Glossary
Insurance Terms Glossary
Actual Cash Value (refers to auto and homeowner insurance): The cost to replace damaged or lost property with comparable or like property, minus depreciation.
Act of God: An accident or event resulting from natural causes, without human intervention or agency, and one that could not have been prevented by reasonable foresight or care, e.g., lightning, wind, or storms. Flood and earthquake are not included in most policies, and must be added separately. Talk to your agent about what is covered or not.
Adjuster: Someone who is paid by the insurance company or the insured person to investigate or negotiate insurance claims on their behalf.
Adverse Selection: This term is used for people who have an above average risk for loss. They have a tendency to buy more insurance coverage than those who are at a lower risk. For example, people with terminal illnesses will often try to buy large amounts of life insurance.
Annuity (refers to life insurance): This is a series of income payments made to a customer at regular intervals by an insurance company in return for a premium or premiums the customer paid. There are many types of annuities, which offer various benefits.
Apportionment: Dividing a loss proportionately among two or more insurers to cover the same loss. For example, assume someone insures their property for $10,000 with one insurance company, and they also insure it for $5,000 with a second insurance company. If a loss occurs, the first company pays two-thirds of the loss and the second company pays one-third.
Auto insurance: If you own and operate commercial vehicles, make sure your fleet is appropriately insured. If you rarely use your personal vehicle for business reasons, your personal policy might include the necessary coverage. Check with your agent to make sure.
Basic Hospital Plans: Basic hospital plans cover only in-hospital (inpatient) care, not other services. This benefit may also limit subscribers to an approved or network facility. Hospitalization in a different facility may qualify for less coverage or none at all.
Binder / Binding Receipt (refers to auto and homeowner insurance): A binder is proof of coverage for a specified time period prior to the company issuing someone the actual policy or requiring a premium payment. However, if the consumer pays the premium with the application, the insurance company will issue a binder or “binding receipt.”
Businessowners Policy (BOP): A package policy that provides both property and liability coverage for eligible small businesses. Businessowners policies are written on special coverage forms that are generally very similar to their monoline property and liability form counterparts, but they typically have some unique features that make them especially advantageous for businesses that qualify.
Business Interruption Insurance: If you are unable to run your business due to a covered loss (fire, storm damage, vandalism, etc.), business interruption insurance will replace lost income, and pay ongoing expenses and the costs to set your business up in a temporary facility.
Carrier: A company that sells insurance (also called an insurer).
Cash Surrender Value (refers to life insurance): The amount of cash due to the insured person who requests the insurance company cancel their life insurance policy.
Claim: A demand made by an insured person for payment of benefits as described in their insurance policy.
Clause: This identifies a specific part of a policy or endorsement.
Closed Formulary (refers to health insurance): In some health plans, doctors must order only patient prescription drugs listed on the health plan’s formulary (also see term “drug formulary”).
COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985): COBRA requires companies with 20 or more employees to offer separating employees the option to continue their group health care coverage at their own expense.
Co-Insurance (refers to health and homeowner insurance): In health insurance, it means the insured person and the insurance company share losses in agreed proportion. It is also known as “percentage participation.” In managed health care, it refers to the portion of the cost of care for which the insured person is responsible. This often applies after the insured person meets a specified deductible. In homeowner insurance, the insured person shares proportionally in losses when the amount of insurance is less than a specified percentage of the property insured.
Collision Coverage (refers to auto and business insurance): This covers the physical damage to the insured person’s vehicle due to a collision with another object, such as another vehicle, a fence, building, etc.
Comprehensive Coverage (refers to auto insurance): This covers damage to an insured person’s car — except by collision. For example, this covers their car if a tree falls on it or someone vandalizes it.
Comprehensive Personal Liability Policy (CPL) (refers to homeowner insurance): This is a personal liability contract individuals may buy. A CPL provides liability insurance coverage for individual and family needs that may arise due to personal activities and situations, such as residential property ownership, pet ownership, sports activities, and many other everyday activities.
Contractor’s Bond (refers to business insurance): Guarantees the performance of a contract and the payment of all related labor and material bills between a contractor and subcontractors, up to the stated bond amount. In situations where two bonds are required, contractors can obtain a performance bond (covers performance) and a payment bond (covers payment of labor and material).
Copayment (refers to health insurance): A copayment is a patient’s share of a health care bill. It usually is a small amount, such as $5 or $10 per office visit.
Cost Sharing (refers to health insurance): When the consumer must pay out-of-pocket to receive health care. This also can occur when an insured person pays a portion of the monthly premium for his or her health insurance.
