Explore a detailed glossary of key insurance terms essential for navigating the Canadian insurance industry. Enhance your understanding and professional communication with clear definitions and practical examples.
The Canadian insurance industry is laden with specialized terminology that can be daunting for newcomers and seasoned professionals alike. This glossary serves as an educational resource, providing concise definitions and context for key insurance terms. Arranged alphabetically, it is designed to enhance comprehension and facilitate effective communication within the industry.
Actual Cash Value (ACV):
The value of property at the time of loss or damage, calculated as the replacement cost minus depreciation. ACV represents the fair market value of the item. For example, if a five-year-old television is damaged, the ACV would consider the cost of a new television minus depreciation for its age and condition.
Actuary:
A professional who uses statistical methods and financial theory to analyze the costs associated with risks and uncertainties. Actuaries are essential in designing insurance policies and setting premiums. They apply mathematical models to predict future events and assess the financial implications for insurance companies.
Additional Insured:
A person or entity other than the primary insured who is covered under an insurance policy. This is often added through an endorsement. For instance, a landlord might be added as an additional insured on a tenant’s liability policy.
Adverse Selection:
A situation where individuals with higher risk are more likely to purchase insurance, potentially leading to imbalanced risk pools. Insurers use underwriting to mitigate adverse selection by evaluating the risk profiles of applicants.
Aggregate Limit:
The maximum amount an insurer will pay for all covered losses during a policy period. This limit is crucial in policies like liability insurance, where multiple claims can be made within a policy term.
Beneficiary:
The person or entity designated to receive the proceeds or benefits from an insurance policy, such as a life insurance payout upon the insured’s death. Beneficiaries can be individuals, trusts, or organizations.
Binder:
A temporary agreement providing insurance coverage until a formal policy is issued. Binders are used to provide immediate coverage while processing the full application. They are common in property and casualty insurance.
Broker:
An intermediary who represents the insured and works to find the best insurance policy to meet their needs. Brokers are licensed professionals who offer advice and negotiate with insurers on behalf of their clients.
Burglary Insurance:
Coverage for losses resulting from theft involving forceful entry into a premises. This type of insurance is often part of a broader property insurance policy.
Cancellation:
Termination of an insurance policy before its expiration date, either by the insurer or the insured, according to the terms specified in the policy. Reasons for cancellation can include non-payment of premiums or changes in risk.
Claims Adjuster:
An insurance professional who investigates and evaluates claims to determine the extent of the insurer’s liability and facilitate settlement. Adjusters may work directly for insurance companies or as independent contractors.
Co-insurance:
A cost-sharing arrangement where the insured and insurer share the covered losses according to a specified ratio. Common in health insurance, where the insured might pay 20% of costs while the insurer covers 80%.
Coverage:
The protection and benefits provided by an insurance policy. Coverage details are outlined in the policy document, specifying what is insured and under what conditions.
Deductible:
The amount the insured is responsible for paying out-of-pocket before the insurer pays a covered loss. Higher deductibles typically result in lower premiums, as they reduce the insurer’s risk.
Declarations Page:
The section of an insurance policy that provides key information, including the insured’s name, policy period, coverage limits, and premiums. It serves as a summary of the policy.
Depreciation:
The reduction in value of an asset over time due to wear and tear or obsolescence. Depreciation is a key factor in calculating actual cash value for claims.
Direct Writer:
An insurance company that sells policies directly to the public without using agents or brokers. Direct writers often use online platforms to reach customers.
Endorsement (Rider):
An amendment or addition to an insurance policy that modifies coverage terms and conditions. Endorsements can add, delete, or alter coverage, such as adding a new driver to an auto insurance policy.
Exclusion:
Specific conditions or circumstances listed in an insurance policy for which the insurer will not provide coverage. Common exclusions include acts of war or intentional damage.
Excess Insurance:
Coverage that kicks in after primary insurance limits are exhausted. Excess insurance provides additional protection and is often used in liability policies.
Experience Rating:
A method of setting premiums based on the insured’s past loss experience. This approach rewards those with fewer claims with lower premiums.
Face Amount:
The nominal value of a life insurance policy, which is the amount payable upon the insured’s death. It does not include additional benefits or dividends.
