Wrecks & Fires
Chapter 15
Glossary
ACTUAL CASH VALUE: the replacement cost of an item less depreciation for its age and/or use. Often it is referred to simply as ACV.
ADVERSE SELECTION: when only a small number of policyholders are sharing a large risk.
ALL-RISK COVERAGE: the insurance company promises to pay for losses from all risks, except for specific exclusions which are listed in the policy.
BASIC FORM OR HO-1: also called Form 1, it generally covers the house and its contents against any of eleven different perils, which range from fire to broken glass. The Basic Form is considered to be limited coverage.
BODILY INJURY LIABILITY INSURANCE: covers someone else (other than the policyholder) who is hurt, or perhaps even killed, in an accident.
BROAD FORM OR HO-2: also called Form 2, this coverage costs more than does the HO-1 because it gives more benefits. It covers the house and its contents against specific losses as stated in the individual policies. The difference between the HO-1 and the HO-2 lies in the perils listed. The HO-2 insures against loss resulting from 18 listed perils rather than 11 or less, as in the HO-1.
CHANCE OF LOSS: the long-run relative frequency of a loss. It is often expressed as a percentage, since it often expresses mathematical probabilities of probable numbers and severity of losses out of a given number of exposures.
COLLISION COVERAGE: usually required by the lender on new vehicles which have not yet been paid for. It applies only to the car itself. The lender wants to be sure they will receive their money in the event that the car is a complete loss, due to an accident. Collision coverage covers repairs to the policy owner's vehicle no matter who caused the accident. It usually covers the fair market value. (Also see fair market value.)
COMPREHENSIVE COVERAGE: this gives coverage for damages that were not the result of a collision, such as damage from fire, flood, theft, vandalism, rocks thrown from the roadway, and so on. It is considered to be essential for new cars and sometimes even for older vehicles. Comprehensive covers the vehicle's fair market value, which normally declines with passing time.
COMPREHENSIVE FORM OR HO-5: also called Form 5, it is the same as HO-3, except that all risk protection is extended to coverage C, unscheduled personal property.
CONDITIONS: the "ground rules" under which the contract operates. Insurance policies are conditional contracts. The conditions are those items which the policy owner must comply with in order for the policy to operate. They control the insurer’s liability for covered losses by imposing obligations on both the insured and the insurer.
CONDOMINIUM UNIT OWNERS FORM OR HO-6: also called Form 6, it was introduced in 1974 expressly for the unique needs of condominium unit owners who were exposed to risks similar to those of renters. HO-6 is a reproduction of HO-4, except for two changes, which offer limited coverage for damage to additions and alterations and also provides that the extra coverage will be excess insurance over and above any offered by the condominium association.
CONTENTS BROAD FORM OR HO-4: also called Form 4, or renters or tenants insurance, this type covers around 17 or 18 risks to personal property. It applies only to the contents of the house, not to the structure itself (which would presumably be covered by the building's owner).
CONTRIBUTORY NEGLIGENCE: allows a policy owner to collect damages only if they had no fault at all in the accident. If the driver had any fault at all, then he or she must collect from their own insurance company.
COVERAGE A: covers the actual dwelling or house.
COVERAGE B: covers all structures, except the house.
COVERAGE C: covers all personal property.
COVERAGE D: covers the loss of use of damaged property or belongs.
DECLARATIONS: descriptive phrases which describe the subjects covered, persons insured, premiums to be paid, period of coverage, policy limits and warranties made by the insured regarding the nature of a hazard. The declarations personalize the policy.
DEDUCTIBLES: many types of policies contain various types of deductibles. It is the amount of the loss that must be assumed (paid) by the policyholder before anything will be paid (covered) by the insurance company. It may be expressed as a dollar amount, a percentage or as time not covered.
DEFINITIONS: See Policy Definitions.
ENDORSEMENTS: used in property and liability insurance, they allow a standard or preprinted policy to be modified to meet specific situations. Riders are used in life insurance policies to modify mass-printed standard forms. They are used to complete policies as well as to take away benefits. For example, a standard fire policy is not considered complete until the endorsement is added, which describes the property which is to be covered. Also see Riders.
ENDORSEMENTS AND RIDERS: Often used when standard or preprinted policies do not entirely meet a specific situation. Modifications of the standard or mass-printed policy is met by adding special provisions to the basic contract. The term, endorsement, is used in property and liability insurance and the term, rider, is used in life insurance policies.
EXCLUSIONS: these eliminate specific benefits or coverage. Exclusions may also be referred to as limitations in some types of policies.
