2.) Insurance Basic Terms

Warranty

A warranty is a pledge, either expressed (written) or implied (not written but is understood by conduct, environment, or other means).

Contract

An agreement between two or more parties enforceable by law.

Tort

Any wrongful act toward someone that leads to legal liability.

Hazard

Anything that increases the chance of loss or the severity of loss due to a peril.

Physical Hazard

Anything that poses a risk and can be seen, heard, touched, tasted, or smelled e.g. weak tree limbs, worn-out brakes

Aircraft insurance

Insures aircraft owners, users and dealers against loss through hazards incidental to ownership, maintenance, operation, and use of aircraft.

Credit insurance

Insures persons engaged in business against loss resulting from extending credit and insurance against loss from the failure of persons to meet existing or contemplated obligations to the insured.

Pure risk

Involves only two possible outcomes: loss or no loss. No possible gain or profit is involved with a pure risk, and this is the only type of risk insurance companies are willing to accept.

Speculative risk

Involves the possible opportunity for loss or gain. Speculative risks are not insurable e.g. playing the lottery, gambling

Representation

Is a statement that may be written or oral.

Loss control

Loss control refers to taking precautions to reduce the risk of a loss e.g. installing smoke alarms and a sprinkler system.

Moral Hazard

Moral hazards are associated with mental attitudes, behaviors and habits e.g. drug abuse, dishonest claims, alcoholism, smoking, and driving over the speed limit.

Morale Hazard

Morale hazard deals with a person's state of mind. Morale hazards are similar to moral hazards because they deal with the way people think.

Human Personnel Loss Exposure

The degree of loss an employer faces in regard to lawsuits brought by employees e.g. workers compensation

Liability Loss Exposure

The degree of loss a person/organization faces in regard to lawsuits brought by a third party.

Property Loss Exposure

The degree of loss a person/organization faces in regard to property.

Utmost Good Faith

A contract that is of utmost good faith is one in which both parties know all the material facts and any relevant information.

Deductible

A deductible is the amount of money the insured pays before the insurer (company) pays any part of a claim.

Materiality

A material fact is a statement made that is important to the contract and will help a company determine whether to accept or reject an application (making a false statement is called misrepresentation).

Misrepresentation

A misrepresentation is a statement, written or oral, that is not only false in nature, but is stated in order to intentionally distract, deceive, or mislead a party to a contract.

Reciprocal insurance exchange

A reciprocal company is an unincorporated company that consists of subscribers managed by an attorney.

Stock company

A stock company sells shares of stock to stockholders in order to get money to run a business. Stock insurance companies are sometimes referred to as non-participating companies because policyholders do not participate in dividends (stockholders are not necessarily policyholders and vice versa).

Unilateral

A unilateral contract contains the exchange of a premium for a promise.

Risk management strategies

Avoiding, transferring (e.g. buying insurance), reducing, sharing (e.g. reinsurance), retaining (covering loss by oneself hence not buying insurance)

Estoppel

Estoppel occurs when misleading actions of an insurance company agent result in the insured being stopped from performing according to the provisions of the contract.

Fraud

Fraud occurs when one party intentionally provides false information or conceals relevant information in order to benefit from unlawful gain.

Aleatory

If the contract has values that are not equal it is called an aleatory contract.

Mortgage insurance

Includes guaranteeing payment of the principal, interest and other sums agreed to be paid under the conditions of any note or bond protected by mortgage.

Mortgage guaranty insurance

Includes insurance against financial loss by reason of the nonpayment of principal, interest and other sums agreed to be paid under the terms of any note or bond or other evidence of indebtedness secured by a mortgage, deed of trust, or other instrument constituting a lien or charge on real estate.

Plate glass insurance

Includes insurance against glass that breaks, its ornamentation, frames, glazing, etc.

Insolvency insurance

Includes insurance against loss arising from the failure of an insolvent insurer to discharge its obligations under its insurance policies.

Burglary insurance

Includes insurance against loss by burglary, theft, or both.

Boiler and machinery insurance

Includes insurance against loss of property and liability for damage to persons or property from explosion of, or accident to, boilers, tanks, pipes, pressure vessels, engines, wheels, electrical machinery, or apparatus connected to or operating nearby.

