Insurance Definitions

The insurance industry uses quite a number of technical terms, usually for reasons of precise meaning, which are not necessarily easily understood by the layman. This section clarifies what the key words and phrases that you'll find in insurance documents mean.

ADDENDUM
A document setting out agreed alterations to an insurance contract. (See also endorsement).

ADDITIONAL PREMIUM
A further premium payable by the insured as a result of policy amendment, that may have increased the risk or changed the policy conditions or sum insured.

ALL RISKS
Term used to describe insurance against loss of or damage to property arising from any fortuitous cause except those that are specifically excluded.

ASSURANCE
A term interchangeable with insurance but generally used in connection with life cover as assurance implies the certainty of an event and insurance the probability. AVERAGE
A clause in insurance policies whereby, in the event of under-insurance, the claim paid out by the insurer is restricted to the same proportion of the loss as the sum insured under the policy bears to the total value of the insured item.

CANCELLATION
Termination of a policy before it is due to expire. There may be a cancellation clause in a policy setting out the condition under which the policy may be cancelled by notice. The period of notice could be anything from 48 hours to 3 months. In most cases this will result in a return premium being paid by the insurer to the insured. CLAIMS
Injury or loss to the insured arising so as to cause liability to the insurer under a policy it has issued.

CONCEALMENT
Deliberate suppression by a proposer for insurance of a material fact relating to the risk, usually making the contract null and void.

COVER NOTE:
A document issued to the insured confirming details of the insurance cover placed. Some cover notes are a legal requirement, e.g. motor.

ENDORSEMENT
Documentary evidence of a change in the wording of or cover offered by an existing policy or qualification of wording if the policy is written on restricted terms. (See also Addendum).

EXCESS
The first portion of a loss or claim which is borne by the insured. An excess can be either voluntary to obtain premium benefit or imposed for underwriting reasons. EXCLUSION
A provision in a policy that excludes the insurer's liability in certain circumstances or for specified types of loss.

EX-GRATIA PAYMENT:
A payment made by an insurer to a policyholder where there is no legal liability so to pay.

FIRST LOSS INSURANCE
Insurance where the sum insured is accepted to be less than the value of the property but the insurer undertakes to pay claims up to the sum insured, without application of average.

INCEPTION DATE
The date from which, under the terms of a policy, an insurer is deemed to be at risk. INDEMNITY
A principle whereby the insurer seeks to place the insured in the same position after a loss as he occupied immediately before the loss (as far as possible). INSURABLE INTEREST
For a contract of insurance to be valid the policyholder must have an interest in the insured item that is recognised at law whereby he benefits from its safety, well being or freedom from liability and would be prejudiced by its damage or the existence of liability. This is called the insurable interest and must exist at the time the policy is taken out and at the time of the loss.

INSURABLE VALUE
The value of the insurable interest which the insured has in the insured occurrence or event. It is the amount to be paid out by the insurer (assuming full insurance) in the event of total loss or destruction of the item insured.

INSURED
The person whose property is insured or in whose favour the policy is issued. 

INSURER
An insurance company or Lloyd's underwriter who, in return for a consideration (a premium). agrees to make good in a manner laid down in the policy any loss or damage suffered by the person paying the premium as a result of some accident or occurrence.

KNOCK FOR KNOCK
A forbearance agreement between two insurance companies designed to avoid legal action. This arrangement applies to motor vehicle policies and under it each company agrees to pay up to the limits of their respective interests for the damage to the vehicle of their own insured without regard as to who was to blame for the accident.

LAPSE
The non-renewal of a policy for any reason.

LATENT DISEASE
An illness which lies dormant for some years before manifesting itself.

LIMIT
The insurer's maximum liability under an insurance, which may be expressed 'per accident', 'per event', 'per occurrence', 'per annum', etc

MATERIAL FACT
Any fact which would influence the insurer in accepting or declining a risk or in fixing the premium or terms and conditions of the contract is material and must be disclosed by a proposer, or by the insurer to the insured.

NEGLIGENCE
Perhaps the most common form of tort. In Blyth v Birmingham Waterworks Co. (1856) it was defined as 'the omission to do something which a reasonable man guided by those considerations which ordinarily regulate the conduct of human affairs would do, or doing something which a prudent and reasonable man would not do'. Gives rise to civil liability.

PERIL
A contingency, of fortuitous happening, which may be covered or excluded by a policy of insurance.

PERIOD OF RISK
The period during which the insurer can incur liability under the terms of the policy. POLICY
A document detailing the terms and conditions applicable to an insurance contract and constituting legal evidence of the agreement to insure. It is issued by an insurer or his representative for the first period of risk. On renewal a new policy may well not be issued although the same conditions would apply, and the current wording would be evidence by the renewal receipt.

POLICY HOLDER
The person in whose name the policy is issued. ( See also insured and assured). PREMIUM
The consideration paid for a contract of insurance.

PROPOSAL FORM
A form sent by an insurer to a person requiring insurance so as to obtain sufficient information to allow the insurer to decide whether or not to accept a risk and what conditions to apply if it is accepted. QUOTE
A statement by an insurer of the premium he will require for a particular insurance.

REINSTATEMENT
Making good. Where insured property is damaged, it is usual for settlement to be effected through the payment of a sum of money, but a policy may give either the insured or insurer the option to restore or rebuild instead.

RENEWAL
The process of continuing an insurance from one period of risk to a succeeding one. RISK
The peril insured against or an individual exposure.

SALVAGE
A recovery of all or part of the value of an insured item on which a claim has been paid. The insurer will normally dispose of the item and apply the proceeds to reduce the cost of the claim.

SCHEDULE
The part of a policy containing information peculiar to that particular risk. The greater part of a policy is likely to be identical for all risks within a class of business covered by the same insurer.

SUM INSURED
The maximum amount payable in the event of a claim under contract of insurance. THIRD PARTY
A person claiming against an insured. In insurance terminology the first party is the insurer and the second party is the insured.

THIRD PARTY LIABILITY
Liability of the insured to persons who are not parties to the contract of insurance and are not employees of the insured

UTMOST GOOD FAITH
Insurance contracts are contracts of utmost good faith (uberrima fides), which means that both parties to the contract have a duty to disclose, clearly and accurately, all material facts relating to the proposed insurance. Any breach of this duty by the proposer may entitle the insurer to repudiate liability.

WARRANTY
A very strict condition in a policy imposed by an insurer. A breach entitles the insurer to deny liability.

WEAR AND TEAR
This is the amount deducted from claims payments to allow for any depreciation in the property insured which is caused by its usage.

WITHOUT PREJUDICE
1. Term used in discussion and correspondence. Where there is a dispute or negotiations for a settlement and terms are offered 'without prejudice' an offer so made or a letter so marked and subsequent correspondence cannot be admitted in evidence without the consent of both parties concerned.
2. Term also used by an underwriter when paying a claim which he feels may not attach to the policy.
This payment must not be treated as a precedent for future similar claims.