Credit Insurance (refers to auto, business and homeowner insurance): An insurance policy that pays debts should the borrower lose his or her job, die, or become disabled (usually called “credit life” policy).
Declaration Page (Dec Sheet) (refers to auto, business, and homeowner insurance): The portion of an insurance policy that contains information about risk. It identifies the parties in the contract and the subject of coverage.
Deductible: The dollar amount an insured person must pay for covered charges during a calendar year before the plan starts paying claims. Only charges outlined in the plan that the insurer would normally pay get applied to the deductible.
Dependent Property (refers to business insurance): This is property not owned, operated or controlled by you, but you are dependent on it for normal business operations. Dependent property coverage protects you from financial losses caused by problems that occur somewhere other than your business. For example, this coverage will help you if your business depends on outside vendors, suppliers, or power sources that can interrupt your business operations because they experience a loss.
Destroyed or Damaged Records Coverage (refers to business insurance): If a covered loss destroys or damages business records, this insurance compensates the owner for his or her inability to collect income, and the cost to reproduce the records.
Difference in Conditions (DIC) Coverage: DIC insurance provides coverage designed to close specific gaps in standard insurance policies and is usually available only for larger industrial or commercial risks. It allows coverage to be customized to extend to such exposures as water damage, flood, collapse, earthquake, landslide, etc., according to the insured’s needs. DIC coverage may be provided by means of a separate insurance policy or it may be added by endorsement to the basic policy.
Disability Income Insurance (refers to disability insurance): An insurance that provides periodic payments to replace income lost to an insured person when they cannot work due to sickness or injury.
Drug Formulary (refers to health insurance): A list of selected prescription drugs and their proper doses that a health plan covers.
Earned Premium: The portion of an insurance premium that applies to the expired part of the policy term. Even though customers pay their premiums in advance, the insurance company does not fully earn the premium until their customers’ policy term expires.
Earthquake Coverage (refers to business and homeowner insurance): Insurance companies offer earthquake coverage as additional coverage to standard commercial property and casualty policies. Earthquake coverage is available in Washington state. It is expensive for masonry structures and business operations with high-risk inventory or equipment.
Employment Practices Liability Insurance (EPLI) Coverage: This type of coverage helps you defend against employment-related claims such as sexual harassment, age discrimination, or wrongful termination. Some policies offer legal assistance. Other policies may pay both legal costs and damages.
Endorsement: A written form attached to the policy that changes the terms of the policy to fit special circumstances.
Exclusions (refers to any insurance contract): Clauses in a health insurance contract that deny coverage for certain conditions, treatments, supplies or risks, such as cosmetic surgery. In home and auto contracts, exclusions from coverage may also include certain events or circumstances, such as drag racing, renting an insured vehicle to others, or flood or earthquake coverages.
Exclusive Provider Organization (EPO) health insurance: EPOs allow subscribers to visit any doctor within the contracted network without prior approval or referrals. Subscribers may not receive coverage for services outside the contracted network.
Experience: The loss record of an insured person, a class of coverage (such as auto or homeowner insurance), or an insurance company’s loss experience (the total number of claims).
Experience Rating: A method insurers use to decide the amount of premium to charge customers based on the actual usage of large groups with like risks.
Exposure: The possibility of loss.
Face: The first page of a policy.
Face Amount (refers to life insurance): This is the death benefit stated on the first page of a life insurance policy.
Fiduciary (refers to health insurance): Someone who is responsible for the administration of a group health insurance plan or an Employee Retirement Income Security Act (ERISA) plan or someone who has discretionary authority over plan assets and claim payments. The federal ERISA law imposes various duties on fiduciaries about the use of their powers. For example, the plan fiduciary must protect plan assets, and administer claims for the exclusive purpose of providing benefits to plan participants.
Fleet Coverage (refers to business insurance): This multi-vehicle coverage applies to businesses that rely on a number of vehicles and need to insure them collectively.
Floater: A separate policy available to cover the value of goods beyond the coverage of a standard home/renters insurance policy including movable property such as jewelry or sports equipment.
Flood coverage: This is coverage for damage caused by floods. It is not included in ordinary homeowner and commercial policies. Flood insurance, which also covers damage caused by mudslides, is available through the National Flood Insurance Program (NFIP) at 1-800-427-4661. Contact your agent for more information.
Foreign-Product Liability Coverage (refers to business insurance): This business-related coverage applies to losses that occur due to difficulties with providing or obtaining items that foreign suppliers manufacture.
Form: This is an insurance policy, or the riders and endorsements attached to it.
