Insurance Dictionary

Definitions provided by the International Risk Management Institute (IRMI) Glossary of Insurance and Risk Management Terms


Accident(1) In common usage: an unforeseen and unplanned event or circumstances; or an unfortunate event resulting especially from carelessness or ignorance (Webster’s Dictionary). In insurance parlance, a term that is included within the insuring agreement of many types of liability insurance. In a few cases, the word “accident” is a defined term within the policy. In most cases, however, common law becomes the determinant of what is, or is not, an accident for purposes of triggering coverage. (2) In boiler and machinery (BM) insurance, “accident” is defined within the policy to mean a sudden and accidental equipment breakdown that causes damage to the equipment that necessitates repair or replacement. BM coverage applies to loss or damage resulting from an accident to a covered object. (3) In liability insurance, particularly older forms, the insuring agreements typically covered injuries or damages caused by an accident that was not the result of a deliberated intended act (even if the intended act caused an unexpected result). The term accident was undefined in such policies. The coverage trigger in the insuring agreement of modern liability policies, such as the commercial general liability (CGL) policy, applies to an “occurrence,” which is defined to mean an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Unlike most other modern liability policies, the commercial auto liability insuring agreement continues to apply to injuries or damages caused by an “accident.” In this case, the policy includes a definition, of sorts, of the term “accident”—that is, “[a]ccident” includes continuous or repeated exposure to the same conditions resulting in “bodily injury” or “property damage.” The personal auto policy’s (PAP’s) liability insuring agreement states that the insurer will pay damages for bodily injury or property damage for which any insured becomes legally responsible because of an auto accident. In this type of policy, the term accident is used in its ordinary sense, without including it as a defined term.

Adjuster: One who settles insurance claims. This typically involves investigation of the loss and a determination of the extent of coverage. In the context of first-party (e.g., property) insurance, the adjuster negotiates a settlement with the insured. In liability insurance, the adjuster coordinates the insured’s defense and participates in settlement negotiations. Adjusters may be employees of the insurer (staff adjusters) or of independent adjusting bureaus (independent adjusters) that represent insurers and self-insureds on a contract basis. Public adjusters are consultants who specialize in assisting insureds in presenting claims to insurance companies in a manner that will maximize their recovery.

Admitted company: A company licensed or authorized to sell insurance to the general public. In the United States, admitted companies are licensed on a state-by-state basis and differentiated from surplus lines insurers, which are authorized to sell insurance in a state on a nonadmitted basis.

Admitted insurance: Insurance written by an insurer licensed to do business in the state or country in which the insured exposure is located.

Admitted insurer:An insurer licensed to do business in the state or country in which the insured exposure is located.

Agent of record: The individual or company authorized to represent an insured in the purchase, servicing, and maintenance of insurance coverage with a designated insurer. Most insurance companies will not disclose any information or discuss an insured’s account with any agent other than the agent of record. An insured wishing to change insurance agents must submit a revised agent of record letter to the insurer authorizing them to release the insured’s information and to discuss the insured’s coverage with the new agent.

Agent’s license: A state-issued permit under whose provisions the agent conducts business.

Aircraft insurance policies: Claims or suits that arise out of the ownership, maintenance, or use of aircraft are generally excluded under the standard commercial general liability (CGL) forms. Businesses that elect to use private aircraft in their operations must purchase specialty insurance to cover their aircraft liability loss exposure: aircraft liability coverage or stand-alone nonowned aircraft liability and perhaps excess aircraft liability coverage as well. Coverage for third-party aircraft liability is often provided, which also includes hull (physical damage) and medical payments coverages. Aircraft policies are not standardized and vary widely. Some insurers offer policies that combine aircraft liability and hull with other aviation coverages, such as aircraft products liability, airport liability, land-based general liability, and hangarkeepers liability coverage.

Alien insurer: An insurer domiciled in and licensed under the laws of a country outside a given jurisdiction. For example, from a U.S. perspective, a Bermuda insurer would be an alien insurer.

Allocated loss adjustment expense (ALAE): Loss adjustment expenses that are assignable or allocable to specific claims. Fees paid to outside attorneys, experts, and investigators used to defend claims are examples of ALAE.

All risks coverage: Property insurance covering loss arising from any fortuitous cause except those that are specifically excluded. This is in contrast to named perils coverage, which applies only to loss arising out of causes that are listed as covered. Although many industry practitioners continue to use the term “all risks” to describe this approach to defining covered causes of loss in a property insurance policy, it is no longer used in insurance policies because of concern that the word “all” suggests coverage that is broader than it actually is. Because of this concern, some industry practitioners have begun to use the term “open perils” or “special perils” instead of “all risks.”

A.M. Best rating: An evaluation published by A.M. Best Company of all life, property, and casualty insurers domiciled in the United States and U.S. branches of foreign property insurer groups active in the United States. The ratings are often used to determine the claims-paying ability, suitability, service record, and financial stability of insurance companies. Other rating agencies include Standard & Poor’s, Conning & Company, Fitch, and Moody’s.

Animal mortality insurance (livestock): A form of life insurance for livestock, zoological, and domesticated animals. Normally covers death from any cause (with some exceptions), as well as voluntary destruction for humane reasons. Also available on a named perils basis.

Anniversary date: In policies with a term that exceeds 1 year, the anniversary of the policy inception date. For 1-year policies, this term can also be used to refer to the policy’s renewal date.

Annual statement: A yearly report required by the state insurance commissioner detailing an insurer’s income, expenses, assets, and liabilities, along with other pertinent data.

Assume: (1) To reinsure all or part of another insurer’s risk. (2) A risk management technique involving the retention of risk (e.g., self-insurance).

Audit: A survey of the financial records of a person or organization conducted annually (in most cases) to determine exposures, limits, premiums, etc.

Automobile liability excess indemnity: Provides excess limits for bodily injury (BI) and property damage (PD) liability for persons unable to secure more than minimum limits under their basic liability policy. This type of coverage stipulates that the primary policy must always be kept in force and is typically purchased by assigned risk plan policyholders.

Automobile physical damage insurance: Automobile insurance coverage that insures against damage to the insured’s own vehicle. Coverage is provided for perils such as collision, vandalism, fire, and theft.


Batch: A group of up to 20 surplus lines documents submitted to SLTX at once for processing.

Batch clause (basket clause): (1) A limitation provision, used most frequently in products liability and umbrella liability policies, that places coverage for all claims arising out of defective products produced in a single manufacturing run (or batch) within a single occurrence limit. (2) A provision found in professional liability policies stating that only one deductible (or retention) applies per wrongful act, regardless of the number of claims resulting from that act.

Batch edit report: A document created by SLTX that lists data collected from all policies submitted in a group.

Beneficiary: A person named by the insured to receive the proceeds or benefits accruing under a life policy.

Benefits: Compensation for loss and other services provided by insurers under terms of insurance contracts.

Best’s Capital Adequacy Ratio (BCAR): An important financial benchmark from A.M. Best that is intended to provide an indication as to whether a company has adequate capital to address its insurance and other risk exposures.

Best’s rating: The rating system developed and published annually by A.M. Best Company that indicates the financial condition of insurers. The ratings resemble grades on a report card and range from A++ (Superior) through C+ (Marginal) and all the way down to D (Poor), E (Under Regulatory Supervision), F (In Liquidation), and S (Rating Suspended).

Binder: A legal agreement issued by either an agent or an insurer to provide temporary evidence of insurance until a policy can be issued. Binders should contain definite time limits, should be in writing, and should clearly designate the insurer with which the risk is bound. They should also indicate the amount of insurance, the type of policy, and (in the case of property insurance) the perils insured against.

Blanket limit: A single limit of insurance that applies over more than one location or more than one category of property coverage, or both. This is in contrast to specific or scheduled limits of insurance, which are separate limits that apply to each type of property at each location.

Blanket policy: A single insurance policy that covers several different properties, shipments, or locations.

Board committees: Committees formed by members of a corporate board of directors that are created to address a particular aspect or feature of the corporation. Three of the most common board committees and their responsibilities include: (1) audit (overseeing the company’s financial, accounting, and internal and external audit functions), (2) nominating (identifying and recruiting new/additional board members and officers), and (3) compensation (recommending appropriate compensation levels for the company’s management, as well as compensation for members of the board). Board committees normally consist of two to four members of a corporate board of directors.

Bodily injury: Liability insurance term that includes bodily harm, sickness, or disease, including resulting death.

Bond: (e.g., fidelity bonds) or the failure to perform a specific act (e.g., performance or surety bonds). The principal (i.e., the party paying the bond premium) is also called the obligor (i.e., the party with the obligation to perform). If there is a default, the surety (i.e., the insurer) pays the loss of the third party (the obligee). The obligor must then reimburse the surety for the amount of loss paid.

Broker: An insurance intermediary who/that represents the insured rather than the insurer. Since they are not the legal representatives of insurers, brokers, unlike independent agents, often do not have the right to act on behalf of insurers, such as to bind coverage. While some brokers do have agency contracts with some insurers, they usually remain obligated to represent the interests of insureds rather than insurers. For example, some state insurance codes impose a fiduciary responsibility to act on behalf of their customers or provide full disclosure of all their compensation from all sources.

Builders risk policy: A property insurance policy that is designed to cover property in the course of construction. There is no single standard builders risk form; most builders risk policies are written on inland marine (rather than commercial property) forms. Coverage is usually written on an all risks basis and typically applies not only to property at the construction site, but also to property at off-site storage locations and in transit. Builders risk insurance can be written on either a completed value or a reporting form basis; in either case, the estimated completed value of the project is used as the limit of insurance.

Building and personal property coverage form (ISO): The key Insurance Services Office, Inc. (ISO), direct damage commercial property coverage form. This form (CP 00 10) covers buildings, business personal property, and personal property of others for direct loss or damage, subject to the limits shown in the declarations for each of these categories. Also provides additional coverages and coverage extensions, including: debris removal, pollutant cleanup, preservation of property, fire department service charges, increased cost of construction, electronic data, newly acquired or constructed property, personal effects and personal property of others, off-premises property, valuable papers and records, outdoor property, and nonowned detached trailers.

Burglary: Theft of property from within a premises by a person who unlawfully enters or exits from the premises.

Business auto policy (BAP): A commercial auto policy that includes auto liability and auto physical damage coverages; other coverages are available by endorsement. Except for auto-related businesses and motor carrier or trucking firms, the business auto policy (BAP) addresses the needs of most commercial entities as respects auto insurance.

Business continuity plan (BCP): A written document summarizing steps to take in the event of a disaster—manmade or natural—assessing the business’s ability to recover from the loss event and subsequent business interruption. It is a hedging tool against the impact of a disruption on an organization. It typically includes estimated recoveries for loss of business income due to damage to: the business’s own locations, key suppliers/customers, adjacent buildings, key objects (such as bridges, highways), and utility interruptions. The BCP outlines the decision-making framework and advanced arrangements and procedures that enable an organization to maintain an acceptable level of operations in the event of a disruption.

Business income coverage: Commercial property insurance covering loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension of its operations. Coverage applies to loss suffered during the time required to repair or replace the damaged property. It may also be extended to apply to loss suffered after completion of repairs for a specified number of days. There are two Insurance Services Office, Inc. (ISO), business income coverage forms: the business income and extra expense coverage form (CP 00 30) and the business income coverage form without extra expense (CP 00 32). Business income coverage (BIC) is also referred to as business interruption coverage.