Fiduciary Duty:
An obligation to act in the best interest of another party. Insurance brokers, for example, have a fiduciary duty to their clients.
First-Party Coverage:
Insurance that covers losses suffered directly by the insured, such as property damage or theft. This contrasts with third-party coverage, which addresses claims made against the insured by others.
Flood Insurance:
Specialized coverage for damages caused by flooding, often not included in standard property insurance policies. Flood insurance is crucial in areas prone to flooding.
Grace Period:
A set period after the premium due date during which the policy remains in force without penalty. If payment is made within this period, coverage continues uninterrupted.
Group Insurance:
Insurance coverage provided to a group of people, typically employees of a company, under a single policy. Group insurance often offers lower premiums than individual policies.
Guaranteed Issue:
A policy that must be offered to any eligible applicant without regard to health status. Guaranteed issue policies are common in group health insurance.
Guaranty Fund:
A fund established by a state to protect policyholders in the event of an insurer’s insolvency. It ensures that claims are paid even if the insurer cannot meet its obligations.
Hazard:
A condition that increases the likelihood or severity of a loss. Hazards can be physical (e.g., faulty wiring), moral (e.g., dishonesty), or morale (e.g., carelessness).
Homeowners Insurance:
A type of property insurance covering losses and damages to an individual’s house and assets in the home. It typically includes liability coverage for accidents that occur on the property.
Host Liquor Liability:
Coverage for individuals or businesses that serve alcohol at events. It protects against claims resulting from alcohol-related incidents.
Hull Insurance:
Coverage for physical damage to a vessel or aircraft. Hull insurance is crucial for owners of ships and airplanes.
Indemnity:
A principle in insurance where the insurer compensates the insured for a covered loss, restoring them to their financial position prior to the loss. Indemnity prevents the insured from profiting from a loss.
Insurable Interest:
A financial or other interest in the insured item or person that would cause the policyholder to suffer a loss if the insured event occurs. Insurable interest is a fundamental requirement for a valid insurance contract.
Insurance Score:
A rating based on an individual’s credit history and other factors used by insurers to assess risk and determine premiums. Insurance scores are commonly used in auto and homeowners insurance.
Insured:
The person or entity covered by an insurance policy. The insured receives the benefits of the policy in the event of a covered loss.
Joint Underwriting Association (JUA):
An organization of insurers formed to provide coverage for high-risk individuals or businesses that might not otherwise qualify for standard insurance. JUAs ensure that essential coverage is available to all.
Judgment Rating:
A method of setting premiums based on the underwriter’s experience and judgment rather than statistical models. This approach is used when there is insufficient data for traditional rating methods.
Jettison:
The act of throwing cargo overboard to lighten a vessel in an emergency. Jettison is covered under marine insurance policies as a necessary action to save the vessel.
Juvenile Insurance:
Life insurance policies purchased for children, often to provide a financial foundation or as a savings vehicle. Juvenile insurance can be converted to adult policies as the child grows.
Key Person Insurance:
A policy that compensates a business for financial losses due to the death or disability of a crucial employee. Key person insurance helps cover the cost of finding and training a replacement.
Knock-for-Knock Agreement:
An arrangement between insurers where each pays for the losses of its own policyholder, regardless of fault. This simplifies claims processing and reduces litigation.
Kidnap and Ransom Insurance:
Coverage for individuals or businesses against financial losses related to kidnapping, extortion, and ransom demands. This insurance is crucial for companies operating in high-risk areas.
Known Loss Rule:
A principle stating that insurance cannot cover a loss that has already occurred or is known to be imminent at the time the policy is purchased.
Lapse:
The termination of an insurance policy due to non-payment of premiums. A lapsed policy no longer provides coverage, but it may be reinstated under certain conditions.
Liability Insurance:
Coverage that protects against claims resulting from injuries and damage to people or property. Liability insurance covers legal costs and payouts for which the insured is found liable.
Loss Ratio:
A measure of an insurer’s profitability, calculated as the ratio of claims paid to premiums earned. A lower loss ratio indicates better financial health for the insurer.
