21+ Useful Insurance Terms You Should Know

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INSURED A person or corporation that contracts for insurance policies to protect him from loss or damage to his property, or in the case where he has a liability policy, defend him from any claim by a third party.

NAMED INSURRED – A person, company, or firm that is specifically named as an insured in a policy. This distinguishes from other individuals who are covered under certain circumstances, even though they may not be named. This principle is often used in auto liability policies, whereby the policy defines “insured”, coverage extends to other drivers who use the vehicle with the permission of named insured. By being named as an “additional insured”, in an endorsement or policy, other parties can be protected by an insurance policy.

ADDITIONAL INSARED An individual or entity who is not automatically insured under another policy, but for which the named insureds policy provides some protection. To obtain additional insured status, an endorsement is usually required. An endorsement is usually required to provide additional insured status.

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COINSURED – Sharing one insurance policy or risk among multiple insurance companies. This means that each insurer pays their share of the loss directly to the insured. In co-insurance, the insured agrees to insure a certain percentage of the insured property for a reduced rate. For example, if you guarantee to insure your contents and building up to 90% or 80% of their total value, regardless of what the case may be. The company will only pay claims if you have the right coverage.

To determine how much can be collected for partial loss, use the following equation:

Insurance amount x loss

The amount of insurance that is equal to payment

Should be carried

Example AMr. The following is an example of a co-insurance clause that Right has:

$100,000 building value

Carry $80,000 in insurance

$ 10,000 building loss

The following amount can be collected by applying the equation to determine payment for partial losses:

$80,000x 10,000 = $10,000

$80,000

Mr. Right is able to recover the entire amount of his loss as he had the coverage he required under his co-insurance clause.

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Example B Mr. Worrong has a 80% co-insurance clause, and the following situation is:

$100,000 building value

Carry $ 70,000 in insurance

$ 10,000 building loss

The following amount can be collected by applying the equation to determine payment for partial losses:

$70,000x 10,000 = $8,750

$80,000

The $10,000 loss suffered by Mr. Wrong is more than the company’s liability limit under his coinsurance clause. For the remainder of the loss, Mr. Wrong is self-insured at $1,250

PREMIUM– This is the amount an insured pays to an insurance company for coverage.

DEDUCTIBLE The first dollar loss for which an insured is responsible before the insurer pays benefits. This is similar to a self insure retention (SIR). When the deductible has been exhausted, the insurer is liable.

SELF-INSURRED RETENTION – This acts in the same manner as a deductible, but the insured is responsible to all legal fees incurred regarding the amount of SIR.

POLICY LIMIT – Maximum monetary amount that an insurance company can charge to an insured under its policy.

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FIRST-PARTY INSURANCE – This insurance covers the insured’s property and/or person. It covers property damage from any cause. It covers property insurance coverage. BUILDERS’ RISK INSURANCE is an example of first-party insurance. It is insurance against damage to rigs and vessels during construction. This insurance only covers the owner and contractor of the rig.

THIRD-PARTY INSURANCE – Liability insurance that covers the negligent acts and claims of third parties (i.e. not the insured or insurance company – a party to the insurance policy). SHIP REPAIRER’S LEGAL LIABILITY – This insurance provides protection to contractors who repair or alter a customer’s vessel at their shipyard, other locations, or at sea. It also covers the insured during the time that the customer’s property is under the “Care Custody and control” of the insured. For additional coverages such as slip-and fall situations, a Commercial General Liability policy will be required.

INSURABLE INTEREST Any interest in something that is covered by an insurance policy, or any legal relationship with that subject, that could trigger an event that causes monetary loss for the insured. An example of an insurable interest is ownership of a piece or interest in that property, e.g. a shipyard building a vessel or rig. (See BUILDERS’ RISK above).

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LIABILITY INSURED – Insurance that covers an insured against third party claims for property or personal injury. These losses are often caused by negligence on the part of the insured. This policy is called an MGL (marine general liability) in marine construction. Non-marine circumstances, the policy is called a CGL (commercial general liability) policy. There are two main types of insurance policies:

  • First party insurance covers the personal property of the insured. A home owner’s policy that promises to cover fire damage to their home is an example of a first-party policy. Third party insurance is sometimes known as liability insurance. It covers policy holders’ liability to others. A homeowners policy may cover liability for someone who falls or trips on the property of the homeowner. One policy may offer both first- and third-party coverage, as shown in the examples above.
  • Two benefits come with liability insurance. The policy covers the loss incurred by third parties. This is sometimes called “indemnity” or covering the loss. A duty to defend is a second feature of most liability policies. In order to fulfill the duty to defend, the insurance company must pay court costs, expert witnesses, and lawyers to defend third parties’ claims. These costs can be quite substantial, so they should not be overlooked when you are facing a claim for liability.
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UMBRELLA LIABILITY COOVERAGE This type of insurance covers excess liability. This coverage is essential for the following reasons:

  • It offers additional coverage than the “underlying” insurance that you have.
  • This policy covers all liability exposures except for a few exclusions. The deductible is approximately $10,000 to $25,000.
  • It covers loss-related losses and provides replacement coverage.

