Comprehensive Glossary of Insurance Terms

Navigating the world of insurance can sometimes feel overwhelming, especially with the wide array of industry-specific terms you might encounter. To help you better understand your insurance policy and make informed decisions, we’ve compiled a comprehensive glossary of the most commonly used insurance terms. Whether you’re reviewing your coverage, filing a claim, or discussing options with your insurance agent, this glossary will serve as your go-to resource for clarity.

A

Accident:
An unforeseen and unintended event that results in injury or damage.
Actual Cash Value (ACV):
The value of property at the time of a loss, calculated as the replacement cost minus depreciation due to age, wear and tear, and obsolescence.
Additional Insured:
A person or entity, other than the primary policyholder, who is added to an insurance policy and receives coverage under specific circumstances.
Adjuster (Claims Adjuster):
A professional employed by an insurance company (or an independent contractor) to investigate, evaluate, and settle insurance claims.
Agent:
A licensed individual or firm authorized to sell and service insurance policies on behalf of an insurer or multiple insurers.
Aggregate Limit:
The maximum total amount an insurance company will pay for all covered losses during a specific policy period (usually a year), regardless of the number of claims.
Application:
A form filled out by an individual or business when seeking insurance, providing information that the insurer uses to assess risk and decide whether to issue a policy and at what premium.
Appraisal:
A process used to resolve disputes between an insurer and policyholder over the amount of a loss. Each party hires an appraiser, and if they can’t agree, a neutral umpire makes the final decision.

B

Beneficiary:
The person, entity, or trust named in a life insurance policy to receive the policy benefits upon the death of the insured.
Binder:
A temporary insurance contract providing proof of coverage until a formal policy is issued. It typically outlines the key terms and coverage.
Bodily Injury (BI) Liability:
Coverage that pays for medical expenses, lost wages, and other damages to another person if you are found legally responsible for their injuries in an accident.
Broker:
An independent insurance professional who represents the insurance buyer (not the insurance company) and works with multiple insurers to find the most suitable policies for their clients.
Business Interruption Insurance:
Coverage for businesses that replaces lost income and covers ongoing operating expenses if the business is temporarily shut down due to a covered peril (like fire or natural disaster).
Business Owner’s Policy (BOP):
A package policy for small to medium-sized businesses that combines several common coverages, such as commercial property, general liability, and business interruption insurance, into a single contract.

C

Cancellation:
The termination of an insurance policy by either the insurer or the insured before its scheduled expiration date.
Certificate of Insurance (COI):
A document issued by an insurer that provides evidence of insurance coverage, outlining the types and limits of coverage for the policyholder. Often required in business contracts.
Claim:
A formal request made by a policyholder to an insurance company for payment or services due to a loss covered by the policy.
Coinsurance (Health Insurance):
The percentage of covered healthcare costs that the insured person must pay after meeting their deductible (e.g., the insurer pays 80%, and the insured pays 20%).
Coinsurance (Property Insurance):
A provision requiring the policyholder to insure their property for a certain percentage of its value (e.g., 80%) to receive full payment for partial losses. If not met, the policyholder may share in the loss.
Collision Coverage (Auto Insurance):
Coverage that pays for damage to your own vehicle resulting from a collision with another vehicle or object, or if your vehicle overturns, regardless of fault.
Commercial General Liability (CGL) Insurance:
A broad type of insurance policy that provides liability coverage for general business risks, including bodily injury, property damage, personal injury (like libel or slander), and advertising injury.
Comprehensive Coverage (Auto Insurance):
Coverage that pays for damage to your own vehicle from non-collision events such as theft, vandalism, fire, hail, flooding, falling objects, or hitting an animal.
Conditions:
Provisions in an insurance policy that outline the duties, rights, and responsibilities of both the insured and the insurer. Failure to comply with conditions can affect coverage.
Coverage:
The protection provided under an insurance policy against specific risks, losses, or liabilities.

D

Declarations Page (Dec Page):
The section of an insurance policy (usually the first page) that provides a summary of key information, such as the insured’s name and address, policy period, coverage types, limits, deductibles, and premium.
Deductible:
The amount of money the policyholder must pay out-of-pocket for a covered loss before the insurance company begins to pay.
Depreciation:
The decrease in the value of property over time due to age, wear and tear, or obsolescence.
Disability Insurance:
A type of insurance that provides income replacement if you are unable to work due to a qualifying illness or injury.

