COP Insurance key terms

A situation where the only possible outcomes are loss or no loss, with no chance of gain. Insurance is designed to handle this type of risk because it is insurable and predictable in aggregate.

A situation that offers the possibility of either gain or loss, such as investing in stocks or starting a business. This type of risk is generally not insurable.

A financial or legal stake in the person or property insured such that the policyholder benefits from its continued existence and suffers a loss if it is destroyed. Required at policy inception.

The concept that insurance restores the insured to approximately the same financial position held before a loss, without allowing profit from the claim. It underpins property and liability coverage.

A settlement method equal to replacement cost minus depreciation. It reflects the current worth of damaged property rather than the cost to buy a new equivalent item.

The amount needed to repair or replace damaged property with new property of similar kind and quality, without deducting depreciation. Often offered as an optional endorsement or coverage enhancement.

A statistical principle stating that as the number of similar exposure units increases, actual results tend to approach expected results. It allows insurers to predict losses accurately and set premiums.

The tendency for people with higher-than-average risk to seek insurance more actively than low-risk individuals. Insurers counter it through underwriting, exclusions, and risk-based pricing.

A change in behavior caused by having insurance, such as carelessness or intentional loss creation. Insurers manage it through deductibles, exclusions, and claims investigation.

The amount a policyholder pays, usually in installments, to keep an insurance policy in force. It reflects expected losses, expenses, and a margin for profit and contingencies.

The amount the insured must pay out of pocket toward a covered loss before the insurer pays its share. Deductibles reduce small claims and help control premium costs.

A cost-sharing or property valuation provision. In health insurance it is the percentage of costs the insured pays after the deductible; in property it is the requirement to insure to a stated percentage of value.

The ability of an insurance company to meet its obligations to policyholders. Regulators monitor capital, reserves, and investments to ensure companies remain financially able to pay claims.

Funds an insurer sets aside to cover liabilities for claims already incurred but not yet paid, and for future obligations. Adequate reserves are essential to solvency and are reviewed by regulators.

Insurance purchased by an insurance company to transfer part of its risk to another insurer. It protects solvency, spreads large exposures, and increases capacity to write more business.

The amount of risk an insurer keeps for its own account after ceding part of it to a reinsurer. It may also refer to a policy provision requiring the insured to bear a portion of loss.

A principle requiring both insurer and applicant to deal honestly and disclose all material facts. Breach by the applicant can allow the insurer to rescind the policy.

A false statement of a fact that would have influenced an insurer's decision to issue a policy or set its terms. It can justify rescission or denial of a claim.

A statement or promise in a policy that must be literally true or complied with. Breach may allow the insurer to deny a claim, depending on the jurisdiction and materiality.

A policy provision that establishes duties or requirements the insured must meet, such as reporting a loss promptly or maintaining the property. Failure to comply can affect coverage.

A policy provision that removes specified perils, property, persons, or situations from coverage. Exclusions define the boundaries of the insurer's promise and are read narrowly against the insurer.

The specific cause of a loss, such as fire, theft, windstorm, or collision. Policies may be named-peril, covering only listed causes, or open-peril, covering all causes except those excluded.

A condition that increases the likelihood or severity of a loss. Physical hazards include oily rags; moral hazards involve dishonesty; morale hazards involve carelessness or indifference.

The insurer's right to recover claim payments from the party responsible for the loss, after compensating the insured. It prevents double recovery and shifts loss to the at-fault party.

Legal responsibility to others for bodily injury or property damage caused by the insured. Liability insurance pays damages and defense costs on behalf of the insured, up to policy limits.

Failure to exercise the degree of care a reasonable person would use in similar circumstances, resulting in harm. It typically requires a duty, breach, causation, and damages.

The maximum amount an insurer will pay for a covered loss. Limits may apply per occurrence, per person, or in aggregate, and amounts above the limit are the insured's responsibility.

Liability coverage that provides excess limits above underlying auto, homeowners, or other policies, and may fill gaps in coverage. It usually requires maintaining specified underlying limits.

The person or entity designated to receive life insurance proceeds or other policy benefits upon the insured's death. Designations should be clear and kept current.

The amount paid to a beneficiary when a life insurance policy matures through the insured's death. It may be reduced by outstanding loans or policy provisions.

The savings component of permanent life insurance that accumulates over time and can be borrowed against or withdrawn. Term life insurance generally has no cash value.

Permanent life coverage that remains in force for the insured's lifetime, with level premiums and guaranteed cash value accumulation. It may pay dividends in participating policies.

Life coverage for a specified period, paying a death benefit only if the insured dies during the term. It generally has no cash value and offers lower premiums for pure protection.

A period, commonly two years, during which an insurer may investigate and contest a life insurance claim for material misrepresentation on the application. After it passes, claims are generally incontestable.

A specified time after a premium due date during which the policy remains in force even though payment is late. Typically used in life and health policies to prevent accidental lapse.

Termination of a policy because required premiums were not paid within the allowed grace period. Lapsed coverage provides no benefits for later losses.

A reserve estimate for claims that have occurred but have not yet been reported to the insurer. It is a key liability on the insurer's balance sheet, especially in liability lines.

A legal obligation to act in the best interests of another party, often applied to agents handling client premiums or giving advice. It requires honesty, loyalty, and full disclosure.

The requirement that an insurance or financial product recommendation fit the customer's needs, goals, and circumstances. Agents must gather relevant information and document the basis for recommendations.

The ethical and regulatory duty to give customers complete, accurate information about coverage, costs, exclusions, and conflicts of interest so they can make informed decisions.