FAIR MARKET VALUE: this is determined by the book values (for automobiles) minus the cost of making repairs, minus a charge for unusually high mileage, if applicable.
FAMILY AUTOMOBILE POLICY (FAP): this has several parts to it, which includes:
1. Coverage A, bodily injury liability (Part 1)
2. Coverage B, property damage liability (Part 1)
3. Coverage C, reasonable & necessary medical expenses to the insured, their relatives and other persons injured (Part 2)
4. Coverages D through I, protection against loss resulting from physical damage to an automobile (Part 3)
5. Coverage K, found in some though not all policies. The insurance company agrees to pay a stated accidental death benefit if the death was caused by bodily injury while occupying a vehicle or by being struck by an insured vehicle, providing that death occurs within 90 days of the actual accident. (Part 4)
Each part of the FAP contains its own recovery limitations, definitions and exclusions.
FIRE AND ALLIED COVERAGE INSURANCE: usually required by a mortgage lender, this means that the structures would be insured against just about everything that might damage it.
FIRST PARTY: In an insurance contract, the first party is the policyholder.
FRAUD: the deliberate attempt to steal or deceive. When applied to insurance policies, it often takes the form of applying for benefits that are not due.
FUNDAMENTAL RISK: a type of risk to which society in general (or at least a large number of people) are exposed to in a single occurrence. An example of this is a recession.
HAZARDS: the catalysts that bring about or increase perils (also see perils).
HOMEOWNER'S INSURANCE: a combination or package policy. The actual provisions contained in the policy will depend upon the needs and/or desires of the homeowner. A homeowner's policy contains a combination of several forms, in most cases. Homeowner policies are designed to protect owners and renters from loss or damage to their property and to provide protection against liability claims.
INFLATION GUARD CLAUSE: a clause in a policy which automatically increases the coverage by a specified percentage amount at specified time intervals. The premium typically increases as well. An inflation guard will not reflect any improvements made.
INSURANCE: the simplified term most often used is the transfer of risk from one entity to another. A more complete definition would be: either the accumulation of a fund or a transfer of a risk, though not necessarily both. It must include a combination of a large number of separate, independent exposure units to make possible individual losses somewhat predictable. The predictable loss is then shared proportionately by all units involved. The definition of insurance should point out that both uncertainties are reduced and losses are shared.
INSURANCE POLICY: the document containing the contract between the insured and the insurer (the policy owner and the insurance company respectively).
INSURANCE RATE: the cost for one unit of insurance. Typically, a unit of insurance is $1,000 of coverage, although this can vary.
INSURED: the policyholder, generally speaking.
INSURER: the insurance company.
INSURING AGREEMENTS: the coverages in an insurance policy which are broadly defined in the insuring agreements. They may sometimes define important terms in the contract. These usually appear immediately after the declarations. Also see Declarations.
LAW OF LARGE NUMBERS: relates to the degree of risk. It may also be referred to as the Law Of Averages or the Law Of Probability. Without becoming involved in the complicated mathematics, basically it states that the greater the number of similar units exposed to a similar loss, the more accurate the loss predictions based on that specific data will be.
LEGAL HAZARDS: these hazards come as the result of court actions which increase the likelihood of a loss or increase the size of the loss itself.
LIABILITY: the state of being responsible or under obligation. Liability insurance covers a person's responsibility or obligation to another due to a loss. Liability insurance is the most expensive type of coverage.
MARKET VALUE: this is the dollar amount that the homeowner could sell their home for. It is not necessarily the same as the amount of money required to rebuild the home, should a loss (such as a fire) occur.
MEDICAL PAYMENTS INSURANCE: this pays, as the name implies the doctor and hospital bills and, if necessary, funeral expenses for the policy owner and members of his or her family who live in the same household, regardless of who caused the accident. It will also cover any passengers in the car being driven and even pedestrians.
MODIFIED COMPARATIVE NEGLIGENCE: bases what a policy owner can collect on the percentage of each person's (driver's) fault.
MORAL HAZARDS: this involves people and their actions. Arson is an example of a moral hazard because it involves the deliberate actions of a person or persons. Also see Morale (with an "e" on the end) Hazards.
MORALE HAZARDS: this involves human carelessness or irresponsibility, rather than an intentional act. Also see Moral Hazards.
MORATORIUM: the legal permission to delay action. This generally applies to such things as the selling of earthquake insurance immediately following the final aftershocks of an earthquake. By allowing a moratorium on the sale of earthquake insurance (following such an occurrence), it allows insurance companies to determine their exact losses before assuming new risks. It also acknowledges the possibility of additional and damaging aftershocks, which could result in additional losses for the insurance companies.