Businessowners policy (BOP): A package policy that provides both property and liability coverage for eligible small businesses. BOPs are written on special coverage forms that are generally very similar to their monoline property and liability form counterparts, but they typically have some unique features that make them especially advantageous for businesses that qualify. Both the American Association of Insurance Services (AAIS) and the Insurance Services Office, Inc. (ISO), offer BOP programs for use by their member insurers. Also, many insurers have their own BOP programs.


Cancel and rewrite: Refers to an insurer’s cancellation and reissuance of the same policy. Typically used to switch a policy renewal to a new date.

Cancellation: The termination of an insurance policy or bond, before its expiration, by either the insured or the insurer. Insurance policy cancellation provisions require insurers to notify insureds in advance (usually 30 days) of canceling a policy and stipulate the manner in which any unearned premium will be returned. As respects reinsurance, cancellation is used in the following contexts: (1) Runoff basis means that the liability of the reinsurer under policies that became effective under the treaty prior to the cancellation date of such treaty shall continue until the expiration date of each policy. (2) Cutoff basis means that the liability of the reinsurer under policies that became effective under the treaty prior to the cancellation date of such treaty shall cease with respect to losses resulting from accidents taking place on and after said cancellation date. Usually the reinsurer will return to the company the unearned premium portfolio, unless the treaty is written on an earned premium basis.

Capacity: The largest amount of insurance or reinsurance available from a company or the market in general. Capacity is determined by financial strength and is also used to refer to the additional amount of business (premium volume) that a company or the total market could write based on excess (unused) capital—that is, surplus capacity.

Capital: In captive insurance, an all-purpose term having one of three different meanings: the amount initially needed to set up a captive, or the initial amount paid in; the total of this paid-in capital plus other forms of capital, like letters of credit; or the sum of these two plus accumulated surplus. The difference between capital in a captive and other forms of insurance capital is that the owners usually consider it risk capital, ready to be used up by adverse results of the business. This is why one seldom hears about “impairment of capital” in captive financial discussions. Instead, one hears about “reduction in capital.”

Capital markets: Markets in which financial instruments such as stocks and bonds that mature in more than 1 year are traded.

Capital stock: The ownership of a corporation as expressed in individually or jointly held shares of stock.

Capital stock company: An insurance company owned by stockholders rather than by its policyholders.

Care, custody, or control (CCC): An exclusion common to several forms of liability insurance, which eliminates coverage with respect to damage to property in the insured’s care, custody, or control. Coverage for this exposure is available under other, more specific forms of insurance, such as motor truck cargo and garagekeepers insurance. In some cases, CCC has been determined to entail physical possession of the property; in others, any party with a legal obligation to exercise care with respect to property has been deemed to have that property in its CCC.

Cargo insurance: Inland or ocean marine insurance covering property in transit.

Carrier: An insurance or reinsurance company that insures or “carries” the insurance or reinsurance.

Casualty insurance: Insurance that is primarily concerned with the losses caused by injuries to persons and legal liability imposed on the insured for such injury or for damage to property of others.

Catastrophe: A severe loss characterized by extreme force and/or sizable financial loss. Often abbreviated to “cat.”

Catastrophe reinsurance: A form of reinsurance that indemnifies the ceding company for the accumulation of losses in excess of a stipulated sum arising from a single catastrophic event or series of events.

Catastrophic loss: Loss in excess of the working layer, usually of such magnitude as to be difficult to predict and therefore rarely self-insured or retained.

Causes of loss: The perils that can bring about or trigger loss or damage. Can be direct (the action immediately precedes the loss) or indirect (part of an uninterrupted chain of events leading to the loss).

Cede: When a company reinsures its liability with another. The original or primary insurer, the insurance company that purchases reinsurance, is the “ceding company” that “cedes” business to the reinsurer.

Ceded premiums: Premiums paid or payable by the captive to another insurer for reinsurance protection.

Cedent: A ceding insurer or a reinsurer. A ceding insurer is an insurer that underwrites and issues an original, primary policy to an insured and contractually transfers (cedes) a portion of the risk to a reinsurer. A ceding reinsurer is a reinsurer that transfers (cedes) a portion of the underlying reinsurance to a retrocessionnaire.

Certificate holder: The entity that is provided a certificate of insurance as evidence of the insurance maintained by another entity. In standard certificate forms, the certificate holder is usually listed in the space provided for that purpose.

Certificate of insurance: A document providing evidence that certain general types of insurance coverages and limits have been purchased by the party required to furnish the certificate.

Claim: Used in reference to insurance, a claim may be a demand by an individual or corporation to recover, under a policy of insurance, for loss that may come within that policy.

Claimant: The person making a claim. Use of the word “claimant” usually denotes that the person has not yet filed a lawsuit. Upon filing a lawsuit, claimant becomes a plaintiff, but the terms are often used interchangeably.

Claims-made basis: A form of reinsurance under which the date of the claim report is deemed to be the date of the loss event. Claims reported during the term of the reinsurance agreement are therefore covered, regardless of when they occurred. A claims-made agreement is said to “cut off the tail” on liability business by not covering claims reported after the term of the reinsurance agreement—unless extended by special agreement.

Claims-paid policy: A liability insurance policy that is triggered at the time a claim is paid, rather than at the time a claim is first reported (claims-made policy) or at the time the injury or damage occurs (occurrence policy). This approach can offer significant benefits in terms of pricing accuracy. However, since claims will be paid only while the policy remains active, the insured facing a claim cannot cancel the policy while the claim is pending, often for years, unless he or she is willing to pay the claim out of personal assets.

Class: Group of insureds who have similar exposures and experience and are grouped together for rating purposes.

Coinsurer: One that shares the loss sustained under an insurance policy. Usually refers to an insured property owner that fails to purchase enough insurance to comply with the coinsurance provision and that, therefore, suffers part of the loss itself.

Collision insurance: A form of automobile insurance that provides for reimbursement for loss to a covered automobile due to its colliding with another vehicle or object or the overturn of the automobile. This covers only damage to the automobile itself as “auto” is defined in the policy.

Combined ratio: The sum of two ratios, one calculated by dividing incurred losses plus loss adjustment expense (LAE) by earned premiums (the calendar year loss ratio), and the other calculated by dividing all other expenses by either written or earned premiums (i.e., trade basis or statutory basis expense ratio). When applied to a company’s overall results, the combined ratio is also referred to as the composite, or statutory, ratio. Used in both insurance and reinsurance, a combined ratio below 100 percent is indicative of an underwriting profit.

Commercial auto insurance coverage forms: The entire portfolio of coverage forms that furnish auto coverage for any type of commercial entity. It includes the business auto, business auto physical damage, garage, motor carrier, and truckers coverage forms.

Commercial crime policy: A crime insurance policy that is designed to meet the needs of organizations other than financial institutions (such as banks). A commercial crime policy typically provides several different types of crime coverage, such as: employee dishonesty coverage; forgery or alteration coverage; computer fraud coverage; funds transfer fraud coverage; kidnap, ransom, or extortion coverage; money and securities coverage; and money orders and counterfeit money coverage.

Commercial general liability (CGL) policy: A standard insurance policy issued to business organizations to protect them against liability claims for bodily injury (BI) and property damage (PD) arising out of premises, operations, products, and completed operations; and advertising and personal injury (PI) liability. The CGL policy was introduced in 1986 and replaced the “comprehensive” general liability policy.

Commercial lines: Insurance lines used to cover commercial risks as opposed to personal lines, which cover personal risks. Examples include commercial general liability (CGL), workers compensation, and commercial property insurance.

Commercial multiple peril (CMP) policy: See commercial package policy.

Commercial package policy: A package insurance policy that provides both liability and property coverage for businesses and other organizations.

Commercial property policy: An insurance policy for businesses and other organizations that insures against damage to their buildings and contents due to a covered cause of loss, such as a fire. The policy may also cover loss of income or increase in expenses that results from the property damage (PD). Commercial property policies may be written on standard or nonstandard forms.

Commission(1) In insurance, a certain percentage of premium produced that is retained as compensation by insurance agents and brokers. Also known as acquisition cost. (2) In reinsurance, the primary insurance company usually pays the reinsurer its proportion of the gross premium it receives on a risk. The reinsurer then allows the company a ceding or direct commission allowance on such gross premium received, large enough to reimburse the company for the commission paid to its agents, plus taxes and its overhead. The amount of such allowance frequently determines profit or loss to the reinsurer.

Commissioner: The title of the head of most state insurance departments.

Common policy conditions: The part of the insurance policy typically relating to cancellation, changes in coverage, audits, inspections, premiums, and assignment of the policy. The commercial lines policy forms portfolio promulgated by Insurance Services Office, Inc. (ISO), takes a modular approach to structuring policies. A commercial lines policy is made up of a declarations page, the common policy conditions, one or more coverage forms, and endorsements that modify the coverage forms. The common policy conditions form (IL 00 17) is used with the commercial property, general liability, and crime forms to specify the conditions applicable to the policy.

Commutation: Usually refers to the cancellation or dissolution of a reinsurance contract in which there are profits or losses to be allocated.

Competitive bidding: A situation in which an insured requests premium quotations on its insurance program from a number of agents/brokers. In some instances, insureds provide agents/brokers with detailed specifications upon which to base their quotations. Under other circumstances, the agents/brokers present proposals for coverage reflecting their own ideas for structuring the insured’s program.

Comprehensive boiler and machinery coverage: Boiler and machinery (BM) coverage that applies to all insurable objects. There are two types: standard comprehensive coverage applies to all objects except production machinery; extended comprehensive coverage applies to all objects including production machinery. Contrasts with blanket group BM coverage, which applies to all objects within specified categories of objects, and with coverage applying only to individually described objects.

Comprehensive general liability (CGL) policy: See commercial general liability policy.

Concurrent causation(1) A tort doctrine that imposes joint liability on two or more parties if their negligence combines to produce the same loss. (2) In property insurance, this term refers to a situation where there is a mixture of covered and uncovered perils acting together (either in sequence or simultaneously) to produce the same property damage. In the early 1980s, lower courts in California misapplied tort concepts to the interpretation of first-party property policies and held that, in “concurrent causation” claims, the property insurer is liable so long as one of the causes is covered by the policy. As a result, these courts refused to enforce flood or earthquake exclusions if there was an unexcluded factor contributing to the loss, such as zoning decisions or the negligence of a contractor. In response, insurers added so-called anti-concurrent causation (ACC) language to standard homeowners, commercial property, and other first-party property policy forms to combat this line of thinking. (3) In liability insurance, this term is occasionally used to refer to a situation where there are two or more causes of action asserted in the complaint against the insured, any one of which would be sufficient by itself to hold the insured liable, but some of the causes of action are covered and some are not. In that situation, the liability insurer must defend the entire complaint.

Conditions: See policy conditions.

Conservator: A person or organization appointed by a court of law to manage an insurer that is financially impaired or in danger of insolvency.

Consolidated insurance program (CIP): Another name for controlled insurance program.

