FREQUENTLY USED HOME INSURANCE TERMS

ACTUAL CASH VALUE: A form of insurance that pays damages equal to the replacement value of damaged property minus depreciation.

ADDITIONAL LIVING EXPENSES: Extra charges covered by homeowners’ policies over and above the policyholder's customary living expenses. They kick in when the insured requires temporary shelter due to damage by a covered peril that makes the home temporarily uninhabitable.

ADJUSTER: An individual employed by a property/casualty insurer to evaluate losses and settle policyholder claims. These adjusters differ from public adjusters, who negotiate with insurers on behalf of policyholders, and receive a portion of a claims settlement. Independent adjusters are independent contractors who adjust claims for different insurance companies.

ADVERSE SELECTION: The tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk. Insurers react either by charging higher premiums or not insuring at all, as in the case of floods. (Flood insurance is provided by the federal government but sold mostly through the private market.) In the case of natural disasters, such as earthquakes, adverse selection concentrates risk instead of spreading it. Insurance works best when risk is shared among large numbers of policyholders.

ALLIED LINES: Property insurance that is usually bought in conjunction with fire insurance; it includes wind, water damage, and vandalism coverage.

APPRAISAL: A survey to determine a property’s insurable value, or the amount of a loss.

BEACH AND WINDSTORM PLANS: State-sponsored insurance pools that sell property coverage for the peril of windstorm to people unable to buy it in the voluntary market because of their high exposure to risk. Seven states (AL, FL, LA, MS, NC, SC, TX) offer these plans to cover residential and commercial properties against hurricanes and other windstorms. Georgia and New York provide this kind of coverage for windstorm and hail in certain coastal communities through other property pools. Insurance companies that sell property insurance in the state are required to participate in these plans. Insurers share in profits and losses.

BINDER: Temporary authorization of coverage issued prior to the actual insurance policy.

BLANKET COVERAGE: Insurance coverage for more than one item of property at a single location, or two or more items of property in different locations.

BURGLARY AND THEFT INSURANCE: For the loss of property due to burglary, robbery or larceny. It is provided in a standard homeowners’ policy and in a business multiple peril policy.

CATASTROPHE: Term used for statistical recording purposes to refer to a single incident or a series of closely related incidents causing severe insured property losses totaling more than a given amount, currently $25 million.

CATASTROPHE DEDUCTIBLE: A percentage or dollar amount that a homeowner must pay before the insurance policy kicks in when a major natural disaster occurs. These large deductibles limit an insurer’s potential losses in such cases, allowing it to insure more property. A property insurer may not be able to buy reinsurance to protect its own bottom line unless it keeps its potential maximum losses under a certain level.

COINSURANCE: In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss.

DECLARATION: Part of a property or liability insurance policy that states the name and address of policyholder, property insured, its location and description, the policy period, premiums, and supplemental information. Referred to as the “dec page.”

DEDUCTIBLE: The amount of loss paid by the policyholder. Either a specified dollar amount, a percentage of the claim amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.

DIRECT PREMIUMS: Property/casualty premiums collected by the insurer from policyholders, before reinsurance premiums are deducted. Insurers share some direct premiums and the risk involved with their re-insurers.

EARTHQUAKE INSURANCE: Covers a building and its contents, but includes a large percentage deductible on each. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies.

E-COMMERCE: The sale of products such as insurance over the Internet.

ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE: A form of insurance designed to cover losses and liabilities arising from damage to property caused by pollution.

ESCROW ACCOUNT: Funds that a lender collects to pay monthly premiums in mortgage and homeowners insurance, and sometimes to pay property taxes.

EXCESS AND SURPLUS LINES: Property/casualty coverage that isn’t available from insurers licensed by the state (called admitted insurers) and must be purchased from a non-admitted carrier.

EXCLUSION: A provision in an insurance policy that eliminates coverage for certain risks, people, property classes, or locations.

EXTENDED REPLACEMENT COST COVERAGE: Pays a certain amount above the policy limit to replace a damaged home, generally 120 percent or 125 percent. Similar to a guaranteed replacement cost policy, which has no percentage limits. Most homeowner policy limits track inflation in building costs. Guaranteed and extended replacement cost policies are designed to protect the policyholder after a major disaster when the high demand for building contractors and materials can push up the normal cost of reconstruction.

FAIR ACCESS TO INSURANCE REQUIREMENTS PLANS/FAIR PLANS: Insurance pools that sell property insurance to people who can’t buy it in the voluntary market because of high risk over which they may have no control. FAIR Plans, which exist in 28 states and the District of Columbia, insure fire, vandalism, riot, and windstorm losses, and some sell homeowners insurance which includes liability. Plans vary by state, but all require property insurers licensed in a state to participate in the pool and share in the profits and losses.

FEDERAL INSURANCE ADMINISTRATION/FIA: Federal agency in charge of administering the National Flood Insurance Program. It does not regulate the insurance industry.

FIRE INSURANCE: Coverage protecting property against losses caused by a fire or lightning that is usually included in homeowners or commercial multiple peril policies.