Formulary (refers to health insurance): A published list of prescription drugs a health care plan covers.
Fraud: Deception or artifice used to cheat or intentionally mislead. This is closely related to misrepresentation and concealment. Proof of fraudulent acts by an insured in procuring insurance may lead to a denial of coverage and voiding of the policy by the insurer. As a loss exposure, certain types of fraud can be insured by a commercial crime insurance policy.
GAP Coverage (refers to auto insurance): If an auto is totaled by an insurance company, this pays the difference between the current market value of the owner’s car and the amount they still owe the lender.
General Liability and Property Coverage (refers to business insurance): Liability insurance protects businesses when they are legally liable for someone’s injury or property damage. The insurer pays the damages, and funds and handles the business’ legal defense. Property insurance covers a business’ physical assets, such as buildings, equipment, furnishings, fixtures, inventory, etc.
Glass Coverage: Commercial insurance packages may or may not include glass breakage. If they don’t include glass coverage you may have the option to buy special glass-breakage coverage for operations that present a special risk. For example, if you own a building with a lot of expensive exterior glass, this policy covers you if the glass is broken due to theft or vandalism.
Guaranteed Insurability Rider (GIR) (refers to life insurance): A contract provision a life insurance policy owner buys from an insurance company. It gives the policy owner the right to buy an additional amount of life insurance at one or more specified “option dates,” without providing new evidence of insurability at that time. For example, a person could buy a $100,000 life insurance policy with a Guaranteed Insurability Rider (GIR). The GIR would allow the person to buy $50,000 of additional insurance on the fifth and tenth year policy anniversary without providing medical information.
Guaranteed Renewable (refers to auto, disability, health, and life insurance): An insurance policy the insurance company is required to renew as long as the insured person makes premium payments. Disability and life insurance policies usually have an age limit while health insurance policies do not. The insurance company may also increase premium rates on a statewide basis.
Health Insurance: A policy or product that provides coverage for someone for doctor, hospital, and other medical expenses that result from illness or injury.
Health Maintenance Organization (HMO): HMOs are health insurance plans that require subscribers to receive all of their care from a list of providers (except for some emergency care). The plan may require the subscriber’s primary care doctor to provide them with a referral before they can see a specialist or go to the hospital.
“Hold Harmless” Clause (refers to health insurance): State law and regulations require contracted health care providers to not hold patients accountable for claim amounts that a health insurance company owes on a contract.
Homeowner Policy: An insurance policy to cover a homeowner’s house, other structures on their property, and personal contents against losses caused by such things as windstorms, fire, or theft. This type of policy also includes liability coverage.
Indemnify: This provides payment, repair, or replacement to a victim of loss.
Indemnity Health Insurance Plans: Indemnity plans, also called “fee-for-service,” allow subscribers the freedom to select doctors or medical facilities, and permits them to self-refer to a specialist. Subscribers must meet a yearly deductible before receiving reimbursement for medical expense. Indemnity plans require the use of patient claim forms and reimbursement checks.
Installment Refund Annuity (refers to life insurance): A type of annuity policy that guarantees if a policyholder dies before receiving payments equal to the amount they paid to establish the annuity, the insurer will refund the difference to the beneficiary in equal installments.
Insurable Interest (refers to homeowner and life insurance): For homeowner insurance, this is when a person has a legal financial interest in the property that is the subject of the insurance. For life insurance, this is the financial interest one person (the beneficiary) has in the person covered by the life insurance policy.
Insurance: A contract to transfer risk from individuals to an insurance company. In exchange for a premium, the insurance company agrees to pay for losses covered under the terms of the policy.
Insurance Policy: This is the entire written insurance contract.
Insured: The individual or party who the insurance company agrees to cover for losses, or provide benefits or service.
Lapse: When an insurance company ends a policy because the insured person fails to pay the premium.
Level Premium Insurance (refers to life insurance): A life insurance premium that remains at the same dollar amount throughout the life of the policy.
Liability Insurance (refers to auto, business, and homeowner insurance): Coverage that pays for any loss if the insured person is legally liable for bodily injury to others or damage to someone’s property.
Liability Limits (refers to auto, business, and homeowner insurance): The dollar amount beyond which a liability insurance company does not protect the insured on a particular policy.
Life Insurance: A contract between a person and a life insurance company that provides coverage in the event the person dies. Life insurance policies may include endowment benefits, additional benefits in the event the insured person loses an arm or leg due to an accident, or in the event of a disability. Life insurance policies also may offer annuities. Insurance agents or brokers can suggest various types of life insurance to protect your company. You can also buy key-person life insurance. This insurance pays the company upon the death of a key person, usually an owner or senior executive, to help the company deal financially with the loss or their expertise.