Contingent insurance: The term contingent insurance refers to a policy that is contingent on the absence of other insurance. For example, the 1973 commercial general liability (CGL) policy stated that it provided “primary insurance, except when stated to apply in excess of or contingent upon the absence of other insurance.… When both this insurance and other insurance apply to the loss on the same basis, whether primary, excess, or contingent, the company shall not be liable [for more than a proportionate share].” (Emphasis added.) In 1986, the phrase “upon the absence of other insurance” was taken out. No change in coverage was intended, however. In modern terms, contingent insurance refers to a policy that has an escape-type other insurance provision saying that it does not apply if there is another policy providing coverage.

Contingent liability: Coverage for losses to a third party for which the insured is vicariously liable. Contingent liability can be assumed—for example, for losses arising from product or service failure, where the insurer has assumed liability by providing a performance warranty.

Contractor controlled insurance program (CCIP): See controlled insurance program.

Contractual liability insurance: Insurance that covers liability of the insured assumed in a contract. Under the standard commercial general liability (CGL) policy, such coverage is limited to liability assumed in any of a number of specifically defined insured contracts or to liability that the insured would have even in the absence of the contract.

Controlled insurance program (CIP): A centralized insurance program under which one party procures insurance on behalf of all (or most) parties performing work on a construction project or on a specific site. Commonly referred to as “wrap-ups,” CIPs are most commonly used on single projects, but other uses include contract maintenance on a large plant or facility or on an ongoing basis for multiple construction projects. Typically, the coverages provided under a CIP include builders risk (for construction wrap-ups), commercial general liability (CGL), workers compensation, and umbrella liability. CIPs offer a number of benefits, including greater control of the scope of coverage, potentially lower project insurance costs, and reduced litigation. CIPs can be purchased by the owner (OCIP) or contractor (CCIP) or a combination of participating parties.

Convention blank: Report form developed by the National Association of Insurance Commissioners (NAIC) and required by most states for reporting annual financial results of an insurance company. Owners of captive insurance companies usually consider completing these reports an onerous burden.

Convention statement: The annual report format developed by the National Association of Insurance Commissioners (NAIC) and adopted by member states as the standard for all commercial insurers. Convention statements are filed by an insurer in its domicile and copied to the NAIC for Insurance Regulatory Information System (IRIS) ratios and risk-based capital calculations to be published.

Corporate governance: A system specifying the division of duties, rights, and responsibilities among various participants in a corporation, such as the board of directors, the various committees within the board of directors, operating managers, and shareholders. Corporate governance enumerates the rules, guidelines, and procedures for making decisions affecting corporate affairs. The term has received particular attention in recent years because of massive lawsuits against the directors and officers of a number of high-profile corporations that filed for bankruptcy. Many business commentators, as well as insurance industry observers, believe that a breakdown of corporate governance, especially in the area of financial and accounting controls, was largely responsible for such failures.

Corporation: An “artificial person,” created under the laws of a given state. A corporation has an identity and an existence distinct and independent from that of its individual owners. Corporations have the power to (1) act; (2) contract; (3) sue and be sued; and (4) own, manage, and buy/sell property. The profits (and losses) of the corporation are distributed according to the ownership interest (i.e., the percentage of total shares) held by each shareholder. The defining feature of a corporation is its legal independence from the people who create it. This means that if a corporation fails, shareholders only stand to lose their investment in the company (i.e., the amount of money they paid for shares of stock in the company) but will not be liable for any remaining debts owed to the corporation’s creditors. Corporations are chartered by all 50 of the United States and by the federal government in certain instances (e.g., national banks and savings and loan institutions).

Coverage: Used synonymously with “insurance” or “protection.”

Coverage form: One of the primary standardized insurance forms used to construct an insurance contract. The coverage form generally contains the insuring agreement, coverage conditions, exclusions, and policy definitions.

Credit insurance: Coverage against insolvency of a customer, which provides protection against payment default on loan, interest, or scheduled payments. Also known as “bad debts” insurance.

Crop-hail insurance: An insurance policy, marketed and underwritten by private insurers, that covers hail damage to insured crops. Farmers often purchase this coverage in areas of the country susceptible to hail, particularly for high-yielding crops. Unlike federal crop insurance, the federal government does not subsidize crop-hail insurance. Licensed insurance agents sell it and the premiums depend, for a large part, on past loss experience. The coverage is township or county rated; in other words, the rate is determined by the historical hail loss experience of that particular township or county. The perils of fire and wind can be added to this coverage; although the availability of these extensions varies by state and by type of crop.

Cyber and privacy insurance: A type of insurance designed to cover consumers of technology services or products. More specifically, the policies are intended to cover a variety of both liability and property losses that may result when a business engages in various electronic activities, such as selling on the Internet or collecting data within its internal electronic network. Most notably, but not exclusively, cyber and privacy policies cover a business’ liability for a data breach in which the firm’s customers’ personal information, such as Social Security or credit card numbers, is exposed or stolen by a hacker or other criminal who has gained access to the firm’s electronic network. The policies cover a variety of expenses associated with data breaches, including: notification costs, credit monitoring, costs to defend claims by state regulators, fines and penalties, and loss resulting from identity theft. In addition, the policies cover liability arising from website media content, as well as property exposures from: (a) business interruption, (b) data loss/destruction, (c) computer fraud, (d) funds transfer loss, and (e) cyber extortion. Cyber and privacy insurance is often confused with technology errors and omissions (tech E&O) insurance. In contrast to cyber and privacy insurance, tech E&O coverage is intended to protect providers of technology products and services, such as computer software and hardware manufacturers, website designers, and firms that store corporate data on an off-site basis. Nevertheless, tech E&O insurance policies do contain a number of the same insuring agreements as cyber and privacy policies.

Cyberspace liability: A term used to describe the liability exposures encountered when communicating or conducting business online. Potential liabilities include the Internet and e-mail. Online communication tools could result in claims alleging breaches of privacy rights, infringement or misappropriation of intellectual property, employment discrimination, violations of obscenity laws, the spreading of computer viruses, and defamation. Media liability policies are available to cover these exposures.


Date of issue (issue date): Date on which the insurer issued the contract.

Declarations: The front page (or pages) of a policy that specifies the named insured, address, policy period, location of premises, policy limits, and other key information that varies from insured to insured. The declarations page is also known as the information page. Often informally referred to as the “dec” or “dec page.”

Declination: The act of rejecting an application for insurance.

Deductible: An amount the insurer will deduct from the loss before paying up to its policy limits. Most property insurance policies contain a per-occurrence deductible provision that stipulates that the deductible amount specified in the policy declarations will be subtracted from each covered loss in determining the amount of the insured’s loss recovery. Usually, the amount of the deductible is not subtracted from policy limits.

Defined benefit plan: A pension plan providing a specific benefit for each employee. The employer is required to make adequate contributions to the plan to fund the promised benefits. No individual accounts are maintained as is done in defined contribution plans.

Defined contribution plan: A pension plan calling for definite annual contributions by the employer but with no specific benefit promised to the employee. The employee’s benefits are ultimately determined by the amount contributed plus the investment income.

Delivery: The actual placing of an insurance policy in the hands of the insured.

Deposit premium(1) In property and casualty insurance, the premium deposit required by the insurer on forms of insurance subject to periodic premium adjustment. Also called “provisional premium.” (2) In reinsurance, the amount of premium (usually for an excess of loss reinsurance contract) that the ceding company pays to the reinsurer on a periodic basis during the term of the contract. This amount is generally determined as a percentage of the estimated amount of premium that the contract will produce based on the rate and estimated subject premium. It is often the same as the minimum premium but may be higher or lower. The deposit premium will be adjusted to the higher of the actual developed premium or the minimum premium after the actual subject premium has been determined by audit or reporting of the actual exposures insured during the coverage period.

Depreciation: The decrease in the value of property over a period of time, usually as result of age, wear and tear from use, or economic obsolescence. Actual physical depreciation (wear and tear from use) is subtracted from the replacement cost of insured property in determining its actual cash value (ACV); courts in some jurisdictions have allowed insurers to deduct depreciation due to economic obsolescence as well.

Diligent effort: A required search by a broker to place coverage with an admitted insurer authorized to write and actually writing that kind and class of insurance in the state before procuring coverage in the surplus lines market, unless the insured is classified as an exempt commercial purchaser or industrial insured, which are exempt from diligent effort requirements (TIC 981.004).

Direct writing carrier: An insurer that deals with its insureds without the use of agents or brokers.

Direct written premium: The total amount of an insurer’s written premiums without any allowance for premiums ceded to reinsurers.

Dodd-Frank Act (2011): An act known formally as the “Dodd-Frank Wall Street Reform and Protection Act” (Dodd-Frank). This 2010 law made dramatic, sweeping changes to the nation’s financial regulatory system. It was enacted to make the U.S. financial system more transparent and accountable and to prevent the type of financial crisis that occurred during 2008. Three specific provisions within Dodd-Frank are likely to increase the nature and scope of legal liability faced by corporate directors and officers. These include: (1) the “clawback” provision, (2) the whistle-blower provision, and (3) the “say-on-pay” provision.

Domestic insurer: An insurer admitted by and formed under the laws under the state in which insurance is written.

Domestic terrorism: The Federal Bureau of Investigation defines this term as “the unlawful use, or threatened use, of force or violence by a group or individual based and operating entirely within the United States or its territories without foreign direction committed against persons or property to intimidate or coerce a government, the civilian population, or any segment thereof, in furtherance of political or social objectives.” Distinguishing between domestic and foreign acts of terrorism is important because the Terrorism Risk and Insurance Act (TRIA) only applies to acts of foreign terrorists.

Domicile: The location or venue in which a captive insurer is licensed to do business. There are a number of factors that must be considered in selecting the best domicile for a given captive, including capitalization and surplus requirements, investment restrictions, income and local taxes, formation costs, acceptance by fronting insurers and reinsurers, availability of banking and other services, and proximity considerations.

Due diligence: Proper care and attention. This term is commonly used to refer to the review of financial and legal documents in a merger or acquisition but is equally applicable to virtually any decision-making process, including whether to insure or self-insure, whether to form a captive insurance company, and a host of other risk management decisions.


Earned premium: That portion of a policy’s premium that applies to the expired portion of the policy. Although insurance premiums are often paid in advance, insurers typically “earn” the premium at an even rate throughout the policy term. The unearned portion of the premium that has been paid is kept in the “unearned premium reserve.”

Earthquake coverage: Typically excluded (along with other earth movement) from most property insurance policies, except ensuing fire. In most cases, earthquake coverage must be purchased by endorsement to a difference-in-conditions (DIC) policy or to an all risks policy. Normally, the coverage provided is subject to a per occurrence sublimit, an annual aggregate limit, and a separate deductible.

Effective date: The date on which an insurance binder or policy goes into effect and from which time protection is provided.

Electronic signature: An electronic sound, symbol, or process attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record.

Eligible insurer: An insurer that is allowed to write surplus lines business in the state of Texas. These insurers must be included on the Surplus Lines Insurers List and must meet the requirements of TIC 981, Subchapter B, and TAC 28 Secs. 15.8 and 15.9.

Emergency response plan: A set of written procedures for dealing with emergencies that minimize the impact of the event and facilitate recovery from the event.

Employee Retirement Income Security Act (ERISA) of 1974: Federal law that established rules and regulations to govern employer-provided pensions and other employee benefits provided to U.S. employees.

Employers liability coverage: This coverage provided by part 2 of the workers compensation policy provides coverage to the insured (employer) for liability to employees for work-related bodily injury or disease, other than liability imposed on the insured by a workers compensation law.

