The policy definitions section clearly defines important terms referenced in an insurance agreement and other sections of a policy.
Insured
The insured or the policy holder, is the person, business, or other entity whose interest is protected in the policy.
a. The name insured is the person, business, or other entity named in the declarations to which the policy is issued
b. The first name insured, generally found in commercial policies, is the first person listed in the declarations, and has the highest level of duties or rights under the policy
c. The additional insured is an individual or company, in addition to the insured, who is listed in the declarations and has an insurable interest in the property insured
Policy Period
The date and time specified in the declarations at which coverage begins and ends.
Policy Territory
identifies the place when coverage under a policy applies
Additional Coverage
These coverages apply only in certain circumstances, have reduced or separate limits of liability, or require the insured to meet certain requirements before they are applicable.
Third Party Provisions
The standard mortgage , or loss payable, clause specifies the rights and duties of the mortgagee or loss payee under the policy. E.x. the mortgagee may be expected to pay the premium if the insured fails to do so
No benefit to bailee ( a person or organization that has temporary possession of someone else’s property) is a condition that states that the bailee is not covered under the insured’s policy while the bailee has possession of the insured’s property.
Extensions
included in a policy to extend coverage beyond the policy limits of liability. E.x. an automobile policy has a transportation expense extension that pays for the temporary transportation costs over and above the policy limits or coverage.
Utmost Good Faith
demonstrated when an insurance company must rely on the honesty and cooperation of the insured and vis-a-versa.
Reasonable Expectations
Because insurance policies are ambiguous and difficult for the average person to understand the reasonable expectations of an insured regarding the TOPolicy will be honored even if the policy states otherwise. This principle protects the insured from technical language, hidden provisions, and confusing language.
Representations
Oral or written statements made by an individual seeking to enter a contract. They are substantially true to the best knowledge of the party making them. Unless they are fraudulent of material, misrepresentations cannot void a contract. A misstatement would be considered material if the insurer would not have issued the contract if correct information had been known at the time of application.
Warranties
Statements made by the aplicee regarding the nature of the risk to be insured. Answers to specific questions on the application are considered warranties. Unlike representations if warranted statements are found to be false, they cause the policy to be voided by the insurer.
The basic difference between a warranty and a representation is that a warranty is part of the contract itself and must be strictly complied with: a representation is usually an incidental statement preceding the formation of a contract and not actually part of it.
Because a warranty is guaranteed to be true, it establishes some restrictions concerning the liability of the insurer if the warranted act fails to take place. E.x An insured warrants that a burglar alarm will always be operational, and coverage is granted on the basis of this fact. If, following a loss, it is determined that the alarm was not operational the insurer may suspend or refuse coverage because the warranty was breached.
Concealment
Neither party may conceal facts that would have affected the formation of the contract. The doctrine prohibiting concealment requires the insured to disclose to the insurer all material facts pertaining to the risk. If material information is concealed, the insurer may void the contract.
Fraud
The intentional misrepresentation of a material fact that may void a contract.
Waiver
the intentional relinquishment of a known right by the insurance company or agent upon which the insured relies. E.x. a claim representative may overlook a policy exclusion that would normally be grounds to deny a claim, thereby waiving the policy exclusion
Estoppel
the intentional or unintentional impression by the insurance company that a certain fact exists when it does not. If the insured relies on that fact and is damaged as a result, the company is estopped from denying the claim.
Binder
a temporary contract pending issue of a policy. It is subject to the terms of the contract to be written later. A binder may be oral or written. The time period for written binders is usually 30 days but rarely more than 60 days.
Binders may usually be canceled by the company or agent two business with two business days notice
Binders cease automatically once the policy is written or declined
Binding authority is granted to an agent through the agency contract with an insurer. E.x. if an agent verbally agrees to a condition a prospect wants, an oral binder has been created subject to the requirements for effect a legal contract
Proposal
an outline or quotation of coverage and premium before any coverage is issued or in force
Insurance Company Structure
- Actuarial
- Sales/Marketing
- Underwriting
- Claims
- Investment
- Accounting
- Legal
Actuarial Department
1 of 6 parts of an Insurance Company
