ASLI key terms

A financial stake in the person or property being insured such that the policyholder would suffer a genuine loss if the insured event occurred. It must exist at the time the policy is purchased.

The idea that an insurance payout should restore the policyholder to roughly the financial position held before a loss, not create profit. It underpins most property and liability coverage.

A statistical principle holding that as the number of similar independent exposure units grows, actual results tend to approach expected results. It allows insurers to predict losses more reliably across large groups.

Combining many separate exposures into one group so that the premiums of the many fund the losses of the few. This spreading of risk is the core mechanism that makes insurance work.

The tendency for people with higher-than-average risk to seek or keep insurance more eagerly than low-risk people. Insurers counter it through underwriting, exclusions, and waiting periods.

The increased likelihood of loss or exaggerated claims caused by the presence of insurance itself, such as carelessness or dishonesty. Insurers manage it with deductibles, exclusions, and claim investigation.

A situation offering only the chance of loss or no loss, with no possibility of gain. Insurers generally insure pure risks such as fire or liability but not speculative ones.

A situation involving the possibility of either gain or loss, such as investing in a business or gambling. Because it is voluntary and offers upside, it is generally not insurable.

The specific cause of a loss, such as fire, windstorm, theft, or collision. Policies list covered perils to define what events will trigger payment.

A condition that increases the chance or severity of a loss without being the cause itself. Examples include icy steps, faulty wiring, or a history of reckless driving.

The first two elements of forming a valid contract: one party proposes terms and the other agrees to them. In insurance, the application is usually the offer and the policy issuance is the acceptance.

The value each party exchanges to make a contract binding. In insurance, the policyholder pays premium and the insurer promises to pay covered claims.

An agreement in which the amounts exchanged by the parties are unequal and depend on an uncertain event. Insurance is aleatory because a small premium may produce a large claim payment.

A contract drafted by one party and offered to the other on a take-it-or-leave-it basis. Because the insurer writes the wording, ambiguities are generally interpreted in the policyholder's favor.

The principle that both parties must deal honestly and disclose material facts. Insurers rely on accurate application information, and misrepresentation can allow a policy to be voided.

A false statement on an application that would have influenced the insurer's decision to issue coverage or set its price. It may give the insurer grounds to rescind the policy.

The intentional failure to disclose a fact that the insurer needs in order to evaluate a risk. Material concealment can make a policy voidable by the insurer.

The voluntary giving up of a known right under a policy, such as an insurer's right to require proof of loss by a deadline. Once waived, the right may not be reclaimed.

A legal bar that prevents a party from asserting a right after its earlier conduct led another party to rely on that conduct to their detriment. It often follows a waiver.

The amount of a covered loss the policyholder must pay out of pocket before the insurer pays. Higher deductibles lower premium but increase the insured's share of each loss.

A property policy provision requiring the insured to carry coverage equal to a stated percentage of the property's value. If underinsured, the insured shares the loss through a reduced claim payment.

A method of valuing a loss as replacement cost minus depreciation. It reflects the used value of damaged property rather than the cost to buy it new.

A valuation method that pays what it would cost to repair or replace damaged property with new property of similar kind and quality, without deducting depreciation. It typically costs more in premium.

A property policy that covers only the perils specifically listed in the contract, such as fire, lightning, and windstorm. The insured bears the burden of showing the loss resulted from a listed peril.

A policy that covers all causes of loss except those expressly excluded. It is broader than a named peril policy, and the insurer bears the burden of proving an exclusion applies.

A policy provision that removes specified losses, property, or persons from coverage. Common examples include intentional acts, wear and tear, and earth movement.

Coverage for the insured's legal responsibility to others for bodily injury or property damage. It protects the insured against claims brought by someone else, not against the insured's own losses.

Failure to use the degree of care a reasonable person would use in similar circumstances, resulting in harm. It is the basis for most liability claims covered by casualty insurance.

The process of evaluating an applicant's risk and deciding whether to accept it and on what terms. It may result in standard, preferred, or substandard classification, or in declination.

Grouping applicants with similar expected loss characteristics so each group pays a premium that reflects its own risk level. It supports fairness and helps control adverse selection.

A statistical chart showing the rate at which people in a defined group are expected to die at each age. Life insurers use it to calculate the cost of death protection and set premiums.

The frequency with which illness or injury occurs within a population over a period. Health insurers use it to estimate expected claim costs and to price coverage.

The person or entity named to receive the death benefit of a life insurance policy. A primary beneficiary is first in line; a contingent beneficiary receives the proceeds if the primary is unavailable.

The savings component that builds inside a permanent life policy and is available to the owner through loans, withdrawals, or surrender. Term policies generally have no cash value.

Coverage that pays a death benefit only if the insured dies within a specified period. It provides pure protection with no savings element and is typically the least expensive form of life insurance.

The amount the insurer pays to the beneficiary when the insured dies while the policy is in force. Policy loans or unpaid premiums may reduce the amount actually paid.

Rules that determine how two or more health plans share payment for the same medical expense so total payments do not exceed the cost. It prevents duplicate payment from overlapping coverage.

A specified time after a policy begins or a condition arises during which benefits are not payable. It helps control adverse selection and claims for pre-existing conditions.

A health condition that was diagnosed or treated before a person's coverage took effect. Policies may limit or delay benefits for such conditions under applicable rules.

The amount a policyholder pays, usually periodically, to keep insurance coverage in force. It reflects expected losses, expenses, and the insurer's margin, adjusted for the insured's risk characteristics.

The legal obligation of an insurance producer or insurer to act in the client's best interest and handle funds responsibly. Breach can lead to regulatory penalties and license action.

Inducing a policyholder to drop existing coverage through misleading or incomplete comparisons in order to sell a replacement policy. It is an unfair trade practice subject to regulatory penalties.

Offering part of a producer's commission or other inducement to a buyer to persuade them to purchase insurance. Most states prohibit it as an unfair trade practice.

An interpretive principle under which coverage is honored according to the reasonable expectations of the policyholder, even where strict policy wording might suggest otherwise. It commonly applies to ambiguous language in adhesion contracts.

The maximum amount an insurer will pay for a covered claim under a policy or coverage part. Amounts above the limit are the insured's responsibility.