Endorsement: An insurance policy form that either changes or adds to the provisions included in one or more other forms used to construct the policy, such as the declarations page or the coverage form. Insurance policy endorsements may serve any number of functions, including broadening the scope of coverage, limiting or restricting the scope of coverage, clarifying the application of coverage to some unique loss exposure, adding other parties as insureds, or adding locations to the policy. They often effect these changes by modifying the existing insuring agreement, policy definitions, exclusions, or conditions in the coverage form or adding additional information, such as insured locations, to the declarations page.

Enterprise risk management (ERM): A holistic approach to identifying, defining, quantifying, and treating all of the risks facing an organization, whether insurable or not. Unlike traditional risk management, ERM deals with all types of risk, such as hazard or event risk, operational risk, credit risk, and financial risk.

Equipment breakdown insurance: Coverage for loss due to mechanical or electrical breakdown of nearly any type of equipment, including photocopiers and computers. Coverage applies to the cost to repair or replace the equipment and any other property damaged by the equipment breakdown. Resulting business income and extra expense loss is often covered as well. Equipment breakdown insurance is increasingly replacing traditional boiler and machinery (BM) insurance, in part simply because the title is more descriptive of the coverage provided. Also, today’s equipment breakdown policies typically provide slightly broader coverage than traditional BM policies, and they usually do not use the specialized terminology found in traditional BM policies.

Error: An incorrect item or mistake on a filing that may require additional information.

Errors and omissions (E&O) insurance: An insurance form that protects the insured against liability for committing an error or omission in performance of professional duties. Generally, such policies are designed to cover financial losses rather than liability for bodily injury (BI) and property damage (PD).

Event insurance: Provides package coverage for the sponsor of public or private events, such as concerts, festivals, conferences, trade shows, sporting events, and celebrations, to name a few. Available coverages include property insurance, general liability insurance, employers liability insurance, and cancellation insurance.

Excess: Insurance to cover unanticipated or catastrophic losses. Excess coverage can be specific excess, which begins paying when any single claim reaches the preestablished retention, or aggregate excess, which begins paying when the cumulative cost of all claims reaches the preestablished retention.

Excess and surplus (E&S) lines insurance: Any type of coverage that cannot be placed with an insurer admitted to do business in a certain jurisdiction. Risks placed in E&S lines markets are often substandard as respects adverse loss experience, unusual, or unable to be placed in conventional markets due to a shortage of capacity. Captives sometimes qualify as E&S companies. Hefty local premium taxes are payable by the broker.

Excess liability policy: A policy issued to provide limits in excess of an underlying liability policy. The underlying liability policy can be, and often is, an umbrella liability policy. An excess liability policy is no broader than the underlying liability policy; its sole purpose is to provide additional limits of insurance.

Excess lines broker: A broker licensed to place insurance not available in the domestic state, through insurers licensed in states other than where the broker operates.

Excess of loss: The reinsurance limit attaches above a per occurrence or aggregate limit.

Expense: The cost of operating the insurance business exclusive of losses or claims.

Expiration: The termination date of an insurance contract.

Extended coverage (EC) endorsement: An endorsement to a standard fire policy adding coverage for the following perils: windstorm, hail, explosion (except of steam boilers), riot, civil commotion, aircraft, vehicles, and smoke. The EC perils are now included in most property policies without the need for a separate endorsement.


Face amount: Generally used to mean the amount of insurance provided.

Fair Access to Insurance Requirements (FAIR) plans: State-run insurance plans that make property insurance available to those who cannot obtain it in the voluntary market. The specifics of each plan vary from state to state, but all plans require licensed property insurers to participate in the pool and share in the profits and losses.

Fair Labor Standards Act (FLSA) of 1938: A law that established a national, hourly minimum wage and promulgated eligibility rules for overtime pay. The Wage and Hour Division of the U.S. Department of Labor administers the law, and virtually all wage and hour claims cite a violation of the FSLA. Wage and hour claims allege that workers classified by employers as “exempt” (and therefore ineligible for overtime pay), are in fact, entitled to overtime pay. Wage and hour claims are a serious exposure for employers; a number of class action wage and hour claims have settled for more than $10 million.

Family and Medical Leave Act (FMLA) of 1993: A law allowing employees to take up to 12 weeks annually of job-protected unpaid leave. Such leaves are permitted in the event of a serious illness of the employee or family member, or the birth or placement (through adoption or foster care) of a child. The law applies to employers having 50 or more employees and to employees who have worked for the employer for a minimum of 1,250 hours during the prior year. Charges of discrimination against those taking leave under the Act (or by those prevented from taking leave under the Act) can be filed with the Department of Labor, which investigates and enforces claims. In addition, an employee can sue his or her employer individually. Such claims are covered by employment practices liability (EPL) policies.

Farmowners insurance: These policies, sometimes referred to as farm insurance, provide homeowners, commercial property, and commercial liability coverage. The unique combination of commercial and personal coverages is necessary because it is typical for farms to have both residential and commercial characteristics. Coverage can apply to farms or ranches. These types of policies typically pertain to family and individually operated farms, not large commercial or corporate farming operations. Some farm coverages may be written on a monoline basis.

Federal crop insurance: Coverage for farmers that is overseen and subsidized by the federal government and marketed and serviced by private insurers and agents. Federal crop insurance offers an array of insurance policies that cover loss of crop value arising from extremely hot weather, drought, excessive moisture, flood, wildlife damage, earthquake, insects, and disease. These policies protect a farmer against production or revenue losses when a particular insured crop does not meet a preset production guarantee. The Risk Management Agency (RMA) of the U.S. Department of Agriculture oversees the federal crop insurance program. RMA provides policies for more than 100 crops, the majority of U.S. crops, although coverage may not be available for some crops in some areas. Federal crop insurance is also referred to as multi-peril crop insurance (MPCI).

Federal Emergency Management Agency (FEMA): An agency of the U.S. Department of Homeland Security that provides a single point of accountability for all federal emergency preparedness, mitigation, and response activities. FEMA’s primary purpose is to coordinate the response to a disaster that overwhelms the resources of state and local governments. It works closely with these governmental bodies by funding emergency programs and offering technical guidance and training. In addition, FEMA administers the National Flood Insurance Program (NFIP) and advises communities on building codes, emergency response, and floodplain management.

Federal Insurance Contribution Act (FICA) of 1935: Establishes a payroll tax to assist in the funding of Social Security benefits.

Federal Liability Risk Retention Act (LRRA): Preempts some state functions. For example, the Act does not allow a state insurance regulator to prohibit risk retention groups (RRGs) domiciled in other states from operating within the regulator’s state, thus eliminating the need for a fronting company.

Fees: Fixed cost charges, as compared to percentage charges (called “commissions”). Captives seek to pay fee-based charges but then express the total as a percentage of premium. In Texas, surplus lines premium is defined under TIC 225.004.

Fidelity bond: See employee dishonesty coverage.

Financial Accounting Standards Board (FASB): An independent body, funded by accounting firms, that sets standards that must be followed when preparing financial statements and reports.

Financial Anti-Terrorism Act (FATA or PATRIOT Act) of 2001: Imposes new recordkeeping and government reporting requirements on banks, certain other financial institutions, and nonfinancial businesses for specified financial transactions and customer financial records. It was added to the Bank Secrecy Act as an attempt to help combat terrorism and money laundering. The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 is Title III of the USA PATRIOT Act of 2001.

Financial capacity: The financial limit of an organization’s ability to absorb losses with its own funds or borrowed funds without major disruption. This value often comes into play when a risk manager attempts to find the appropriate retention amount. Any planned retention figures should fall below the financial capacity point.

Financial responsibility law: A statutory provision requiring owners of automobiles to provide evidence of their ability to pay damages arising out of the ownership, maintenance, or use of an automobile.

Financial statement: A firm’s operating statements, including balance sheet and profit and loss statement, along with associated information. Underwriters frequently request financial statements when they provide both new business and renewal quotations. This is because an insured’s financial condition is an important factor in assessing its insurability, commitment to loss control programs, and ability to pay premiums.

First dollar coverage: Insurance coverage that provides for the payment of all losses up to the specified limit without any use of deductibles.

Flat cancellation: The cancellation of an insurance policy or bond as of its effective date, before the insurer has assumed liability. This requires the return of paid premium in full since the insured has never been covered under the policy.

Flood coverage: Coverage for damage to property caused by flood. May be available by endorsement to an all risks policy or to a difference-in-conditions (DIC) policy. Normally, the coverage provided is subject to a per occurrence sublimit, an annual aggregate limit, and a separate deductible. Coverage may also be available from the National Flood Insurance Program (NFIP).

Flood exclusion: A provision found in nearly all property insurance policies (even in all risks policies) eliminating coverage for damage by flood. May also eliminate coverage for other types of water damage, such as seepage and sewer backup. Flood coverage can sometimes be provided by endorsement. If not, a separate flood insurance policy may be available from the National Flood Insurance Program (NFIP).

Foreign insurer: From the U.S. perspective, an insurer domiciled in the United States but outside the state in which the insurance is to be written. In effect, it is a domestic insurer doing business outside of the state in which it is domiciled.

Form: A document prepared in a prescribed arrangement of words and layout. A rider, policy, endorsement, or application—all of these are forms.

Front company: An insurer that issues a policy and cedes all or a substantial part of the risk to another insurer. Certain types of statutory coverages requiring evidence of insurance from admitted insurers are fronted and reinsured by captives. A “pure front” is one that delegates underwriting and claims handling authority to the reinsurer or a managing general agent (MGA). Most insurers that front for captives are not pure fronts.


Garage liability insurance: Insurance covering the legal liability of franchised and non-franchised automobile, truck, truck-tractor, motorcycle, recreational vehicle, and trailer dealers for claims of bodily injury (BI) and property damage (PD) arising out of business operations. It includes two separate insuring agreements, “who is an insured” provisions, and “limit of insurance” provisions—one dealing with garage operations involving the ownership, maintenance, or use of autos and the other dealing with all other garage operations.

General liability insurance: Insurance protecting commercial insureds from most liability exposures other than automobile and professional liability.

Glass insurance: A property insurance policy covering breakage of building glass (such as windows) regardless of cause. The 2000 edition standard property insurance policies provide very limited coverage for glass breakage.

Gramm-Leach-Bliley (GLB) Act of 1999: The Act eliminates many Depression-era restrictions on banks, securities firms, insurance companies, and other financial service providers that had previously barred companies in different financial sectors from engaging in each other’s businesses. It also addresses other issues such as information privacy and redomestication of mutual insurers. Generally, it bars a financial institution from disclosing a consumer’s nonpublic personal information to an unaffiliated third party unless it provides notice to the consumer and allows the consumer an opportunity to opt out. It requires financial institutions to provide customers with a privacy notice at the start of the customer relationship and once annually thereafter. Also, GLB requires each federal regulatory agency to establish standards by which the financial institutions under its jurisdiction implement “administrative, technical, and physical safeguards.”

Gross premium: Pure premium adjusted upward to include insurer expenses.

Gross written premium (GWP): The total premium (direct and assumed) written by an insurer before deductions for reinsurance and ceding commissions. Includes additional and/or return premiums. Written does not imply collected, but the gross policy premium to be collected as of the issue date of the policy, regardless of the payment plan.

