Insurance terminology and definitions for everyday use
The impartial transfer of the possibility of a loss, from the insured to the insurer in exchange for payment. It is a form of risk management mainly used to protect against the risk of uncertain loss and to indemnify the insured.
It is the recognition, evaluation, and prioritization of risks to apply resources to minimize and monitor the likelihood and/or effect of unfortunate events. Risks can come from uncertainty in financial markets, possible project failures, accidents, natural causes and disasters as well as unpredictable events.
The strategies to manage uncertainties with negative consequences typically include transferring the risk to another party, as in the case of purchasing insurance.
It is to restore or to be reinstated to the position that one was in prior to the happening of a specified event or peril.
Three types of insurance contracts that seek to indemnify an insured:
- a “reimbursement” policy
- a “pay on behalf” policy
- an “indemnification” policy.
The insurance policy is a contract between the insurer and the insured (policyholder). The policy determines the claims which the insurer is required to pay.
The insurance policy is a contract whereby the insurer will pay the insured if certain stipulated events transpire. Subject to the “fortuity principle”, the event must be uncertain, either the moment of the event (e.g. death of the insured) or whether the event will happen at all (e.g. flood or fire).
Insurance contracts operate by the principle of utmost good faith (uberrima fides) which requires both parties to deal in good faith. The insured has a definite duty to reveal every fact related to the risk to be covered.
Items of an insurance policy
- Declarations – all details of the insured, the insuring company, what risks or property is covered, the amount of insurance, what deductibles apply, the policy period and premium amount.
- Definitions – explanations of important terms used in the policy.
- Insuring agreement – details of insured risks and the contractual agreement between insurer and insured. A summary of the major promises of the insurance company.
- Exclusions – losses arising from specific events which are not covered by the policy.
- Conditions – provisions and obligations required for coverage. If policy conditions are not met, the insurer can deny the claim.
- Endorsements – modifications to the policy.
- Policy riders – The terms of policy amendments.