E

Effective Date:
The date on which an insurance policy’s coverage begins.
Endorsement (Rider):
A written amendment or addition to an insurance policy that modifies its original terms, coverage, or conditions. It can add, remove, or change coverage.
Errors and Omissions (E&O) Insurance (Professional Liability Insurance):
A type of liability insurance that protects professionals (e.g., doctors, lawyers, consultants, agents) and businesses against claims of negligence, errors, or inadequate work that cause financial harm to a client.
Exclusions:
Specific risks, perils, situations, or types of property not covered by an insurance policy, as explicitly stated in the policy document.
Exposure:
The state of being subject to the possibility of a loss. It’s a measure of the risk an insurer takes on.

F

Fair Market Value:
The price that a piece of property would sell for on the open market between a willing buyer and a willing seller, with neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts.
First-Party Claim:
A claim made by the policyholder directly against their own insurance company for a loss they suffered (e.g., damage to your own car or home).
Flood Insurance:
A specialized type of insurance that covers property damage caused by flooding. Standard homeowners and business property policies typically exclude flood damage, requiring a separate policy, often through the National Flood Insurance Program (NFIP) in the U.S.
Fraud (Insurance Fraud):
An intentional act of deception or misrepresentation made by an applicant or policyholder to gain an unearned benefit from an insurance policy (e.g., exaggerating a claim or providing false information on an application).

G

Grace Period:
A specified period of time after a premium payment is due during which the policy remains in force, and the payment can be made without penalty or lapse in coverage.
Group Insurance:
A single insurance policy that covers a group of people, typically offered by employers to employees or by associations to their members. Common types include group health, life, and disability insurance.
Guaranteed Replacement Cost (Property Insurance):
Coverage that pays the full cost to repair or replace damaged property with new property of like kind and quality, without a deduction for depreciation, even if the cost exceeds the policy’s dwelling coverage limit (often up to a certain percentage over the limit).

H

Hazard:
A condition or situation that increases the likelihood or severity of a loss occurring (e.g., storing flammable materials near a heat source is a hazard for fire).
Health Insurance:
Insurance that covers medical, surgical, and sometimes dental expenses incurred by the insured. It can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly.
Health Maintenance Organization (HMO):
A type of health insurance plan that typically requires members to use doctors, hospitals, and specialists within its network and to choose a primary care physician (PCP) who coordinates care and provides referrals.
Homeowners Insurance:
A package policy that provides coverage for damage to a home (dwelling and other structures), personal belongings, and liability for injuries or property damage to others that occur on the property or due to the policyholder’s actions.

I

Indemnity/Indemnification:
The core principle of insurance that aims to restore the insured to the same financial position they were in before a covered loss occurred, without allowing them to profit from the loss.
Independent Agent:
An insurance agent who represents multiple insurance companies, rather than just one, allowing them to offer clients a wider range of products and price comparisons.
Insurable Interest:
A financial or other legitimate interest in an asset, property, or person such that its loss, damage, or death would cause the policyholder to suffer a financial or other type of loss. This must exist at the time of loss (for property/casualty) or at the inception of the policy (for life insurance).
Insurance:
A contractual agreement in which one party (the insurer) agrees to compensate another party (the insured) for specified losses, damages, illness, or death in return for payment of a premium. It’s a method of risk transfer.
Insured:
The individual, group, or entity whose risk of financial loss is covered by an insurance policy.
Insurer:
The insurance company or organization that provides insurance coverage and agrees to pay for covered losses.

L

Lapse:
The termination of an insurance policy due to non-payment of premiums after the grace period has expired.
Liability Insurance:
Coverage that protects the insured against financial loss arising from legal claims for bodily injury or property damage caused to others for which the insured is found legally responsible.
Limit of Liability (Coverage Limit):
The maximum amount an insurer will pay for a single covered loss or for all losses during a policy period, as stated in the policy.
Long-Term Care Insurance:
Coverage that helps pay for the costs associated with long-term care services, such as nursing home care, assisted living, or in-home care, typically not covered by health insurance or Medicare.
Loss:
The financial damage or injury suffered by an insured person or business due to a covered event or peril.
Loss Control:
Actions and measures taken to reduce the frequency (how often losses occur) or severity (how costly losses are) of potential losses.