Guaranty fund: Established by law in every state, guaranty funds are maintained by a state’s insurance commissioner to protect policyholders in the event that an insurer becomes insolvent or is unable to meet its financial obligations. The funds are usually financed by assessments against all property and liability insurers regulated by a state.


Hard market: In the insurance industry, the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases. Can be caused by a number of factors, including falling investment returns for insurers, increases in frequency or severity of losses, and regulatory intervention deemed to be against the interests of insurers.

Hazard: Conditions that increase the probability of loss. Examples include poor housekeeping in a factory and inadequate lighting in a crime-prone area.

Hired automobile: Term used (“hired autos”) in the Insurance Services Office, Inc. (ISO), business auto, garage, and motor carrier coverage forms to denote a particular type of auto included as a covered auto under the policy. With certain exceptions, the term refers to autos the named insured leases, hires, rents, or borrows. As respects both the business auto and the garage policy, the term does not include any auto the named insured leases, hires, rents, or borrows from any of its employees, partners, limited liability members, or members of their households. As respects the motor carrier, the exception applies as respects private passenger type autos only.

Home office: The corporate headquarters of an insurance company.

Home state of the insured: The state in which an insured maintains its principal place of business or, in the case of an individual, the individual’s principal residence; or if 100% of the premium of the insured risk is located out of the previously mentioned state, the state to which the greatest percentage of the insured’s taxable premium for that insurance contract is located.

Homeowners policy: A package insurance policy providing property and liability coverages tailored to the needs of most home owners, condominium owners, and apartment tenants. Various versions are available depending on the type of dwelling insured and the scope of protection to be covered. It is the most commonly used insurance policy protecting homes in the United States.

Host liquor liability: Liability for bodily injury (BI) or property damage (PD) arising out of the serving or distribution of alcoholic beverages by a party not engaged in this activity as a business enterprise. Host liquor liability exposures are insurable under standard general liability policies.

Hull coverage: Marine or aviation insurance covering damage sustained to an insured vessel or airplane.


Incurred but not reported (IBNR) losses: An estimate of the liability for claim-generating events that have taken place but have not yet been reported to the insurer or self-insurer. The sum of IBNR losses plus incurred losses provides an estimate of the total eventual liabilities for losses during a given period.

Indemnification: (1) In policies written on an indemnification basis, the insurer reimburses the insured for claims and claim costs already paid by the insured. Technically, the insured must not only suffer a loss but must also pay the loss before being indemnified by the insurer. (2) The agreement of one party to assume financial responsibility for the liability of another party. Hold harmless agreements are typically used to impose this transfer of risk.

Industrial insured: A commercial insurance buyer presumed by virtue of its financial size to be able to negotiate insurance contracts with insurers without the protection of insurance regulators. Restrictions may apply on the ability of the insured to recover from a state’s guaranty funds. Under some state insurance laws, an industrial insured must meet size criteria (net worth and number of employees) to be eligible to purchase nonadmitted insurance.

Inland marine coverage: Property insurance for property in transit over land, certain types of moveable property, instrumentalities of transportation (such as bridges, roads, and piers, instrumentalities of communication (such as television and radio towers), and legal liability exposures of bailees. Many inland marine coverage forms provide coverage without regard to the location of the covered property; these are sometimes called “floater” policies. As a group, inland marine coverage forms are generally broader than property coverage forms.

Inspection fees: Fees for statutory boiler inspections. Fully earned when paid (not part of property policy premium or routine engineering expenses).

Insurable interest: An interest by the insured person in the value of the subject of insurance, including any legal or financial relationship. Insurable interest usually results from property rights, contract rights, and potential legal liability.

Insurance: A contractual relationship that exists when one party (the insurer) for a consideration (the premium) agrees to reimburse another party (the insured) for loss to a specified subject (the risk) caused by designated contingencies (hazards or perils). The term “assurance,” commonly used in England, is considered synonymous with “insurance.”

Insurance commissioner: In the United States, the head of the state’s insurance department or regulatory agency.

Insurance contract: An insurance policy, cover note, certificate, or any other detailed evidence of coverage, including policy jackets, endorsements, audits, evidence of cancellation, and coverage parts.

Insurance line: A type of insurance business, grouped according to the reporting categories used when filing an insurer’s statutory reports.

Insured: The person(s) protected under an insurance contract.

Insurer: The insurance company that undertakes to indemnify for losses and perform other insurance-related operations.

Insuring agreement: That portion of the insurance policy in which the insurer promises to make payment to or on behalf of the insured. The insuring agreement is usually contained in a coverage form from which a policy is constructed. Often, insuring agreements outline a broad scope of coverage, which is then narrowed by exclusions and definitions.

Intellectual property (IP): Intangible products of human intelligence, especially as one may be entitled to the commercial proceeds of such products, such as patents or copyrights.

Intermediary: A reinsurance broker who negotiates contracts of reinsurance on behalf of the reinsured, usually with those reinsurers that recognize brokers and pay them commissions on reinsurance premiums ceded. The intermediary also acts as a conduit through which communications between the insurer and reinsurer are passed, including the payment of premiums by the reinsured to the reinsurer and the collection of losses for the reinsured from the reinsurer.

Item: A policy, binder, endorsement, cancellation, audit, etc.


Jewelers block insurance: Inland marine insurance designed to provide coverage for loss of or damage to jewelry that is the stock of jewelry retailers, wholesalers, manufacturers, and pawnbrokers.

Jurisdiction: (1) A term used to describe which courts have the power or authority to decide a particular matter. (2) The geographical subdivision with respect to which an individual insurance regulatory body (such as a state insurance department) has authority.


Key man insurance: Life insurance owned by a business entity on the life of a key individual that will, in the event of his or her death, offset a loss in earnings and provide the funds necessary to find, hire, and develop a replacement. It is designed to offset losses resulting from the death of a key person, such as reduced sales, interruption of a vital research project, flow of production, or an impaired credit standing.

Kidnap/ransom insurance: Specialty crime coverage that insures against loss by the surrender of property as a result of a threat of harm to the named insured, an employee, or a relative or guest of the insured or the insured’s employees. Available under an Insurance Services Office, Inc. (ISO), crime coverage form G, extortion (CR 00 08).


Layer: A horizontal segment of the liability insured—for example, the second $100,000 of a $500,000 liability, is the first layer if the cedent retains $100,000 but a higher layer if it retains a lesser amount.

Liability: Any legally enforceable obligation. Within the context of insurance, the obligation to pay a monetary award for injury or damage caused by one’s negligent or statutorily prohibited action.

Liability insurance: Insurance paying or rendering service on behalf of an insured for loss arising out of legal liability to others.

License: Certification of appropriate authority issued by a regulatory body to allow an entity to operate as an insurer or an insurance agent after certain standards have been met.

Limit: expressed either on a per occurrence basis (e.g., per accident or event) or on an aggregate basis (e.g., all losses under a single policy, or for all policies during an underwriting period).

Line of business: A general classification of insurance industry business—for example, fire, life, health, liability.

Liquidity ratio: A measurement of key financial variables that impact an insurer’s ability to pay claims. In the Insurance Regulatory Information System (IRIS), liabilities to liquid assets and agent’s balances to surplus are monitored.

Lloyd’s of London: An association of independent underwriters operating in England. It is not an insurance company; rather, it operates as a marketplace for large and/or unusual insurance exposures where brokers representing insurance applicants are able to contract with underwriters offering coverage.

Lloyd’s syndicate: A group of individuals at Lloyd’s of London who have entrusted their assets to a team of underwriters who underwrite on behalf of the group.

Lloyd’s underwriter: A person who writes business for Lloyd’s of London through a Lloyd’s association or facility of Lloyd’s.

Loss: (1) The basis of a claim for damages under the terms of a policy. (2) Loss of assets resulting from a pure risk. Broadly categorized, the types of losses of concern to risk managers include personnel loss, property loss, time element loss, and legal liability loss.

Loss adjustment expense (LAE): The cost of investigating and adjusting losses. LAEs need not be allocated to a particular claim. If they are allocated to a particular claim, they are called “allocated loss adjustment expenses” (ALAE); otherwise, they are unallocated loss adjustment expenses (ULAE).

Loss development: The difference between the original loss as initially reserved by an insurer and its subsequent evaluation later or at the time of its final disposal. Loss development occurs because of (1) inflation—both “social inflation” and inflation in the consumer price index—during the period in which losses are reported and ultimately settled and (2) time lags between the occurrence of claims and the time they are actually reported to an insurer. To account for these increases, a “loss development factor” (LDF) or multiplier is usually applied to a claim or group of claims in an effort to more accurately project the ultimate amount for which they will be closed.

Loss ratio: Proportionate relationship of incurred losses to earned premiums expressed as a percentage. If, for example, a firm pays $100,000 of premium for workers compensation insurance in a given year, and its insurer pays and reserves $50,000 in claims, the firm’s loss ratio is 50 percent ($50,000 incurred losses/$100,000 earned premiums).

Loss reserve: An estimate of the value of a claim or group of claims not yet paid. A case reserve is an estimate of the amount for which a particular claim will ultimately be settled or adjudicated. Insurers will also set reserves for their entire books of business to estimate their future liabilities.


Managing general agent (MGA): A specialized type of insurance agent/broker that, unlike traditional agents/brokers, is vested with underwriting authority from an insurer. Accordingly, MGAs perform certain functions ordinarily handled only by insurers, such as binding coverage, underwriting and pricing, appointing retail agents within a particular area, and settling claims. Typically, MGAs are involved with unusual lines of coverage, such as professional liability and surplus lines of insurance, in which specialized expertise is required to underwrite the policies. However, MGAs also write some personal lines business, especially in geographically isolated areas (e.g., western Oklahoma, North Dakota) where insurers do not want to set up a branch office. MGAs benefit insurers because the expertise they possess is not always available within the insurer’s home or regional offices and would be more expensive to develop on an in-house basis.

Managing general underwriter (MGU): Used in life and health companies instead of managing general agent (MGA). The terms have been used interchangeably, and there is little real distinction.

Manuscript certificate of insurance: A nonstandard document for providing evidence of insurance coverages required by the certificate holder in a contract with the insured. Sometimes drafted in an effort to overcome the limitations of a standard certificate of insurance, manuscript certificate of insurance forms are often resisted because they require more information or place greater legal obligations on the party providing the certificate.

Manuscript form or policy: An insurance policy form that is custom designed for a particular insured.

Marine insurance: A type of insurance designed to provide coverage for the transportation of goods either on the ocean or by land as well as damage to the waterborne instrument of conveyance and to the liability for third parties arising out of the process. The two branches of marine insurance are ocean marine (primarily water-based exposures) and inland marine (primarily land-based exposures).

Market cycles: Market-wide fluctuations in the prevailing level of insurance and reinsurance premiums. A soft market (i.e., a period of increased competition, depressed premiums, and excess capacity) is followed by a hard market—a period of rising premiums and decreased capacity. Traditionally, each period has a causative effect on the other. For example, in a hard market, insurers’ earnings are greater than during a soft market. Large earnings have the effect of increasing capacity. More capacity means more supply. When supply equals or exceeds demand, premiums go down, competition heats up, and earnings begin to shrink. Once earnings shrink to the point where the amount of capacity is reduced, the market hardens up, and the cycle starts all over again.