Loss of Use:
Coverage for additional living expenses incurred when a policyholder cannot use their home due to a covered loss. This includes costs like hotel stays and meals.
Moral Hazard:
The risk that a party insulated from risk behaves differently than they would if they were fully exposed to the risk. Insurers mitigate moral hazard through deductibles and co-payments.
Mutual Insurance Company:
An insurance company owned by its policyholders. Profits are typically distributed as dividends or used to reduce future premiums.
Market Value:
The price at which an asset would trade in a competitive auction setting. Market value is considered in determining actual cash value for claims.
Marine Insurance:
Coverage for loss or damage to ships, cargo, and other maritime property. Marine insurance is essential for international trade and shipping.
Named Perils:
Specific risks or causes of loss listed in an insurance policy. Coverage is provided only for perils explicitly named, such as fire or theft.
Negligence:
Failure to exercise the care that a reasonably prudent person would in similar circumstances. Negligence is a key factor in liability claims.
No-Fault Insurance:
A type of auto insurance where policyholders are compensated by their own insurer regardless of fault in an accident. No-fault systems aim to reduce litigation and speed up claims processing.
Non-Renewal:
The decision by an insurer not to renew a policy at the end of its term. Non-renewal can occur for various reasons, including changes in risk or claims history.
Occurrence:
An event that results in a loss covered by an insurance policy. Occurrence-based policies cover claims arising from incidents that occur during the policy period, regardless of when the claim is filed.
Open Perils:
Coverage for all risks of loss except those specifically excluded. Open perils policies provide broader protection than named perils policies.
Ordinance or Law Coverage:
Insurance that pays for the increased cost of repairing or rebuilding a property to comply with current building codes. This coverage is important for older buildings.
Overinsurance:
Having insurance coverage that exceeds the value of the insured item or risk. Overinsurance can lead to higher premiums without additional benefits.
Peril:
A specific risk or cause of loss covered by an insurance policy. Common perils include fire, theft, and natural disasters.
Personal Injury Protection (PIP):
Coverage in auto insurance that pays for medical expenses and lost wages regardless of fault. PIP is mandatory in some jurisdictions.
Policyholder:
The individual or entity that owns an insurance policy. The policyholder is responsible for paying premiums and has the right to make changes to the policy.
Premium:
The amount paid by the insured to the insurer for coverage. Premiums can be paid monthly, quarterly, or annually.
Quote:
An estimate of the premium for a specific insurance policy. Quotes are based on the information provided by the applicant and are subject to change upon further underwriting.
Qualified Annuity:
An annuity that meets specific IRS requirements for tax-deferred growth. Qualified annuities are often used for retirement savings.
Quarantine Coverage:
Insurance that covers losses related to quarantine restrictions, such as business interruption or travel cancellation. This coverage gained prominence during the COVID-19 pandemic.
Quota Share Reinsurance:
A type of reinsurance where the insurer and reinsurer share premiums and losses according to a fixed percentage. Quota share agreements help insurers manage risk and capital.
Reinsurance:
Insurance purchased by insurers to transfer risk and stabilize financial performance. Reinsurance allows insurers to underwrite larger policies and protect against catastrophic losses.
Replacement Cost:
The cost to replace damaged property with new property of similar kind and quality without deduction for depreciation. Replacement cost coverage ensures full restoration after a loss.
Rider:
An amendment to an insurance policy that modifies its terms or coverage. Riders can add, exclude, or limit coverage, such as adding a jewelry rider to a homeowners policy.
Risk Management:
The process of identifying, assessing, and controlling risks. Insurance is a key component of risk management strategies.
Salvage:
The remaining value of damaged property that can be recovered and sold. Insurers may take possession of salvage to offset claim costs.
Subrogation:
The process by which an insurer seeks reimbursement from a third party responsible for a loss after paying the insured’s claim. Subrogation helps insurers recover costs and maintain premium levels.
Surety Bond:
A contract guaranteeing the performance of a third party. Surety bonds are used in construction and other industries to ensure contractual obligations are met.
Surrender Value:
The amount available to a policyholder upon voluntary termination of a life insurance policy before maturity or death. Surrender value is typically lower than the policy’s face value.