Liability insurance

Includes insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person or resulting from liability for damage to property or property interests of others.

Common carrier liability insurance

Includes insurance against loss resulting from liability of the goods of a common carrier for property in their care, but not owned by them.

Sprinkler insurance

Includes insurance against loss through damage by water to goods or premises arising from the breakage or leakage or sprinklers, pumps, or other apparatus placed for extinguishing fires, or loss arising from the breakage or leakage of water pipes or through accidental injury to such sprinklers, pumps, or other apparatus.

Team and vehicle insurance

Includes insurance against loss through damage or legal liability for damage to property caused by the use of teams or vehicles other than ships, boats, or railroad rolling stock.

Indemnity

Indemnity means the insurer restores the insured to the condition the insured was in before the loss occurred.

Insurance

Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.

Adverse selection

Occurs when people seek insurance at the last minute, when they really need it.

Intentional tort

Occurs when someone deliberately acts in a way that causes harm to another person, regardless of whether he/she intended to injure that person. Intentional torts include libel (a written statement that causes a person personal injury), slander (a verbal statement that causes a person personal injury) and false arrest (wrongful physical restraint of another person's freedom).

Unintentional tort

Occurs when someone doesn't provide proper care for another person.

Insurable events

Only losses resulting from events that exist but may or may not happen can be insured.

Self funding

Paying out of pocket for expenses arising as a result of not having insurance.

Mutual insurance Company

Policyholders in a mutual insurance company contribute money by buying policies and paying the premiums, and become owners in the company. Mutual companies are sometimes referred to as participating companies because policyholders participate in dividends.

Ideally Insurable Risk

Refers to risk that is financially within reason and is, therefore reasonable to insure. The loss must be an accident, create economic hardship, predictable, definite and measurable, cannot be catastrophic and the insured person must fit a category to which a company can apply the law of large numbers.

Exposure

Refers to the possibility of a loss.

Waiver

The act of giving up a right, claim or privilege.

Peril

The actual cause of a loss e.g. fire, wind, hail, accident, or theft.

Legal Hazard

The chance of a certain risk ending up in court.

Insurance policy

The policy is the written instrument setting forth a contract of insurance.

Underwriting

The process of reviewing applications for insurance and checking the information on the application.

Fraternal Organization (Fraternal Insurance Company)

These companies are social organizations or societies that are usually engaged in charitable acts.

Legal insurance

This coverage is a prepaid service that entitles a group member to a schedule of benefits for certain legal services - such as those for adoptions, probates and divorces - at a stipulated premium.

Loss of Use

This is a "contingent" loss as it is a resulting indirect loss. Unknown events are the only events that can be insured against.

Personal contract

This is a contract between the insurance company and an individual.

Contract of adhesion

This is a contract prepared by the insurer and accepted or rejected by the insured.

De-mutualization

This is the process through which a mutual insurer becomes a stock company.

Recission

This is the revocation of a contract.

Risk

This is the uncertainty or chance of a loss occurring.

Insurable Interest

This means that, before something or someone can be insured, the insured must establish that he or she actually owns or has interest in it.

Churning

This occurs when a producer makes false statements to convince the policy holder to cancel their present policy in order to sell him or her, another one.

Twisting

This occurs when a producer makes false statements with regards to policy comparison or false statements about the financial condition of a company in order to sell its products.

Rebating

This occurs when a producer returns a financial benefit to a client as an inducement to purchase insurance from him or her.

Reinsurance

This occurs when the insurer transfers all or part of its risk to another insurer in order to protect itself from major or catastrophic losses.

Conditional contract

This type of contract is conditional because the company only pays on condition of a loss.

Spread of risk

When the company works to pay claims and other expenses and still makes a profit, the degree or range of risk is known as spread of risk.

Profitable Distribution of Exposures

When the number of preferred risks is balanced with poor risks, and the number of average risks is in the middle, a profitable distribution of exposure exists.

Loss Ratio

incurred losses + loss adjusting expense/earned premium = loss ratio.