Master policy: In property and liability coverage, the combining of several locations or operations under a single policy for the same insured or insureds. The term may also be used in the case of construction wrap-ups. In either case, underlying policies or certificates of insurance are issued to insureds under the policy as evidence of coverage under the master policy.

Maximum foreseeable loss (MFL): The worst loss that is likely to occur because of a single event.

Maximum possible loss (MPL): The worst loss that could possibly occur because of a single event.

Medical malpractice insurance: Coverage for the acts, errors, and omissions of physicians and surgeons, encompassing physicians professional liability insurance, hospital professional liability (HPL) insurance, and allied healthcare (e.g., nurses) professional liability insurance. Although the majority of policies are written with a claims-made coverage trigger, such coverage is sometimes available on an occurrence basis. Typical exclusions are for: intentional/criminal acts, punitive damages, sexual misconduct, and specialized procedures (e.g., radial keratotomy) for which coverage may be “bought back” in return for additional premium. In addition to commercial insurers, medical malpractice coverage is also available in most states through physician-owned insurance companies known as “bedpan mutuals.”

Mortgage insurance: A life or health insurance policy intended to pay off the balance of a mortgage upon death or to meet payments on the mortgage in case of disability. Also known as “mortgage redemption insurance.”

Motor carrier policy: A commercial auto policy introduced by Insurance Services Office, Inc. (ISO), in 1993 to address the needs of the motor carrier (i.e., trucking) industry. Coverages available include auto liability, trailer interchange, and auto physical damage; other coverages are available by endorsement. The policy was developed as an alternative to the truckers policy because of the changes taking place in the industry. That is, the truckers policy is applicable only for “for-hire” motor carriers, whereas the motor carrier policy is appropriate for all types of motor carriers—for-hire, private, or a combination of both types of operations.


Named insured: Any person, firm, or organization, or any of its members specifically designated by name as an insured(s) in an insurance policy, as distinguished from others that, although unnamed, fall within the policy definition of an “insured.”

National Association of Insurance Commissioners (NAIC): A trade association of state insurance commissioners that issues model insurance acts that states can adopt. The NAIC accredits states that have enacted specific insurance legislation and demonstrate adequate regulatory oversight over the insurers they license.

National Association of Registered Agents and Brokers (NARAB): A federally chartered agency that may come into existence pursuant to the Gramm-Leach-Bliley Act in the event a majority of states (through the NAIC) fail to pass uniform (agent/broker) licensing or reciprocity laws by November 2002.

National Flood Insurance Program (NFIP): A federally funded program established in 1968 to make flood insurance available at a reasonable cost for properties located in participating communities. NFIP flood insurance is available only for direct damage to buildings and contents; there is no time element coverage.

Negligence: A tort involving failure to use a degree of care considered reasonable under a given set of circumstances. Acts of either omission or commission, or both, may constitute negligence. The four elements of negligence are a duty owed to a plaintiff, a breach of that duty by the defendant, proximate cause, and an injury or damage suffered by the plaintiff. Liability policies are designed to cover claims of negligence.

Net written premium (NWP): Written premium less deductions for commissions and ceded reinsurance.

Nonadmitted and Reinsurance Reform Act (NRRA): An act, effective July 21, 2011, that established a single-state compliance requirement where brokers are only required to comply with the regulations of the insured’s home state, and introduced provisions to increase consistency in the market.

Nonadmitted asset: An asset that may be accounted for in an insurance company’s balance sheet but not allowed to be counted for purposes of calculating statutory capital or compliance with solvency ratios.

Nonadmitted insurance: Insurance written by an insurance company not licensed to do business in a certain state or country. In U.S. jurisdictions, such insurers can nevertheless write coverage through an excess and surplus lines broker licensed in that jurisdiction.

Nonadmitted insurance (international insurance): Insurance written by a company that is neither licensed nor registered to do business in the country where the property or risk is located. Some countries allow nonadmitted insurance; others do not.

Nonadmitted insurer: An insurance company not licensed to do business in a certain state or country. In U.S. jurisdictions, such insurers can nevertheless write coverage through an excess and surplus lines broker licensed in that jurisdiction.

Nonadmitted reinsurance: Reinsurance purchased from a company not licensed or authorized to transact business in a particular jurisdiction. Nonadmitted reinsurance may not be treated as an asset against reinsured losses or unearned premium reserves for insurance company accounting and statement purposes.

Nonresident agent: An agent who is licensed in a domicile in which he or she does not reside.


Occurrence basis: For coverage to be provided, the act giving rise to a claim needs to occur within the policy period. The claim does not need to be reported during the policy period. Used with liability policies.

Ocean marine coverage: Insurance covering the transportation of goods and/or merchandise by vessels crossing both foreign and domestic waters including any inland or aviation transit associated with the shipment. This type of marine insurance also encompasses coverage for damage to the vessels involved in shipments and any legal liability arising in the course of shipment.

Owners and contractors protective (OCP) liability coverage: A stand-alone policy that covers the named insured’s liability for bodily injury (BI) and property damage (PD) caused, in whole or in part, by an independent contractor’s work for the insured. The contractor purchases the policy to provide coverage for vicarious liability the client (project owner) incurs as a result of the contractor’s acts or omissions on the project. The OCP policy also responds to liability arising out of the insured’s own acts or omissions in connection with its general supervision of the contractor’s operations.


Package policy: A combination policy providing several different coverages. Usually refers to a policy providing both general liability insurance and property insurance. Premium discounts are usually allowed to reflect cost efficiencies.

Paid losses: Losses and allocated loss adjustment expenses (ALAE) paid to claimants during a financial reporting period.

Parent company: Where property-casualty (P&C) insurers constitute a group of companies, the “flagship” or senior company. The use of multiple corporate entities allows additional flexibility in working with varying state regulations. For example, an insurance company group might consist of one or more admitted insurers and one or more nonadmitted insurers operating in various states. The entire group is often referred to by the parent company’s name.

Peril: Cause of loss—for example, fire, windstorm, collision.

Per occurrence limit: In liability insurance, the maximum amount the insurer will pay for all claims resulting from a single occurrence, no matter how many people are injured, how much property is damaged, or how many different claimants may make claims.

Per person limit: In liability insurance, the maximum amount the insurer will pay for one person’s injuries. If two people are injured in an auto accident and the at-fault driver’s policy has a $50,000 per person limit, the insurer will pay no more than $50,000 to each person for his or her injuries. If one person’s injuries are worth $25,000 and the other person’s are worth $75,000, the first claimant will receive $25,000 and the second will receive the per person maximum of $50,000 from the insurer.

Personal lines: Insurance purchased by an individual (as opposed to an organization) to protect against personal risks.

Personal property: All tangible property not classified as real property.

Policy: A written contract of insurance between the insurer and the policyholder. It is typically composed of a declarations page, policy form, and endorsements or riders that amend the policy form.

Policy conditions: The section of an insurance policy that identifies general requirements of an insured and the insurer on matters such as loss reporting and settlement, property valuation, other insurance, subrogation rights, and cancellation and nonrenewal. The policy conditions are usually stipulated in the coverage form of the insurance policy.

Policy fee: A one-time charge or flat per policy charge that does not change with the size of the policy.

Policyholder: Person in actual possession of insurance policy; policy owner.

Policyholder surplus: The difference between an insurer’s admitted assets and liabilities—that is, its net worth. This figure is used in determining the insurer’s financial strength and capacity to write new business.

Policy period: The term of duration of the policy. The policy period encompasses the time between the exact hour and date of policy inception and the hour and date of expiration.

Pollution: The contamination of an environment by substances regarded as pollutants. Liability from pollution is normally excluded to some degree by the general, auto, and umbrella liability policies. In recent years, insurers have attempted to introduce strict exclusionary language into these policies, making it necessary for insureds to seek coverage under separate “environmental impairment liability” policies.

Pool(1) A group of insurers or reinsurers through which particular types of risks (often of a substandard nature) are underwritten, with premiums, losses, and expenses shared in agreed ratios. (2) A group of organizations that form a shared risk pool. Pooling is an attractive alternative for insureds that are not large enough to legally or feasibly self-insure but that desire more control over their loss exposures as well as an opportunity to reduce their cost of risk, compared to a program written by a commercial insurer.

Premises: (1) In a property insurance policy, the location where coverage applies. Usually described in the policy with a legal address. (2) Building or land occupied or owned by an insured.

Premium: The amount of money an insurer charges to provide the coverage described in the policy or bond. See TIC 225.001(5).

Premium capacity: The total amount of premiums for all exposures that the insurer can safely write in a given period. This figure is also restricted based on state regulations as well as the generally accepted accounting principles applicable to property-casualty (P&C) insurers. The insurer’s written premium to policyholder’s surplus is often calculated to ascertain this capacity. Reinsurance is frequently purchased to assist insurers in this area.

Premium reserve: Insurers earn the premium paid for an insurance policy over the life of the policy. In other words, one-twelfth of an annual premium is earned each month. An unearned premium reserve is maintained on an insurer’s balance sheet to reflect the unearned premiums that would be returned to policyholders if all policies were canceled on the date the balance sheet was prepared.

Premiums earned: The portion of the written premium allocable (usually pro rata) to the time already elapsed under the policy period.

Probable maximum loss (PML): A property loss control term referring to the maximum loss expected at a given location in the event of a fire at that location, expressed in dollars or as a percentage of total values.

Producer: A term commonly used for an agent, broker, or other insurance representative who has responsibility for selling insurance.

Professional liability: A type of liability coverage designed to protect traditional professionals (e.g., accountants, attorneys) and quasi-professionals (e.g., real estate brokers, consultants) against liability incurred as a result of errors and omissions in performing their professional services. Although there are a few exceptions (e.g., physicians, architects, and engineers), most professional liability policies only cover economic or financial losses suffered by third parties, as opposed to bodily injury (BI) and property damage (PD) claims. This is because the latter two types of loss are typically covered under commercial general liability (CGL) policies. The vast majority of professional liability policies are written with claims-made coverage triggers. In addition, professional liability policies contain what are known as “shrinking limits,” meaning that unlike CGL policies (where defense costs are paid in addition to policy limits), the insurer’s payment of defense costs reduces available policy limits. Accordingly, when attempting to determine appropriate policy limits, insureds must consider the fact that because defense costs are often a high proportion of any claim settlement or judgment, they must usually purchase additional limits. The most common exclusions in professional liability policy forms are for BI, PD, and intentional/dishonest acts.

Property insurance: First-party insurance that indemnifies the owner or user of property for its loss, or the loss of its income-producing ability, when the loss or damage is caused by a covered peril, such as fire or explosion. In this sense, property insurance encompasses inland marine, boiler and machinery (BM), and crime insurance, as well as what was once known as fire insurance, now simply called property insurance: insurance on buildings and their contents.

Protective liability insurance: A general term describing a type of liability insurance that is purchased by an indemnitor, such as a contractor, for its indemnitee, such as the person for whom the contractor is performing operations, to protect that party against liability for bodily injury (BI) or property damage (PD) arising out of the indemnitor’s operations.

Public adjuster: A claims adjuster who represents the interests of an insured in a property loss. Public adjusters negotiate settlement of such claims with the insurer’s claim representative. Public adjusters are compensated with a percentage of the payable loss that they are able to secure for their clients (2 to 15 percent, depending upon the size and complexity of the claim). They are frequently retained in situations involving business interruption (BI) claims, which involve special expertise in the areas of accounting and insurance coverage analysis.

