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69 terms

2.) Insurance Basic Terms

Terms for study in preparation for California Insurance Agent test. 2 of 26
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Insurance
Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.
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.
Risk
This is the uncertainty or chance of a loss occurring.
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
Risk management strategies
Avoiding, transferring (e.g. buying insurance), reducing, sharing (e.g. reinsurance), retaining (covering loss by oneself hence not buying insurance)
Peril
The actual cause of a loss e.g. fire, wind, hail, accident, or theft.
Hazard
Anything that increases the chance of loss or the severity of loss due to a peril.
Legal Hazard
The chance of a certain risk ending up in court.
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.
Physical Hazard
Anything that poses a risk and can be seen, heard, touched, tasted, or smelled e.g. weak tree limbs, worn-out brakes
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.
Exposure
Refers to the possibility of a loss.
Property Loss Exposure
The degree of loss a person/organization faces in regard to property.
Liability Loss Exposure
The degree of loss a person/organization faces in regard to lawsuits brought by a third party.
Human Personnel Loss Exposure
The degree of loss an employer faces in regard to lawsuits brought by employees e.g. workers compensation
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.
Insurable events
Only losses resulting from events that exist but may or may not happen can be insured.
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.
Indemnity
Indemnity means the insurer restores the insured to the condition the insured was in before the loss occurred.
Underwriting
The process of reviewing applications for insurance and checking the information on the application.
Loss Ratio
incurred losses + loss adjusting expense/earned premium = loss ratio.
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).
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.
De-mutualization
This is the process through which a mutual insurer becomes a stock company.
Reciprocal insurance exchange
A reciprocal company is an unincorporated company that consists of subscribers managed by an attorney.
Fraternal Organization (Fraternal Insurance Company)
These companies are social organizations or societies that are usually engaged in charitable acts.
Adverse selection
Occurs when people seek insurance at the last minute, when they really need it.
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 control
Loss control refers to taking precautions to reduce the risk of a loss e.g. installing smoke alarms and a sprinkler system.
Self funding
Paying out of pocket for expenses arising as a result of not having insurance.
Deductible
A deductible is the amount of money the insured pays before the insurer (company) pays any part of a claim.
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.
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.
Plate glass insurance
Includes insurance against glass that breaks, its ornamentation, frames, glazing, etc.
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.
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.
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.
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.
Burglary insurance
Includes insurance against loss by burglary, theft, or both.
Insolvency insurance
Includes insurance against loss arising from the failure of an insolvent insurer to discharge its obligations under its insurance policies.
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.
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.
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.
Aircraft insurance
Insures aircraft owners, users and dealers against loss through hazards incidental to ownership, maintenance, operation, and use of aircraft.
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.
Contract
An agreement between two or more parties enforceable by law.
Tort
Any wrongful act toward someone that leads to legal liability.
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.
Contract of adhesion
This is a contract prepared by the insurer and accepted or rejected by the insured.
Aleatory
If the contract has values that are not equal it is called an aleatory contract.
Unilateral
A unilateral contract contains the exchange of a premium for a promise.
Conditional contract
This type of contract is conditional because the company only pays on condition of a loss.
Personal contract
This is a contract between the insurance company and an individual.
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.
Insurance policy
The policy is the written instrument setting forth a contract of insurance.
Fraud
Fraud occurs when one party intentionally provides false information or conceals relevant information in order to benefit from unlawful gain.
Warranty
A warranty is a pledge, either expressed (written) or implied (not written but is understood by conduct, environment, or other means).
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).
Representation
Is a statement that may be written or oral.
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.
Waiver
The act of giving up a right, claim or privilege.
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.
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.
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.
Rebating
This occurs when a producer returns a financial benefit to a client as an inducement to purchase insurance from him or her.
Recission
This is the revocation of a contract.