Limit of Liability: The maximum dollar amount an insurance company agrees to pay the insured person in case of loss.
Limitations: These are exclusions, exceptions, or reductions of coverage in an insurance policy.
Limits: The maximum amount of benefit the insurance company will pay for a given situation or occurrence. Limits also include the ages below or above what an insurance company will not issue a new policy, or continue a policy.
Long-Term Disability (refers to long-term care and disability insurance): Typically, a disability is the limitation of normal physical, mental, and social activities that lasts longer than two years. Note: each individual insurance policy defines the terms “long-term” and “disability.”
Maturity (refers to life insurance): The date the face amount of a life insurance policy is due.
Maximum Allowable Charge (refers to health insurance): The highest amount the insurance company will allow as a covered benefit for a particular medical service.
Maximum Lifetime Benefit (refers to health insurance): This is the maximum dollar amount a health insurer agrees to pay on behalf of the insured for covered services during the course of his or her lifetime.
Morbidity Rate (refers to health insurance): An actuarial term for the likelihood that medical expenses will occur.
National Flood Insurance Program (NFIP) (refers to business and homeowner insurance): A program offered by the U.S. government’s Federal Emergency Management Administration that pools policy premiums throughout the United States. It is backed by the federal government and offers reasonable rates to the public for flood damage coverage.
Non-Forfeiture Values (refers to life and long-term care insurance): Those values in a life or long-term care insurance policy that the policy owner does not forfeit – even if he or she stops paying premiums.
Non-Standard Market (refers to auto insurance): This auto insurance market includes young drivers with less experience, drivers with multiple tickets or accidents, and drivers with reckless or drunk driving histories.
Open Enrollment (refers to health insurance): A period when eligible members may enroll in, or transfer between available health care plans. Federal Health Maintenance Organization (HMO) regulations require that HMOs, which meet certain criteria, conduct annual open enrollment periods of no less than 30 days.
Ordinance or Law Coverage: 1) Coverage for loss to the undamaged portion of the building. Pays for the loss of value of an undamaged portion of the existing building which must be demolished and/or removed to conform with municipal ordinance, code, etc. 2) Demolition cost: Pays for the cost of demolition of the undamaged portions of the building necessitated by the enforcement of building, zoning or land use ordinance or law. 3) Increased cost of construction: Pays for any increased expenses incurred to replace the building with one conforming to building laws or ordinances, or to repair the damaged building so that it meets the specifications of current building laws or ordinances.
Ordinary Life (refers to life insurance): A whole life insurance policy in which the insured person pays the premiums continuously as long as they live. It’s also called Straight Life.
Out-of-Pocket Limit (refers to health insurance): The maximum coinsurance a health care plan requires a person to pay, after which the insurer will pay 100 percent of covered expenses up to the policy limit.
Paid-Up (refers to life insurance): This is a life insurance term, in which the policy owner paid all required premiums, but the policy has not yet matured (by either death or endowment). For example, in a 10-year payment policy, after the policy owner completes the 10-year premium-paying period, the policy will continue to cover the insured person for the rest of his or her life.
Participating Provider (refers to health insurance): A provider who contracts with a health insurance plan to provide health care. The provider agrees to provide health care services to covered individuals for payment (other than coinsurance, copayments, or deductibles) from the health insurance plan.
Peril: The cause of a possible loss.
Personal Injury Protection (PIP) (refers to auto insurance): This is insurance coverage for medical and other expenses, such as wage loss and funeral expenses that result from an auto accident – no matter who is at fault. Auto insurance companies must offer PIP to consumers. If consumers do not want it, they must reject it in writing.
Personal Liability: Responsibility for the damage or loss to someone’s property or bodily injury of someone.
Personal Property: Property not considered real property, such as automobiles, clothing, and furnishings.
Policy Dividend: Most common in life insurance policies, this is a partial return of the premium. It represents the difference between the premium charged and the company’s actual cost of coverage during the term of the insurance policy.
Policyholder: The person who has possession of the policy.
Policy Owner: The person who may exercise the rights and privileges in the insurance policy. This person may or may not be the insured.
Preadmission Review (refers to health insurance): Requires an insured person or their doctor to obtain prior authorization from the health care plan before any non-emergency hospitalization occurs.
Pre-Existing Condition (refers to health insurance): A health problem someone has before the date their new health insurance plan starts. Coverage for a pre-existing condition depends on the health insurance plan.