M

Malpractice Insurance (Medical Malpractice Insurance):
A type of professional liability insurance purchased by healthcare professionals or institutions to protect against claims of negligence or improper treatment resulting in patient injury or death.
Material Misrepresentation:
A false or misleading statement made by an applicant for insurance that is significant enough to influence the insurer’s decision to issue the policy, set the premium, or determine the terms of coverage. It can be grounds for voiding the policy.
Moral Hazard:
A situation where the behavior of an insured person changes in a way that increases the likelihood or severity of a loss, often because the insured person no longer bears the full financial consequences of that behavior (e.g., being less careful with property because it’s insured).
Mortgagee Clause:
A provision in a homeowners or property insurance policy that protects the lending institution’s (mortgagee’s) financial interest in the insured property, even if the policyholder (mortgagor) does something to void the policy.

N

Named Insured:
The person(s), business, or entity specifically named on the declarations page of an insurance policy as the one to whom coverage is provided.
Named Perils Policy:
An insurance policy that only covers losses caused by perils (causes of loss) specifically listed in the policy (e.g., fire, theft, windstorm). If a peril isn’t listed, it’s not covered.
Negligence:
The failure to exercise the degree of care that a reasonable and prudent person would exercise under similar circumstances, resulting in unintended injury or damage to another. It’s a common basis for liability claims.
Non-Renewal:
A decision by an insurance company not to renew an insurance policy after its expiration date. The insurer must typically provide advance notice and a reason for non-renewal.

O

Occurrence:
In liability insurance, an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results in bodily injury or property damage that is neither expected nor intended by the insured.
Open Perils Policy (All-Risk Policy or Special Form Policy):
An insurance policy that covers losses from all perils except those specifically excluded in the policy. This generally provides broader protection than a named perils policy.

P

Peril:
The specific cause of a loss, such as fire, windstorm, theft, vandalism, or collision.
Personal Auto Policy (PAP):
An insurance policy designed to cover the personal use of private passenger vehicles owned by an individual or family.
Personal Property Coverage:
Protection for personal belongings (e.g., furniture, clothing, electronics) against risks such as theft, fire, or damage, typically part of homeowners, renters, or condo insurance.
Policy:
The written contract of insurance between the insurer and the insured, detailing the terms, conditions, coverages, and exclusions.
Policyholder:
The person, business, or entity that owns an insurance policy and is entitled to its benefits.
Preferred Provider Organization (PPO):
A type of health insurance plan that contracts with a network of medical providers (doctors, hospitals) to offer services at a reduced cost to members. Members can typically see out-of-network providers but will pay higher out-of-pocket costs.
Premium:
The periodic payment made by the policyholder to the insurance company in exchange for insurance coverage.
Principal of Utmost Good Faith (Uberrimae Fidei):
A legal doctrine fundamental to insurance contracts, requiring all parties (insured and insurer) to deal with each other honestly and disclose all material facts relevant to the risk being insured.
Professional Liability Insurance (see Errors and Omissions Insurance).
Proof of Loss:
A formal written statement made by the insured to the insurer regarding a loss, providing details about the incident, the extent of damage, and supporting documentation. It’s usually required before a claim can be paid.
Property Damage (PD) Liability:
Coverage that pays for damage you cause to someone else’s property (e.g., their car, fence, or building) for which you are legally responsible.
Proximate Cause:
The primary cause of a loss, which, in a natural and continuous sequence, unbroken by any new and independent cause, produces the loss, and without which the loss would not have occurred.

Q

Quote (Quotation):
An estimate of the premium for an insurance policy based on the information provided by the applicant. It is not a binder or a policy.

R

Rate:
The price per unit of insurance (e.g., per $1,000 of coverage) used to calculate the premium.
Reinsurance:
Insurance purchased by an insurance company (the ceding company) from another insurance company (the reinsurer) to transfer a portion of its risk, especially for large or catastrophic losses.
Replacement Cost Value (RCV):
The cost to repair or replace damaged or destroyed property with new property of like kind and quality, without any deduction for depreciation.
Rider (see Endorsement).
Risk:
The uncertainty or chance of a loss occurring. Insurance is designed to manage and transfer risk.
Risk Management:
The systematic process of identifying, assessing, controlling, and mitigating risks to an individual’s or organization’s assets, income, or operations.

S

Salvage:
Damaged property that an insurer takes possession of after paying a claim for a total loss. The insurer may then sell the salvaged property to reduce its overall loss.
Schedule:
A list within an insurance policy that details specific items of property being insured, along with their descriptions, locations, and individual coverage amounts (e.g., a schedule of jewelry or fine arts).
Self-Insured Retention (SIR):
A dollar amount specified in a liability policy that must be paid by the insured before the policy will respond to a loss. Unlike a deductible, the insured often manages claims within the SIR. More common in commercial insurance.
Settlement:
The final agreement and payment made by an insurance company to resolve an insurance claim.
Subrogation:
The right of an insurance company, after paying a loss to its policyholder, to pursue recovery from a third party who was legally responsible for causing the loss.
Surety Bond:
A three-party contract where one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee). Often used in construction or for certain licenses.

