Understanding Business Insurance Terminology

Act of God (Force Majeure)
Nugent v Smith (1876) “Natural causes directly and exclusively without human intervention and that could not have been prevented by any amount of foresight and pains and care reasonably to have been expected”. Suggesting that an event was an “act of God” may be a defence in English law against a claim for liability since it may be held that it could not have been foreseen or safeguarded against.

A condition in a non-marine property insurance that if the property value has been understated the insured’s claim is reduced proportionately to the understatement.

Business Interruption Insurance

This form of insurance provides loss of income coverage for your business by replacing your operating income during the period when damage to the premises or other property prevents income from being earned.

Cancellation

Termination of a policy before it is due to expire. There may be a cancellation clause in a policy setting out the condition under which the policy may be cancelled by notice. The period of notice could be anything from 48 hours to 3 months. In most cases this will result in a return premium being paid by the insurer to the insured.

Cancellation Clause

A clause in an insurance contract which permits an insurer and/or an insured to cancel the contract before it is due to expire. The clause may provide for a return of premium in respect of the unused portion of the policy.

Claim

Depending on the context this term may refer to:
(A) a demand made by a policyholder on his insurer (s) for payment or some other contractual benefit under an insurance policy
(B) a demand made by an insurer on its reinsurer(s) to be paid under a reinsurance contract
(C) a demand made by a third party on a policyholder to be compensated for some injury, damage or loss for which the third party blames the policyholder.
A claim is payable under an insurance or reinsurance contract if it is caused by an insured peril and it is not excluded under the terms of that contract.

Deductible

The amount that is deducted from some or all claims arising under an insurance or reinsurance contract. The practical effect is the same as an excess: the insured or reassured must bear a proportion of the relevant loss. If that loss is less than the amount of deductible/excess then the insured or reassured must bear all of the loss (unless there is other insurance in place to cover the deductible).
An increase in deductible should result in a reduction in premium.

Duty of disclosure
The duty of every person seeking insurance or reinsurance to inform the insurer/reinsurer from whom a quotation for insurance/reinsurance is sought of every material fact. The duty arises when seeking new insurance/reinsurance, when seeking a variation of cover (but only as regards a change in risk where the carrier is the same as before) and at renewal (but only as regards a change in risk where the carrier is the same as before). The scope of the duty may be modified by the terms of a proposal form.

Should a person seeking insurance/reinsurance fail to disclose a material fact then this may lead to the avoidance of the relevant insurance or reinsurance by the underwriter. The consequences of non-disclosure may be modified by the terms of the relevant insurance/reinsurance.

Excess

The amount or proportion of some or all losses arising under an insurance or reinsurance contract that is the insured or reassured must bear. If the loss is less than the amount of the excess then the insured/reassured must meet the cost of it (unless there is other insurance in place to cover the excess). Excesses may either be compulsory or voluntary. An insured which accepts an increased excess in the form of a voluntary excess will receive a reduction in premium.

Inception date

The date on which an insurance or reinsurance contract comes into force.

Indemnity

The principle according to which a person who has suffered a loss is restored (so far as possible) to the same financial position that he was in immediately prior to the loss, subject in the case of insurance to any contractual limitation as to the amount payable (the loss may be greater than the policy limit). The application of this principle is called indemnification.
Most contracts of insurance are contracts of indemnity. Life insurances and personal accident insurances are not contracts of indemnity, as the payments due under those contracts for loss of life or bodily injury are not based on the principle of indemnity.

Insurance

A contract whereby an insurer promises to pay the insured a sum of money or some benefit upon the happening of one or more uncertain events in exchange for the payment of a premium. There must be certainty as to whether the relevant event (s) may happen at all or if they will occur (e.g. Death) as to their timing.

Insured

A person who is insured under a contract of insurance. Where there is one insured this person may also be referred to as the policyholder.

Insurer

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

Limit of Indemnity

Another term for policy limit. It refers to the maximum amount payable under a policy of insurance or reinsurance, either overall or with reference to a particular section of a policy.

Material fact

This refers to any fact, which would influence the judgment of a prudent underwriter in deciding whether to accept an insurance/reinsurance risk and the terms on which he would be willing to grant cover. See duty of disclosure.

Motor Assessor

Person who values and agrees repair costs of motor vehicles.

New for Old

Where insurers agree to pay the cost of property lost or destroyed without deduction for depreciation.

No claims bonus (or discount)

A rebate of premium given to an insured person by an insurer where no claims have been made by that insured. Very common in motor insurance.

Products Liability Insurance

These policies cover the insured’s legal liability for bodily injury to persons, or loss of or damage to property caused by defects in goods (including containers) sold, supplied, erected, installed, repaired, treated, manufactured, and/or tested by the insured.

Professional Indemnity Cover

This policy protects a professional person against his legal liability towards third parties for injury, loss, or damage, arising from his own professional negligence or that of his employees

Quotation

A statement of the premium that an underwriter requires to underwrite an insurance/ reinsurance risk based on the information supplied by the person seeking cover, either directly or via their broker. A quotation may be conditional, eg it may be subject to the provision of further information, or not.
If a quotation is accepted before it is withdrawn, then subject to the satisfaction of any conditions that may attach to the quotation, an insurance/reinsurance contract will be made.

Renewal

The process of continuing an insurance from one period of risk to a succeeding one.

Risk

The peril insured against or an individual exposure.

Schedule

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

Statement of Fact

An alternative to a completed proposal form. A statement provided by the insurer clarifying the basis on which insurance is accepted and what conditions apply.

Sum insured

The maximum amount that an insurer will pay under a contract of insurance. The expression is usually used in the context of property and life insurance where (subject to the premium cost) the insured determines the amount of cover to be purchased.

Third Party

Someone other than the insured or his insurer who has suffered injury or loss. A person claiming against an insured. In insurance terminology the first party is the insurer and the second party is the insured.

Utmost Good Faith

Contracts of insurance and reinsurance are contracts of utmost good faith. In the event that either party fails to observe utmost good faith towards the other in regard to the negotiation of cover then the other party may avoid the contract. The duty of utmost good faith requires each party to inform the other all material facts during the negotiation of the placement, renewal or alteration of cover. An insured has a separate duty of good faith when making a claim under an insurance policy.

Warranty

Where an insured or reassured promises that something will or will not be done during the period of cover or that a particular state of affairs exists or does not exist at the inception of cover. If the promise is untrue or is not kept then the insurer/reinsurer may disclaim all liability under the policy from the date of the breach, regardless as to whether the false declaration was material to the underwriting of the contract or causative of any loss.

Wear and tear

The amount deducted from a claims payment in recognition of the depreciation of the property insured through usage of it over time. Where cover is provided on a ‘new for old basis’ i.e. where the insurer agrees to replace an old item with a similar new one, no such deduction is made.