NATIONAL FLOOD INSURANCE PROGRAM: this is administered by the Federal Emergency Management Agency (FEMA). Both the private and government flood insurance coverages are part of this program.
NEGLIGENCE: the lack of proper care or attention; carelessness.
NO-FAULT: a system in which the driver's own coverage pays for the losses regardless of who actually caused the accident. It is due to this fact that it is referred to as "no-fault."
OLDER HOME FORM OR HO-8: also called Form 8, it is identical to HO-1, except losses under the 10 listed perils are settled on an Actual Cash Value (ACV) basis rather than on a replacement cost basis.
PARTICULAR RISK: a risk to which relatively few people are exposed to in a single occurrence. Particular Risk and a Fundamental Risk have much in common. The main difference is the number of people exposed to the risk itself.
PARTIES: There are several parties involved in insurance:
1. The first party is the policy owner.
2. The second party is the insurance company.
3. The third party is the other driver.
PERILS: perils are the things that cause losses, such as fire, floods, explosions or negligence. Also see Hazards.
PERSONAL-INJURY PROTECTION: Often referred to as PIP, it is required by law in some states. It covers:
1. the policy owner's own medical bills up to a specified limit
2. funeral expenses
3. replacement services in some states.
PHYSICAL HAZARDS: these come from material, structural or operational features. A physical hazard is, as the name implies, something that exists physically.
POLICY DEFINITIONS: a list of terms and phrases with their fully defined meanings stated. Wherever those words or phrases appear in the policy, they are printed in boldface type to remind the reader that a specifically listed definition applies.
POLICY LIMIT: contained in most policies, it means there is a limit to the amount of money the insurance company (policy) will pay out on a covered loss.
PRODUCER: the insurance agent who is selling the product.
PROPERTY DAMAGE LIABILITY INSURANCE: this is usually the other driver's car which is damaged in an accident. It can, however, also include other types of property, such as sign posts, fences or structures.
PURE COMPARATIVE NEGLIGENCE: this bases what a policy owner can collect on the percentage of each person's (driver's) fault.
PURE RISK: this is a chance of financial loss which does not offer any chance of financial gain simultaneously. Also see Speculative Risk.
RENTER'S INSURANCE: known as HO-4, Form 4 or Contents Broad Form, it covers only the personal property in a house; it does not cover the structure itself. It is identical to the HO-2, except that losses to the structure itself are not covered.
REPLACEMENT VALUE: the current cost of replacing an item or items that are lost, stolen or destroyed.
RIDERS: used in life insurance policies, they are used when standard or preprinted policies do not entirely meet specific situations. Modifications of the standard or mass-printed policy is obtained by adding special provisions to the basic contract. Also see Endorsements.
RISK: simply put, exposure to danger or adversity. For investments, risk is generally defined as uncertainty concerning loss. Risk is always connected to the uncertainty rather than to the loss itself. Also see Pure and Speculative Risk and Fundamental and Particular Risk.
SECOND PARTY: In an insurance policy, the second party is the insurance company.
SPECIAL FORM OR HO-3: also called Form 3, this plan offers still more coverage than either the HO-1 or the HO-2. It covers the house for all perils except those explicitly excluded by the policy. On personal property, it covers loss or damage from the same risks listed in the HO-2, but on the house itself, the policy owner is protected from all risks except any specifically excluded in the policy.
SPECULATIVE RISK: a risk which does offer the chance of both financial loss and financial gain at the same time. This is true in many types of investments; either a loss or a gain may be realized. A speculative risk is often created by the actions of the individual.
TENANTS COVERAGE: this is more commonly called "renters insurance" or HO-4. See Renter's Insurance or Contents Broad Form.
THIRD PARTY: In an automobile insurance policy, the third party is the other driver.
TOTAL LOSS: when the cost of an auto repair following an accident is higher than the value of the vehicle itself. A standard auto policy will not pay to repair a vehicle if the repairs would cost more than the cash value of the car.
UMBRELLA INSURANCE: often needed by individuals with relatively large asset bases. An Umbrella policy covers liability judgments that exceed the limits of the auto and homeowner's policies.
UNINSURED AND/OR UNDER-INSURED MOTORISTS: this type of coverage pays the cost of the policy owner's own injuries if they are hit by:
1. an uninsured driver who is at fault for the accident.
2. an at-fault driver whose small insurance policy will not cover all the damages incurred
3. a hit-and-run accident.
This type of coverage may also cover lost wages and, in some states, damages to the vehicle.
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