T

Term Life Insurance:
A type of life insurance that provides coverage for a specified period (term), such as 10, 20, or 30 years. If the insured dies during the term, a death benefit is paid to the beneficiary. It typically does not build cash value.
Third-Party Claim:
A claim made by someone against another person’s insurance policy (e.g., if you are injured in an accident caused by another driver, you would file a third-party claim against their auto insurance).
Tort:
A civil wrong (other than breach of contract) that causes harm or loss to another person, for which the law provides a remedy, usually in the form of monetary damages. Negligence is a common tort.

U

Umbrella Insurance (Personal or Commercial):
Additional liability coverage that provides an extra layer of protection above the limits of underlying policies (such as auto, homeowners, or commercial general liability). It kicks in after the underlying policy limits are exhausted.
Underwriting:
The process insurers use to evaluate the risk associated with an applicant or a group, decide whether to issue insurance, and determine the policy terms, conditions, and premium.
Unearned Premium:
The portion of an insurance premium that has been paid by the policyholder but has not yet been “earned” by the insurer because the policy period for which it provides coverage has not yet expired. If a policy is canceled mid-term, the unearned premium is typically refunded.

V

Valued Policy:
An insurance policy that pays a pre-agreed, specified amount in the event of a total loss of the insured property, regardless of its actual cash value at the time of loss. Often used for items like fine art or antiques.

W

Waiver:
The voluntary and intentional relinquishment of a known right, claim, or privilege. For example, an insurer might waive a policy condition.
Waiver of Premium Rider (Life or Disability Insurance):
An optional policy provision that waives premium payments if the policyholder becomes totally disabled for a specified period.
Warranty:
A statement or promise in an insurance policy that, if found to be untrue or unfulfilled, can void the policy or deny a claim. Warranties must be strictly complied with.
Whole Life Insurance:
A type of permanent life insurance that provides coverage for the insured’s entire life and includes a savings component (cash value) that grows over time on a tax-deferred basis.
Workers’ Compensation Insurance:
Insurance that provides wage replacement, medical benefits, and rehabilitation services to employees who are injured or become ill in the course of their employment, regardless of fault. It also protects employers from lawsuits by injured employees.

Z

Zero Depreciation Cover (Nil Depreciation Cover - Auto Insurance):
An add-on benefit, typically for auto insurance, that ensures the policyholder receives the full cost of replacing damaged parts (like bumpers or fenders) without any deduction for depreciation, subject to policy terms.

Conclusion

Understanding insurance terms is vital for making confident, informed decisions about your policies and ensuring you receive the protection you need. With this glossary, you’ll have a handy reference to decode the language of insurance policies, claims, and coverages. Keep this guide nearby whenever you review your policy or communicate with your insurer—it’s a valuable tool for empowering your financial and risk management journey!

For more resources or further clarification, feel free to contact Paca Insurance or explore our website for detailed educational materials.

Next Steps

To further enhance your understanding of insurance and how it works, explore the following key sections of the Policyholder’s Handbook. These articles have been curated to complement the information in the glossary by diving deeper into fundamental insurance topics:

What Is Insurance?
Gain a foundational understanding of what insurance is and how it works to protect you against uncertainties. This article is perfect for policyholders new to the world of insurance or those seeking to revisit the basics.
Key Components of an Insurance Policy
Learn about the essential parts of an insurance policy, including the declarations page, endorsements, and exclusions. This detailed breakdown will help you understand how policies are structured and what to look out for during your review.
Understanding Coverage Limits
Delve into the mechanics of insurance coverage limits and how they affect your policy’s scope. Knowing these limits will help you make informed decisions about the level of protection you may need.
When and How to File a Claim
Familiarize yourself with the step-by-step process of filing an insurance claim. This article provides detailed guidance to ensure a smooth claims experience when accidents or losses occur.
Your Rights as a Policyholder
Discover the legal rights and protections you have as an insurance policyholder. Understanding these rights ensures you can advocate for yourself effectively in case of disputes or claims issues.

These articles will provide you with a broader understanding of the insurance ecosystem and empower you to make smarter decisions about your coverage and policies. Continue exploring the handbook to strengthen your knowledge!