Preferred Market (refers to auto insurance): This auto insurance market features the lowest premiums. It is available to low-risk drivers with exceptional driving records.
Preferred Provider Organization (PPO): PPO health insurance plans often pay more if you get care from doctors or hospitals that contract with the insurance plan. These providers and hospitals are referred to as “network” providers. You will pay more if you go to a doctor or hospital not listed in the plan’s network.
Preferred Risk (refers to auto insurance): This typically refers to drivers who statistically have fewer accidents than average. Insurance companies take into account factors such as age, gender, or a clean driving record. These drivers are usually eligible for a reduced rate.
Premium: The dollar amount an insured person pays to the insurance company to cover the cost of insurance.
Pro Rata: Dividing the premium proportionately between the insured person and the insurance company based on how long the insurance policy was in force.
Producer: A term applied to an agent, solicitor, or other person who sells insurance.
Proof of Loss: A formal statement made by the insured person to the insurance company about a loss. The purpose is to provide the company with sufficient information about the loss to help it decide its liability under the policy.
Replacement Cost (refers to business and homeowner insurance): The cost to replace property without deducting depreciation.
Rider: An attachment to a policy that modifies the conditions of the policy by expanding or decreasing its benefits, or excluding certain conditions from coverage.
Risk: The chance that a loss will occur.
Schedule (refers to health and homeowner insurance): For health insurance, it’s a list of specific items a policy covers, such as surgical procedures, therapy, or additional expenses. For property-related insurance, it’s a list of items covered under one policy, such as various buildings, animals, and other property.
Self-insurance (refers to health insurance): When an employer or organization assumes responsibility for the covered health care expenses of its employees. Usually the employer sets up and contributes money to an account solely to pay claims. Often an independent organization, such as a third-party administrator, processes employee claims and makes claim payments out of the employer’s self-funded plan account.
Special Limits (refers to homeowner insurance): The limitation in a homeowner’s policy about losses for specific items, such as gold and silver bullion, currency, securities, letters of credit, manuscripts, passports, tickets, stamps, boats, trailers, firearms, and silver and goldware. To cover these items, the homeowner must buy additional coverage.
Standard Market (refers to auto insurance): This auto insurance market refers to the average driver who uses family-type cars and has a reasonably good driving record.
Stand-alone Dental Plan: This plan type provides dental coverage only.
Stand-alone Life Insurance Plan: This plan type provides life insurance only.
Stand-alone Prescription Plan: This plan type provides prescription drug coverage only.
Stop Loss: A provision in an insurance policy created to cut off an insurer’s or insured’s losses at a certain point.
Subrogation: This allows the insurance company to recover the payment it made to the person it insures from the person responsible for the damages or their insurance company.
Surplus Line: Coverage a consumer buys from an unlicensed insurance company because it’s unavailable from an insurance company licensed in the state.
Term: The period of time that an insurance policy is issued.
Unearned Premium: This is the part of an advance insurance premium payment that has not yet been used for coverage written. For example, if an insured person has an annual premium, at the end of the first month of the premium period, 11 months of his or her premium would still be “unearned.”
Uninsured/Underinsured Motorist (UIM) (refers to auto insurance): This coverage protects an insured driver from losses due to another driver, who doesn’t have auto insurance, or who is not fully covered. Auto insurance companies must offer UIM as part of an auto insurance policy. Consumers who do not want the coverage must sign a waiver.
Whole Life (refers to life insurance): A life insurance policy that runs for the whole life of the person covered under the policy until death. Policyholders may pay premiums for a whole life policy for their entire life or for a limited period at a higher premium.
Workers’ Compensation (refers to health insurance): Most employers in Washington state are required by law to provide workers’ compensation insurance through the state’s Department of Labor and Industries (L&I). Workers’ compensation pays employees’ medical expenses and provides some income replacement when they are injured on the job. For more information, call L&I at (360) 902-5800 or visit the agency’s Web site at http://www.lni.wa.gov
Write: In the insurance industry, this means to insure. It also means to underwrite or to sell insurance policies.
Didn’t find what you were looking for? Try IRMI for a more complete glossary of insurance terms.
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© 2008, Mark S. Balcos. The reader assumes all responsibilities for his/her own actions in regards to any items discussed in this report. Adherence to all applicable laws and regulations, federal, state and local, governing the use of any product or service described in this report in the US or any other jurisdiction is the sole responsibility of the reader. The publisher and author assume no responsibility or liability whatsoever on the behalf of the reader of these materials. The reader is encouraged to consult directly with his/her insurance professional.
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