Vocabulary Flashcards
Risk
The uncertainty or chance of loss
The law of large numbers
With a large enough sample size, predictions can be made about a population
Insurer
The insurance company providing coverage
Insured
the individual/s whose property the policy is based on
5 criteria of risk
Rate of loss must be predictable; catastrophic loss must be unlikely; loss must be definite (monetarily defined); loss must be uncertain (unknown to client before loss); loss must be economically feasible
4 requirements of contracts to be legally binding
CALC- Consideration (insured’s is down payment, insurer is terms of contract); Agreement (applicant offers property to be covered, insurer offers terms); Legal purpose (contract cannot be illegal); Competent parties (each party must be sober, over 15, legally and mentally competent)
Adhesion
Insurers require that potential clients take contracts as written. No negotiation on policy language. Client “adheres” to insurers policy.
Aleatory
Principle of inequality of an insurance policy due to inherent element of chance in the contract. Insured exchanges small premiums for potentially large payment..
Conditional
Performance of an insurance contract is conditional upon certain events taking place. Ex. Insurer will only pay if premiums are current and there is proof of a loss.
Unilateral
Only one party is obliged to perform in an insurance contract, the insurer. (Insured can void policy anytime, insurer is bound to honor contract)
Utmost good faith
Insurer relies upon the statements made by insured as truthful. Insured relies on promise of payment in event of loss.
Express Authority
Abilities of agent which are explicitly stated as actions he/she can take on behalf of insurer
Implied Authority
Actions which are not explicitly stated, but are necessary and allowable on behalf of the insurer
Apparent Authority
authority a prudent person (insured) may believe the agent has the ability to execute, but in reality the agent does not.
Presumption of Agency
The presumption a prudent person (insured) believes an agent is acting within his/her authority, but in reality the agent has overstepped their boundaries.
Domestic domicile of insurer
Insurer conducting business in its state of incorporation
Foreign domicile of insurer
Insurer incorporated in a state other than the one its doing business in.
Alien domicile of insurer
Insurer incorporated in a country other than the US
Commercial insurers
Consist of mutual or stock insurers; mutual are owned by the policyholders.
Reinsurers
Companies that provide insurance to insurance companies to spread risk.
Lloyd’s of London
Specialize in nonstandard risks that other insurers will not.
Brokers vs. Captive agents
Brokers represent multiple insurers, captive agents only one insurer.
Loss
Reduction in the value of an asset
Hazard
increases the likelihood of a loss
peril
cause of a loss; fire, accident, flood
Accident
unplanned, unpredicted event
Pure risk
The possibility of a loss with no possibility of a gain
5 risk management techniques
STARR; Sharing, sharing risk with another; Transferring, insurance is an example of risk transfer; Avoiding, simply not engaging in a possible risk; Retaining, ex. deductible, retaining some risk while transferring the rest; Reducing, minimizing exposure to a hazard.
Physical hazard
any tangible hazard
Moral hazard
Potential loss when applicants and claimants are untruthful
Morale hazard
When insured doesn’t take measures to reduce the severity of a loss.
Legal hazard
Potential losses due to punitive and compensatory damages
Economic loss
Includes the total monetary costs of a loss, including the continuing and future expenses.
Indemnity
To make whole, to place the insured in the same financial position as he/she was prior to the loss
Insurable interest
Exists when an individual or entity (ex. bank) will suffer a financial loss if the insured’s property is damaged or destroyed. An insurable interest must exist at the time of application and at the time of loss (ex. Bank with mortgage must be listed on application, and still hold a financial interested when loss occurs).
Deducible
Amount of loss insured would retain in the event of a loss.
Direct vs. Indirect loss
Direct loss occurs due to peril such as fire, etc. Indirect loss occurs secondarily due to loss of use of property (Ex. hotel room costs due to house fire)
Named peril vs, open peril policy
named peril only covers explicitly named risks, open peril policy covers everything except explicitly named risks.
Actual cash value
ACV= replacement cost - depreciation
Replacement cost
represents the amounts needed to rebuild or replace the dwelling or personal property in today’s dollars.
Functional replacement cost
when materials or craftsmanship outweighs market value, in which case insurer will replace items with functional equivalents.
Salvage value
Refers to a property that has been damaged, insurer provides option of replacement cost or salvage property with replacement cost- salvage property value.
Material misrepresentation
A misrepresentation that would have resulted in a different underwriting decision.
Warranty
Statement that an individual guarantees to be true
Breach of warranty
a lie that is grounds for void of contract of insurance
Concealment
Not revealing the whole truth
Negligence
Failure to do what a reasonable person would do in a given set of circumstances
Subrogation
The insurer’s right to recover from a third party that caused loss suffered by the insured.
Binder
written statement showing temporary insurance coverage . Valid for up to 60 days.
Endorsement
attachment to the policy that can add or take away coverage.