FLOATER: Attached to a homeowners policy, a floater insures movable property, covering losses wherever they may occur. Among the items often insured with a floater are expensive jewelry, musical instruments, and furs. It provides broader coverage than a regular homeowners policy for these items.

FLOOD INSURANCE: Coverage for flood damage is available from the federal government under the National Flood Insurance Program but is sold by licensed insurance agents. Flood coverage is excluded under homeowners policies and many commercial property policies. However, flood damage is covered under the comprehensive portion of an auto insurance policy.

FORCED PLACE INSURANCE: Insurance purchased by a bank or creditor on an uninsured debtor’s behalf so if the property is damaged, funding is available to repair it.

FRAUD: Intentional lying or concealment by policyholders to obtain payment of an insurance claim that would otherwise not be paid, or lying or misrepresentation by the insurance company managers, employees, agents, and brokers for financial gain.

GUARANTEED REPLACEMENT COST COVERAGE: Homeowners policy that pays the full cost of replacing or repairing a damaged or destroyed home, even if it is above the policy limit.

HOMEOWNERS INSURANCE POLICY: The typical homeowners insurance policy covers the house, the garage and other structures on the property, as well as personal possessions inside the house such as furniture, appliances and clothing, against a wide variety of perils including windstorms, fire and theft. The extent of the perils covered depends on the type of policy. An all-risk policy offers the broadest coverage. This covers all perils except those specifically excluded in the policy. Homeowners insurance also covers additional living expenses. Known as Loss of Use, this provision in the policy reimburses the policyholder for the extra cost of living elsewhere while the house is being restored after a disaster. The liability portion of the policy covers the homeowner for accidental injuries caused to third parties and/or their property, such as a guest slipping and falling down improperly maintained stairs. Coverage for flood and earthquake damage is excluded and must be purchased separately.

HOUSE YEAR: Equal to 365 days of insured coverage for a single dwelling. It is the standard measurement for homeowners insurance.

HURRICANE DEDUCTIBLE: A percentage or dollar amount added to a homeowner’s insurance policy to limit an insurer’s exposure to loss from a hurricane. Higher deductibles are instituted in higher risk areas, such as coastal regions. Specific details, such as the intensity of the storm for the deductible to be triggered and the extent of the high risk area, vary from insurer to insurer and state to state.

INDEMNIFY: Provide financial compensation for losses.

INFLATION GUARD CLAUSE: A provision added to a homeowners insurance policy that automatically adjusts the coverage limit on the dwelling each time the policy is renewed to reflect current construction costs.

INSURABLE RISK: Risks for which it is relatively easy to get insurance and that meet certain criteria. These include being definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable. The insurance company also must be able to come up with a reasonable price for the insurance.

INSURANCE: A system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium.

INSURANCE SCORE: Insurance scores are confidential rankings based on credit information. This includes whether the consumer has made timely payments on loans, the number of open credit card accounts and whether a bankruptcy filing has been made. An insurance score is a measure of how well consumers manage their financial affairs, not of their financial assets. It does not include information about income or race. Studies have shown that people who manage their money well tend also to manage their most important asset, their home, well. And people who manage their money responsibly also tend to handle driving a car responsibly. Some insurance companies use insurance scores as an insurance underwriting and rating tool.

INSURANCE-TO-VALUE: Insurance written in an amount approximating the value of the insured property.

JOINT UNDERWRITING ASSOCIATION/JUA: Insurers which join together to provide coverage for a particular type of risk or size of exposure, when there are difficulties in obtaining coverage in the regular market, and which share in the profits and losses associated with the program. JUAs may be set up to provide auto and homeowners insurance and various commercial coverages, such as medical malpractice.

LIABILITY INSURANCE: Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.

LOSS: A reduction in the quality or value of a property, or a legal liability.

LOSS ADJUSTMENT EXPENSES: The sum insurers pay for investigating and settling insurance claims, including the cost of defending a lawsuit in court.

MINE SUBSIDENCE COVERAGE: An endorsement to a homeowners insurance policy, available in some states, for losses to a home caused by the land under a house sinking into a mine shaft. Excluded from standard homeowners’ policies, as are other forms of earth movement.

MORTGAGE GUARANTEE INSURANCE: Coverage for the mortgagee (usually a financial institution) in the event that a mortgage holder defaults on a loan. Also called private mortgage insurance (PMI).

MORTGAGE INSURANCE: A form of decreasing term insurance that covers the life of a person taking out a mortgage. Death benefits provide for payment of the outstanding balance of the loan. Coverage is in decreasing term insurance, so the amount of coverage decreases as the debt decreases. A variant, mortgage unemployment insurance pays the mortgage of a policyholder who becomes involuntarily unemployed.

MULTIPLE PERIL POLICY: A package policy, such as a homeowners or business insurance policy, that provides coverage against several different perils. It also refers to the combination of property and liability coverage in one policy. In the early days of insurance, coverages for property damage and liability were purchased separately.

NAMED PERIL: Peril specifically mentioned as covered in an insurance policy.