Public Company Accounting Oversight Board (PCAOB): A private-sector, non-profit corporation created as part of the Sarbanes-Oxley Act (SOx). The PCAOB developed in response to the auditing failures that were associated with several high-profile corporate bankruptcies in the early 2000s. Its purpose is to oversee the accounting firms that audit public corporations, in an effort to protect the interests of the investing public. The PCAOB consists of five members, including its chairman, each of whom the Securities and Exchange Commission (SEC) appoints. It conducts inspections of public accounting firms, develops auditing quality control standards, and conducts investigations and disciplinary proceedings.

Purchasing group: Authorized by the Liability Risk Retention Act of 1986, a group formed to obtain liability coverage for its members, all of which must have similar or related exposures. The Act requires a purchasing group to be domiciled in a specific state. In contrast to risk retention groups (RRGs), purchasing groups are not risk-bearing entities.


Quick assets: Highly liquid assets, consisting of cash, marketable securities, and net receivables.


Rate: A unit of cost that is multiplied by an exposure base to determine an insurance premium. An insurance rate is the amount of money necessary to cover losses, cover expenses, and provide a profit to the insurer for a single unit of exposure. Rates, as contrasted with loss costs, include provision for the insurer’s profit and expenses.

Rated insurer: An insurance company that has received a financial size and strength rating from a rating agency such as A.M. Best or Standard and Poor’s.

Rating bureau: An organization that collects statistical data (such as premiums, exposure units, and losses), computes advisory rating information, develops standard policy forms, and files information with regulators on behalf of insurance companies that purchase its services. Years ago, insurers were required by law in most states to belong to the designated rating bureau and to use its rates and policy forms. Today, however, these organizations serve in an advisory capacity for most services and most coverage lines; generally, insurers are free to use their products and services as they see fit. The best known rating bureaus are National Council on Compensation Insurance (NCCI) (for workers compensation insurance), the Surety Association of America (SAA) (for surety bonds and crime insurance), Insurance Services Office, Inc. (ISO) (for most commercial and personal lines other than workers compensation insurance), and American Association of Insurance Services, Inc. (AAIS) (for many commercial and personal lines other than workers compensation).

Rating organization: The financial strength of insurance companies and their ability to pay the claims of their policy owners are very important to the insurance-buying public and to the states that license and certify those insurers. Accordingly, insurance companies are rated by various rating organizations. Some of these rating organizations are:

  • A.M. Best Company
  • Conning & Company
  • Demotech
  • Fitch Ratings
  • Moody’s
  • Standard and Poor’s
  • Weiss Rating

Registered agent: In the United States, the person or firm legally appointed to accept service of process. Alien insurers must appoint (by filed proxy) the insurance commissioner as their agent, in states where they do business, to ensure protection of policyholder rights.

Reinsurance: A transaction in which one party, the “reinsurer,” in consideration of a premium paid to it, agrees to indemnify another party, the “reinsured,” for part or all of the liability assumed by the reinsured under a policy of insurance that it has issued. The reinsured may also be referred to as the “original” or “primary” insurer or the “ceding company.”

Reinsurance agreement: Agreement by which one insurance company transfers risk to another (buys reinsurance). Unlike an insurance policy, both parties sign a reinsurance agreement.

Reinsurance assumed: That portion of a risk that a reinsurer accepts from an original insurer (also known as a “primary” insurer) in return for a stated premium.

Reinsurance ceded: That portion of a risk that an original insurer (also known as a “primary” insurer) transfers to a reinsurer in return for a stated premium.

Renewal certificate: A very limited method of policy renewal by issuing a certificate rather than by issuing a new policy. The certificate refers to the original policy but does not enumerate all of its terms.

Renewal policy: An insurance policy issued to replace an expiring policy.

Reported losses: Paid losses plus case reserves. Excludes incurred but not reported (IBNR) losses.

Request for proposal (RFP): A document used to secure proposals for insurance or risk management services.

Reserve: An amount of money earmarked for a specific purpose. Insurers establish unearned premium reserves and loss reserves indicated on their balance sheets. Unearned premium reserves show the aggregate amount of premiums that would be returned to policyholders if all policies were canceled on the date the balance sheet was prepared. Loss reserves are estimates of outstanding losses, loss adjustment expenses (LAEs), and other related items. Self-insured organizations also maintain loss reserves.

Resident agent: An agent domiciled in the state in which he or she conducts his or her business activities.

Residual market: Insurance market systems for various lines of coverage (most often workers compensation, personal automobile liability, and property insurance). They serve as a coverage source of last resort for firms and individuals who have been rejected by voluntary market insurers. Residual markets require insurers writing specific coverage lines in a given state to assume the profits or losses accruing from insuring that state’s residual risks in proportion to their share of the total voluntary market premiums written in that state.

Retail agent: An insurance agent who acts as an intermediary between an insured and the marketplace. In some instances, retail agents deal directly with an insurer in arranging coverage, while in others, retail agents work with managing general agents or wholesale brokers to secure coverage for their client-insured.

Retention: (1) Assumption of risk of loss by means of noninsurance, self-insurance, or deductibles. Retention can be intentional or, when exposures are not identified, unintentional. (2) In reinsurance, the net amount of risk the ceding company keeps for its own account.

Retrocession: A transaction in which a reinsurer transfers risks it has reinsured to another reinsurer.

Rider: A form that is attached to a surety or fidelity bond that alters the provisions of the bond form in some manner. A rider is the surety and fidelity equivalent of an insurance policy endorsement, and though not common, insurance endorsements are sometimes called riders.

Risk(1) Uncertainty arising from the possible occurrence of given events. (2) The insured or the property to which an insurance policy relates.

Risk and Insurance Management Society, Inc. (RIMS): An industry association of risk managers that publishes several periodicals, lobbies, sponsors seminars, and conducts an annual conference.

Risk-based capital (RBC) requirements: A method developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of capital required of an insurer to support its operations and write coverage. The insurer’s risk profile (i.e., the amount and classes of business it writes) is used to determine its risk-based capital requirement. Four categories of risk are analyzed in arriving at an insurer’s minimum capital requirement: asset, credit, underwriting, and off-balance-sheet.

Risk pool: Multiple subjects of insurance insured or reinsured by a single insurer where, to avoid risk concentration and improve risk distribution, different combinations of exposures, perils, and hazards will be underwritten.

Risk purchasing group (RPG): A group formed in compliance with the Risk Retention Act of 1986 authorizing a group of insureds engaged in similar businesses or activities to purchase insurance coverage from a commercial insurer. This is in contrast to a risk retention group (RRG), which actually bears the group’s risks rather than obtaining coverage on behalf of group members.

Runoff provision: A provision in a claims-made policy stating that the insurer remains liable for claims caused by wrongful acts that took place under an expired or canceled policy, for a certain time period. For example, consider a policy written with a January 1, 2015-2016, term and a 5-year runoff provision. In this situation, coverage will apply under the runoff provision to all claims caused by wrongful acts committed during the January 1, 2015-2016, policy period that are made against the insured and reported to the insurer from January 1, 2016-2021 (i.e., the 5-year period immediately following the expiration of the January 1, 2015-2016, policy). Although runoff provisions function in a manner that is identical to extended reporting period (ERP) provisions, there are several differences. First, ERPs are generally written for only 1-year terms, whereas runoff provisions normally encompass multi-year time spans, often as long as 5 years. Second, while ERPs are most frequently purchased when an insured changes from one claims-made insurer to another, runoff provisions are generally used when one insured is acquired by or merges with another. In such instances, the acquired company buys a runoff provision that covers claims associated with wrongful acts that took place prior to the acquisition but are made against the acquired company after it has been acquired.


Salvage value: The amount for which an asset can be sold at the end of its useful life. In insurance circles, this term commonly refers to the scrap value of damaged property. In property insurance, salvage value (e.g., scrap value) will be subtracted from any loss settlement if the insured retains the damaged property. In extra expense coverage, the salvage value of property purchased for temporary use while repairs are made will be deducted in determining the amount of loss recovery.

Schedule: A list of an insured’s locations or property such as computers, mobile equipment, or vehicles. Can also refer to a list of primary or underlying insurance.

Securities Act of 1933: Act to ensure the availability of complete and reliable information about securities being sold to the public. The most important components of the Act are Section 5, which makes it illegal to offer or sell securities to the public unless they have first been registered with the Securities and Exchange Commission (SEC), and Section 11, which imposes civil liability for material misstatements in registration statements. Failure to comply with the Act’s technical or substantive requirements in connection with a public offering of a security can result in liability of the corporation and its directors and officers.

Securities Exchange Act of 1934: The Act and its accompanying rules were enacted to protect investors in connection with the trading of securities already issued and outstanding. The most important components of the Act are Section 10(b) and Securities and Exchange Commission (SEC) Rule 10b-5, which prohibits manipulative or deceptive acts in connection with the purchase or sale of a security. Corporate directors and officers are frequently the targets of lawsuits brought under these antifraud provisions.

Severity: The amount of damage that is (or that may be) inflicted by a loss or catastrophe. Sometimes quantified as a severity rate, which is a ratio relating the amount of loss to values exposed to loss during a specified period.

SLTX: Surplus Lines Stamping Office of Texas.

Soft market: One side of the market cycle that is characterized by low rates, high limits, flexible contracts, and high availability of coverage.

Solvency ratio: A statutory ratio test, which is usually net written premiums divided by capital and surplus.

Special or specialty risks: A term used to denote those accounts whose premium size, unique exposures, or other characteristics are such that they require specialized handling by an underwriting operation specifically set up for that purpose. What constitutes a “special risk” varies by insurer.

Special perils: Property insurance that insures against loss to covered property from all fortuitous causes except those that are specifically excluded. This method of identifying covered causes of loss in a property policy has traditionally been referred to as “all risks” coverage. Many industry practitioners continue to use the term “all risks” to describe this approach to defining covered causes of loss in a property insurance policy. However, it is no longer used in insurance policies because of concern that the word “all” suggests coverage that is broader than it actually is. Because of this concern, some industry practitioners have begun to use the term “special perils” or “open perils” instead of “all risks.”

Specialty risks: Term used by commercial insurers to describe unusual coverage features or types of risks not underwritten by most insurers.

Standard property policy (ISO): A restrictive Insurance Services Office, Inc. (ISO), commercial property policy (CP 00 99) intended for use when, for underwriting reasons, coverage would otherwise be unavailable. Combines in one form many of the provisions of the common policy conditions, commercial property conditions, building and personal property coverage, and basic causes of loss forms. However, there are significant coverage restrictions in the following areas: covered causes of loss, cancellation, vacancy, coverage territory, and coverage options.

Statement blank: See convention statement.

Statutory accounting principles (SAP): Rules for insurance accounting codified by the National Association of Insurance Commissioners (NAIC) or as promulgated by a domicile as rules to be used in reporting an insurer’s results to regulators. These rules focus on the balance sheet and solvency analysis, and differ from the generally accepted accounting principles (GAAP) used for other types of businesses. For example, statutory accounting rules do not allow the inclusion of certain nonadmitted assets on the balance sheet; require that certain loss reserves be set by conservative formulas instead of the insurer’s estimates; require the insurer to immediately recognize the expenses associated with writing new business instead of amortizing them over the policy period; and do not allow premiums for reinsurance placed with unauthorized reinsurers to be recognized as an asset.