NEGLIGENCE – Failure to exercise reasonable care. A person who does something that a reasonable prudent person would not do or fails to do in similar circumstances. Negligence can be considered a legal cause of damage if it directly or in a continuous and natural sequence causes or contributes substantially towards producing such damage.

GROSSNEGLIGENCE A reckless disregard or carelessness for the safety and lives of others. It is almost like a conscious violation other people’s safety rights. This is not just negligence; it can also be considered willful misconduct. In certain jurisdictions, punitive damages can be awarded to those found guilty of gross negligence by the trier-of-fact (jury or judge).

WILLFUL MISLEAD – Intentional action that is aware of the potential for serious injury or reckless disregard for its consequences.

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PRODUCT LIABILITY– A liability that results from a product being negligently manufactured and then sent into the stream. A manufacturer’s failure to properly manufacture, test, or warn about a manufactured item is a liability.

MANUFACTURING DEFECTS A product that is not in accordance with its design.

DESIGN DEFECTS When the foreseeable dangers of harm posed to the product could be reduced or avoided through the adoption of a reasonable alternate design. Failure to use the alternative design renders it not reasonably safe.

INADEQUATE WARNINGS OR INSTRUCTIONS – The product is not considered reasonably safe if they fail to provide reasonable instructions or warnings.

PROFESSIONAL LICENSE – Liability insurance that covers professionals (doctors and lawyers, architects, engineers, etc.) for any loss or expense resulting from the insured professional’s negligence, error, omission or failure to render professional services. Similar to malpractice insurance.

Over the years, professional liability has grown to include occupations that require special knowledge, skills, and close client relationships. As the business sector shifts from being a manufacturing-based one to becoming more service-oriented, professional occupations are increasing in number. Due to the litigious nature our society, service-based businesses and employees are more vulnerable to malpractice claims than ever.

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ERRORS & OMISSIONS– The same as professional liability or malpractice insurance.

HOLD-HARMLESS AGREEMENT A contract arrangement in which one party assumes all liability and relieves the other. A lease of premises might stipulate that the lessee “hold harmless” the lessor in the event of any accidents.

INEMNIFY– To compensate the victim for a loss in whole or in part by repair, payment, or replacement.

INEMNITY AGREEMENTS These clauses identify who is responsible for any liabilities that may arise and transfer liability to the other party for any wrongful acts.

WARRANTY A contract between a buyer or seller of goods and services that specifies the conditions under which repairs or fixes will be made or provided at no cost to the buyer.

Either implied or explicit warranties can be given. EXPRESS WARRANTY refers to a guarantee given by the seller of goods that expressly states the condition attached to the sale, e.g. “This item is warranted against defects in construction for one-year.”

IMPLIED WARRANTY can be found in common law jurisdictions. It is attached to the sale by operation of law on behalf of the manufacturer. These warranties are usually not in writing. These implied warranties include a warranty that the item will be fit for its intended purpose (which is implied by law if the seller knows that purpose) and a warranty that the goods will be merchantable (which is implied by law that the goods will be reasonably fit for that purpose).

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DAMAGES – A monetary consequence that results from injury to an object or person.

CONSEQUENTIAL DAMEN – Indirect loss or damage is any loss or damage that results from a covered peril such as fire, windstorm or other natural disasters. If windstorm is considered a covered peril, then a tree that falls on a refrigerator can cause it to shut down, and food could spoil. Insurance policies may extend coverage for consequential damage or loss. Insurance for Business Interruption covers consequential loss and damage, such as additional expenses, rent value, profits, commissions, and so forth.

LIQUIDATED DAMAGES– A payment made by parties to a contract to fulfill certain provisions that were not fulfilled. Liquidated damages can be forfeiture of a deposit, a down payment or a percentage of contract value, depending on the amount of work not completed. Although liquidated damages can be paid in lieu or a lawsuit in some cases, court action may still be necessary in others. When there is uncertainty about the amount of the monetary loss, liquidated damages are often paid. Liquidated damages are paid to relieve the party who has breeched a contract from the obligation of performing the remainder of the contract.

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SUPROGATION: “To stand in place of” This is usually found in property policies (first-party) and when an insurance company covers a loss or damages to insured property, the insurer acts as the insured and may pursue any third parties who might be responsible. If a defective part is sold to a manufacturer and the product is damaged as a result, then the insurer may sue the manufacturer. The manufacturer of the defective part may be sued by the insurance company that paid the loss.

There are many sub-principles to Subrogation, namely:

  • The insurer can’t be subrogated to an insured’s right of action before it has paid the insured or made up the loss.
  • Only actions that the insured would bring against the insurer are eligible for subrogation.
  • The insurer’s subrogation right must not be affected by the insured. If he is unable to exercise any rights against the third party, the insured must not compromise or renounce them.
  • Subrogation against an insurer. The insurer cannot make a profit on the insured’s loss. The insurer can only recover the amount they paid in indemnity. The insured should receive the remainder if they recover more.
  • Subrogation grants the insurer the right to salvage.
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