Learning the Language
Do you know the difference between a dwelling form and a homeowners form? Ever wonder about buying insurance on the voluntary market versus the shared market? How about the difference between open perils and named perils?
As with any endeavor, knowledge is power. The information provided in this guide gives you the power to properly assess your insurance needs, so in the event of a natural disaster, you and your family will not be left out in the cold. To that end, the following Glossary will define many of the key terms used in the insurance industry, and thus aid in your understanding of the information presented in this guide.
Glossary of Terms
Actual Cash Value – A claim settlement provision that pays damages equal to the replacement value of damaged property minus depreciation. (See Replacement cost.)
Availability – Reference to “insurance availability” generally means when insurance is obtainable by consumers in the general marketplace.
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.
Claim Settlement Provision – The provision in your insurance policy that defines the method that will be used to determine the amount of money (claim payment) the insured will receive as a result of a claim. (See Actual Cash Value, Replacement cost).
Coinsurance Provision – A provision in the policy that affects the amount of total damage
that will be covered in the event of a loss. For example, if the coinsurance provision is “80% coinsurance” that means that the property must be insured for at least 80% of the full estimated replacement value. If less insurance is purchased, there will be a deduction at the time of loss
payment to reflect this.
Community Rating System Discounts – Provides premium discounts in those communities that undertake floodplain activities beyond the basic requirements of the National Flood
Coverage – The extent of protection afforded by an insurance policy.
Deductible – The portion of loss paid by the policyholder. A deductible may be a specified dollar amount, a percentage of the insured 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 Response System – Insurance sold through direct mail, telephone or Internet.
Direct Writer System – Sales agents who are employees of the insurance companies.
Dollar Deductible – The dollar value the insured must pay before the insurance company will pay the remainder of the claim.
Dwelling Form – A policy form that only covers building property losses.
Earthquake Insurance – Covers a building and its contents in the event of an earthquake. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies.
Exclusive Agency System – Independent contractors who may only represent a single insurance company.
Exposure – Possibility of loss.
FAIR Plans – FAIR ACCESS TO INSURANCE REQUIREMENTS 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.
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 homeowner’s policies and many commercial property policies. However, flood damage is covered under the comprehensive portion of an auto insurance policy.
Functional Replacement Cost – (Market value coverage) Repairs are made using common, modern materials and methods without deduction for depreciation; if a total loss, the payment amount will be the market value of the home.
Homeowners Form – Combines property coverage with liability coverage.
Homeowners Insurance – 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. 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 typically excluded and must be purchased separately.
Hurricane Deductible – A percentage or dollar amount that must be paid by the policyholder in the event of a 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.
Independent Agency System – Independent contractors who are usually free to represent multiple insurance companies.
Insurance-to-Value Ratio – The relationship of the amount of insurance purchased to the replacement value of the property.
Involuntary Market Mechanisms – Sometimes referred to as “shared markets,” these have been developed to provide coverage for entities that do not qualify for coverage in the voluntary market.
Joint Underwriting Associations (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 homeowner’s insurance and various commercial coverages, such as medical malpractice.
Lines of Insurance – Types of insurance available for purchase; (for example, homeowners, auto, renters, boatowners).
Loss Mitigation – measures to reduce damage to property.
Loss of Use – A Provision in homeowners and renters insurance policies that reimburses policyholders for any extra living expenses due to having to live elsewhere while their home is being restored following a disaster.
Named Peril – Peril specifically mentioned as covered in an insurance policy.
National Flood Insurance Program – Federal government-sponsored program under which flood insurance is sold to homeowners and businesses.
Open Peril Policies – Policies will list what is excluded from coverage.
Package Coverage – 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.
Percentage Deductible – Percentage deductibles are based on the home's insured value.
Peril – A specific risk or cause of loss covered by an insurance policy, such as 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.
Peril-Specified Coverage – Coverage that will be provided only in the event of a specific peril. For example, earthquake coverage provides coverage only in the even of an earthquake.
Policy – A written contract for insurance between an insurance company and policyholder stating details of coverage.
Preferred Risk Policies – The NFIP has a Preferred Risk Policy (PRP), using the Dwelling Form, for those properties in low to moderate flood risk areas.
Premium – The price of an insurance policy, typically charged annually or semiannually.
Prior Loss – A loss that has occurred to the home or to the homeowner prior to applying for insurance.
Replacement Cost Coverage – Claim settlement provision that pays damages equal to the replacement cost of the damaged property with no deduction for depreciation (and subject to the limits of policy limits).
Special Payment – Loss is paid before dwelling is repaired, rebuilt or replaced.
Stated Value – A selected value established by the insured, and this value is the limit of liability,
Voluntary Market – Refers to the insurance market that is available to everyone, at the consumer's choice.