Statutory capital: The amount of capital and/or surplus required in order for an insurance company to obtain and retain a license to do business. May be stated as a minimum dollar amount or by reference to a solvency ratio or a solvency margin.

Stop loss: A form of reinsurance also known as “aggregate excess of loss reinsurance” under which a reinsurer is liable for all losses, regardless of size, that occur after a specified loss ratio or total dollar amount of losses has been reached.

Storm surge: Water that is pushed toward the shore due to the force of winds swirling around a storm advancing across a body of water. This advancing surge combines with the normal tides to generate the hurricane storm tide, which can lead to severe flooding in coastal areas. Numerous coverage disputes over the applicability of flood exclusions to storm surge losses caused by major hurricanes, such as Katrina (often called “wind versus water” cases), have arisen because this term is not often listed as an excluded peril in property insurance forms. Most courts, however, have ruled against coverage for these losses under standard property insurance policies, stating that “storm surge” is little more than a synonym for a “tidal wave” or “wind-driven flood,” both of which are excluded under most property forms. In summary, the courts have generally ruled that only flood insurance policies cover these losses.

Surety: A party that guarantees the performance of another. The contract through which the guarantee is executed is called a surety bond.

Surety bond: A contract under which one party (the surety) guarantees the performance of certain obligations of a second party (the principal) to a third party (the obligee). For example, most construction contractors must provide the party for which they are performing operations with a bond guaranteeing that they will complete the project by the date specified in the construction contract in accordance with all plans and specifications.

Surplus: The amount by which an insurer’s assets exceed its liabilities. It is the equivalent of “owners’ equity” in standard accounting terms. The ratio of an insurer’s premiums written to its surplus is one of the key measures of its solvency.

Surplus line: Risks placed with nonadmitted insurers.

Surplus lines broker: A broker who is licensed to place coverage with nonadmitted insurers (insurers not licensed to do business in a given state). Surplus lines insurers can write coverage through a surplus lines broker if the broker is licensed in the state where coverage is being written. The types of risks typically written by surplus lines brokers are generally substandard risks (e.g., risks with adverse loss experience), unusual risks, and risks for which there is a shortage of capacity in the admitted market.

Surplus lines broker of record: The Texas licensed surplus lines broker who places a policy with an eligible surplus lines insurer, or the Texas licensed surplus lines broker who transacts business directly with an out-of-state broker not licensed by Texas as a surplus lines broker to obtain coverage with an eligible surplus lines insurer (28 TAC Sec. 15.2(8) and 34 TAC Sec. 3.822(a)(8)).

Surplus lines insurance: Refers to coverage lines that need not be filed with state insurance departments as a condition of being able to offer coverage. The types of risks typically insured in the surplus lines insurance markets can usually be categorized as risks with adverse loss experience, unusual risks, and those for which there is a shortage of capacity within the standard market.

Surplus lines insurers list: A list of all eligible surplus lines insurers that is maintained by the Texas Department of Insurance (TDI) indicating all unlicensed insurers that meet the requirements of TIC 981, Subchapter B, and 28 TAC Secs. 15.8and 15.9.


Terrorism endorsement: A provision attached to an insurance policy that restricts, excludes, or otherwise explains coverage for loss due to terrorist acts. The passage of the Terrorism Risk Insurance Act (TRIA) of 2002 voided all terrorism exclusion endorsements then in force on commercial property and casualty policies, to the extent that such exclusions eliminated coverage for certified acts of terrorism as covered by the federal program. It also led to the creation of many standard terrorism endorsements that provide for a wide range of terrorism coverage options: from no terrorism coverage at all (permissible only when the insured rejects or fails to pay for TRIA terrorism coverage) to full coverage for both international and domestic terrorism, subject to the $100 billion program-year cap established in the Act.

Terrorism insurance: Insurance covering loss due to acts of terrorism. Unless endorsed to exclude loss due to terrorism, commercial insurance policies issued in the United States (for example, commercial property policies, commercial general liability (CGL) policies, and commercial auto policies) generally provide terrorism insurance coverage. Terrorism insurance also may be written on a stand-alone terrorism policy.

Terrorism Risk Insurance Act (TRIA) of 2002: Federal legislation enacted in 2002 to guarantee the availability of insurance coverage against acts of international terrorism. Under the Act, commercial insurers are required to offer insurance coverage against such terrorist incidents and are reimbursed by the federal government for paid claims subject to deductible and retention amounts. This legislation was modified and extended by the Terrorism Risk Insurance Extension Act (TRIEA) in 2005.

Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA 2015): Passed in January 2015, after a delay when the outgoing Congress failed to reauthorize the Terrorism Risk Insurance Act (TRIA) in the last days of the 2014 legislative session, TRIPRA of 2015 extended TRIA through December 31, 2020. It also made several changes to the reinsurance program, including reducing the federal share of insured terrorism losses incrementally through 2020, increasing the trigger threshold for federal involvement in insured terrorism losses incrementally through 2020, and increasing the mandatory recoupment of federal losses incrementally through 2020.

Third-party administrator (TPA): A firm that handles various types of administrative responsibilities, on a fee-for-services basis, for organizations involved in cash flow programs. These responsibilities typically include claims administration, loss control, risk management information systems, and risk management consulting.

Third-party claims: Liability claims brought by persons allegedly injured or harmed by the insured. The insured is the first party, the insurer is the second party, and the claimant is the third party.

Third-party liability coverage: In general, any type of insurance covering the legal liability of one party to another party. For example, commercial general, business auto, and errors and omissions (E&O) liability policies all provide third-party liability coverage. In the context of employment practices liability (EPL) insurance, a so-called third-party liability coverage option is sometimes available to address claims made by nonemployees (e.g., customers, vendors, clients) against the insured company that arise from acts committed by employees. Most often, third-party claims allege some form of either discrimination or harassment. The majority of EPL policies do not explicitly cover third-party claims, although most insurers will provide such coverage by endorsement.

Tort: A civil or private wrong giving rise to legal liability.

Total insurable value (TIV): A property insurance term referring to the sum of the full value of the insured’s covered property, business income values, and any other covered property interests.

Travel insurance: Insurance that provides indemnification for (1) trip cancellation or interruption; (2) theft of, or loss to, property such as jewelry, cameras, baggage, or passports while on the trip; and (3) emergency medical and dental expenses during the trip. Travel insurance may be procured from travel agents or directly from certain insurers.


Umbrella liability policy: A policy designed to provide protection against catastrophic losses. It generally is written over various primary liability policies, such as the business auto policy (BAP), commercial general liability (CGL) policy, watercraft and aircraft liability policies, and employers liability coverage. The umbrella policy serves three purposes: it provides excess limits when the limits of underlying liability policies are exhausted by the payment of claims; it drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted by the payment of claims; and it provides protection against some claims not covered by the underlying policies, subject to the assumption by the named insured of a self-insured retention (SIR).

Unauthorized insurer: An insurer not licensed to write business in a particular state.

Underlying coverage: With respect to any given policy of excess insurance, the coverage in place on the same risk that will respond to loss before the excess policy is called on to pay any portion of the claim.

Underwriter: Any individual in insurance who has the responsibility of making decisions regarding the acceptability of a particular submission and of determining the amount, price, and conditions under which the submission is acceptable.

Underwriting: The process of determining whether to accept a risk and, if so, what amount of insurance the company will write on the acceptable risk, and at what rate. Underwriters are companies, individuals, or insurance companies that carry on this critical activity for their own account or for that of others.

Underwriting agency: An agency given underwriting and policy writing authority by an insurer. This authority actually allows an agent to price and issue the physical policy to the insured. In return for this additional administrative work, the agency normally receives increased commissions from the insurer involved.

Underwriting capacity: The risk retention ability of an insurer or of the insurance industry as a whole. Determined by the amount of surplus.

Unearned premium (UEP): That portion of the policy premium that has not yet been “earned” by the company because the policy still has some time to run before expiration. A property or casualty insurer must carry all unearned premiums as a liability in its financial statement since, if the policy should be canceled, the insurer would have to pay back a certain part of the original premium.


Voluntary market: A group of insurers that elect to write insurance in a competitive environment retaining the right*- to accept and reject business submitted. More specifically, the term also applies to the two types of mandatory insurance: automobile liability and workers compensation. In these instances, voluntary market refers to the insurers that provide coverage to desirable risks while rejecting the less attractive risks, which must then be afforded coverage through assigned risk markets.


War exclusion: A provision found in nearly all insurance policies that excludes loss arising out of war or warlike actions. The loss can result from either declared or undeclared war but must be related to actions of a military force directed by a sovereign power. Prior to the September 11, 2001, terrorist attacks, the war exclusions in most liability insurance policies applied only with respect to contractually assumed liability, on the theory that private persons and organizations could not otherwise incur liability in connection with war. Following the September 11, 2001, terrorist attacks, “war and terrorism” exclusions that broadened the war portion of the exclusion beyond contractually assumed liability were quickly added to liability policies. That broadened war exclusion is now standard, regardless of whether terrorism is insured or excluded in the policy.

Warranty: (1) A guarantee of the performance of a product. Product warranties are included within the definition of the named insured’s product in general liability policies. (2) A statement of fact given to an insurer by the insured concerning the insured risk which, if untrue, will void the policy.

Wholesale agent: An insurance agent who deals with retail agents and not directly with individual insureds. The wholesale agent serves as an intermediary between the retail agent and the insurer.

Wholesale broker: A type of insurance broker who acts as an intermediary between a retail broker and an insurer, while having no contact with the insured. Wholesale agents place business brought to them by retail agents. Unlike a retail broker, wholesale brokers have direct contact with the insurer, whereas the retail agent who produced the business does not. The same broker can function as a retailer or wholesaler, depending on the specific situation. Wholesale brokers often possess specialized expertise in a particular line of coverage or in a line of coverage that is unusual and/or have greater access to or influence with certain insurance markets, which is especially valuable when dealing with a difficult-to-place risk. There are two types of wholesale brokers: managing general agents and surplus lines brokers. The latter work with the retail agent and the insurer to obtain coverage for the insured; but unlike a managing general agent, a surplus lines broker does not have binding authority from the insurer.

Write-Your-Own (WYO) Program: A program available under the National Flood Insurance Program (NFIP) that allows participating insurers to issue NFIP flood insurance policies, in contrast to policies issued directly by the NFIP. WYO insurers write the coverage on their own “paper,” but the NFIP reinsures 100 percent of the coverage. Regardless of whether NFIP or a WYO insurer issues the policy, the coverage provided is identical. WYO insurers employ exactly the same policy terms that are included in policies issued directly by NFIP. The majority of flood insurance policies are written via the WYO program.

Written premium: This is the premium registered on the books of an insurer or a reinsurer at the time a policy is issued and paid for.

Wrongful act: The event triggering coverage under many professional liability policies. Typically, a “wrongful act” is defined as an act, error, or omission that takes place within the course of performing professional services.



Yellow Book: The annual reporting form for property and casualty insurers in the United States. Also known as Yellow Peril, for its size and complexity, although with the advent of computerized work sheets and electronic filings, much less of a peril than in the days of typewriters and calculators.