NON-ADMITTED ASSETS: Assets that are not included on the balance sheet of an insurance company, including furniture, fixtures, past-due accounts receivable, and agents’ debt balances.

NOTICE OF LOSS: A written notice required by insurance companies immediately after an accident or other loss. Part of the standard provisions defining a policyholder's responsibilities after a loss.

OCCURRENCE POLICY: Insurance that pays claims arising out of incidents that occur during the policy term, even if they are filed many years later.

ORDINANCE OR LAW COVERAGE: Endorsement to a property policy, including homeowners, that pays for the extra expense of rebuilding to comply with ordinances or laws, often building codes, that did not exist when the building was originally built. For example, a building severely damaged in a hurricane may have to be elevated above the flood line when it is rebuilt. This endorsement would cover part of the additional cost.

PACKAGE POLICY: A single insurance policy that combines several coverages previously sold separately. Examples include homeowners insurance and commercial multiple peril insurance.

PERIL: A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy in contrast to an all-risk policy, which covers all causes of loss except those specifically excluded.

PERSONAL ARTICLES FLOATER: A policy or an addition to a policy used to cover personal valuables, like jewelry or furs.

PERSONAL LINES: Property/casualty insurance products that are designed for and bought by individuals, including homeowners and automobile policies.

POLICY: A written contract for insurance between an insurance company and policyholder stating details of coverage.

PREMISES: The particular location of the property or a portion of it as designated in an insurance policy.

PREMIUM: The price of an insurance policy, typically charged annually or semiannually.

PROPERTY/CASUALTY INSURANCE: Covers damage to or loss of policyholders’ property and legal liability for damages caused to other people or their property. Property/casualty insurance, which includes auto, homeowners and commercial insurance, is one segment of the insurance industry. The other sector is life/health. Outside the United States, property/casualty insurance is referred to as non-life or general insurance.

RATE: The cost of a unit of insurance, usually per $1,000. Rates are based on historical loss experience for similar risks and may be regulated by state insurance offices.

RATING BUREAU: The insurance business is based on the spread of risk. The more widely risk is spread, the more accurately loss can be estimated. An insurance company can more accurately estimate the probability of loss on 100,000 homes than on ten. Years ago, insurers were required to use standardized forms and rates developed by rating agencies. Today, large insurers use their own statistical loss data to develop rates. But small insurers, or insurers focusing on special lines of business, with insufficiently broad loss data to make them actuarially reliable depend on pooled industry data collected by such organizations as the Insurance Services Office (ISO) which provides information to help develop rates such as estimates of future losses and loss adjustment expenses like legal defense costs.

RENTERS INSURANCE: A form of insurance that covers a policyholder’s belongings against perils such as fire, theft, windstorm, hail, explosion, vandalism, riots, and others. It also provides personal liability coverage for damage the policyholder or dependents cause to third parties. It also provides additional living expenses, known as loss-of-use coverage, if a policyholder must move while his or her dwelling is repaired. It also can include coverage for property improvements. Possessions can be covered for their replacement cost or the actual cash value that includes depreciation.

REPLACEMENT COST: Insurance that pays the dollar amount needed to replace damaged personal property or dwelling property without deducting for depreciation but limited by the maximum dollar amount shown on the declarations page of the policy.

RIDER: An attachment to an insurance policy that alters the policy’s coverage or terms.

RISK: The chance of loss or the person or entity that is insured.

SALVAGE: Damaged property an insurer takes over to reduce its loss after paying a claim. Insurers receive salvage rights over property on which they have paid claims, such as badly-damaged cars. Insurers that paid claims on cargoes lost at sea now have the right to recover sunken treasures. Salvage charges are the costs associated with recovering that property.

SCHEDULE: A list of individual items or groups of items that are covered under one policy or a listing of specific benefits, charges, credits, assets or other defined items.

SEWER BACK-UP COVERAGE: An optional part of homeowners insurance that covers sewers.

SUBROGATION: The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is legally liable for it.

TITLE INSURANCE: Insurance that indemnifies the owner of real estate in the event that his or her clear ownership of property is challenged by the discovery of faults in the title.

TOTAL LOSS: The condition of an automobile or other property when damage is so extensive that repair costs would exceed the value of the vehicle or property.

UMBRELLA POLICY: Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.

UNDERINSURANCE: The result of the policyholder’s failure to buy sufficient insurance. An underinsured policyholder may only receive part of the cost of replacing or repairing damaged items covered in the policy.

UNDERWRITING: Examining, accepting, or rejecting insurance risks and classifying the ones that are accepted, in order to charge appropriate premiums for them.

UNINSURABLE RISK: Risks for which it is difficult for someone to get insurance.

VANDALISM: The malicious and often random destruction or spoilage of another person’s property.

VOLCANO COVERAGE: Most homeowners’ policies cover damage from a volcanic eruption.

WATER-DAMAGE INSURANCE COVERAGE: Protection provided in most homeowners’ insurance policies against sudden and accidental water damage, from burst pipes for example. Does not cover damage from problems resulting from a lack of proper maintenance such as dripping air conditioners. Water damage from floods is covered under separate flood insurance policies issued by the federal government.