Third-Party Coverage:
Insurance that covers claims made against the insured by others. Third-party coverage is common in liability insurance, where the insurer pays for damages caused by the insured to others.
Total Loss:
A situation where the cost to repair damaged property exceeds its value or the policy limits. Total loss claims result in a payout of the policy’s full coverage amount.
Treaty Reinsurance:
A reinsurance agreement covering a portfolio of policies rather than individual risks. Treaty reinsurance provides automatic coverage for specified risks and simplifies reinsurance transactions.
Twisting:
An unethical practice where an insurance agent persuades a policyholder to switch policies unnecessarily, leading to higher commissions for the agent. Twisting is prohibited by most regulatory bodies.
Umbrella Policy:
Additional liability coverage that extends beyond the limits of underlying policies, such as auto or homeowners insurance. Umbrella policies provide extra protection against large claims.
Underwriting:
The process of evaluating risk and determining the terms and pricing of insurance coverage. Underwriters assess the likelihood of a claim and set premiums accordingly.
Unearned Premium:
The portion of a premium that corresponds to the remaining term of a policy. Unearned premiums are refunded if a policy is canceled before its expiration.
Utmost Good Faith:
A fundamental principle of insurance requiring both parties to act honestly and disclose all relevant information. Utmost good faith ensures transparency and trust in the insurance contract.
Valued Policy:
An insurance policy that pays a predetermined amount in the event of a total loss, regardless of the actual value of the lost item. Valued policies are common in art and jewelry insurance.
Variable Life Insurance:
A type of life insurance where the policyholder can invest the cash value in various investment options. The death benefit and cash value fluctuate based on investment performance.
Vicarious Liability:
Legal responsibility for the actions of another person, such as an employer’s liability for an employee’s actions. Vicarious liability is a key consideration in liability insurance.
Voidable Contract:
An insurance contract that can be declared invalid due to misrepresentation or fraud. Voidable contracts are not enforceable by the insurer.
Waiver of Premium:
A provision that allows the policyholder to stop paying premiums if they become disabled. This ensures continued coverage without financial burden during disability.
Whole Life Insurance:
A permanent life insurance policy with fixed premiums and a guaranteed death benefit. Whole life policies also accumulate cash value over time.
Workers’ Compensation Insurance:
Coverage for employees’ medical expenses and lost wages due to work-related injuries or illnesses. Workers’ compensation is mandatory in most jurisdictions.
Write-Off:
The reduction or elimination of an asset’s value, often used in accounting for uncollectible debts or depreciation. Insurers may write off unrecoverable claims.
Ex Gratia Payment:
A payment made by an insurer without admitting liability, often to maintain goodwill or settle a dispute. Ex gratia payments are discretionary and not required by the policy.
Excess of Loss Reinsurance:
A type of reinsurance where the reinsurer covers losses exceeding a specified amount. Excess of loss agreements protect insurers from large, unexpected claims.
Exclusion Clause:
A provision in an insurance policy that excludes certain risks or perils from coverage. Exclusion clauses define the scope of coverage and limit the insurer’s liability.
Examination Under Oath (EUO):
A formal proceeding where the insured is questioned under oath about a claim. EUOs help insurers investigate claims and prevent fraud.
Yield:
The income return on an investment, expressed as a percentage. Yield is an important factor in evaluating the performance of insurance company investments.
Yearly Renewable Term (YRT):
A type of term life insurance that renews annually with increasing premiums. YRT policies offer flexibility but can become expensive over time.
Yield Spread:
The difference in yield between different types of bonds or investments. Yield spread analysis helps insurers manage investment risk and return.
Yacht Insurance:
Coverage for boats and yachts, including physical damage and liability protection. Yacht insurance is tailored to the unique risks of marine recreation.
Zero Depreciation Cover:
An add-on to auto insurance that covers the full cost of repairs without depreciation deductions. Zero depreciation cover ensures complete reimbursement for new parts.
Zone Rating:
A method of setting insurance rates based on geographic areas. Zone rating considers factors like climate, crime rates, and natural disaster risk.
Zoning Ordinance:
Local laws regulating land use and building standards. Zoning ordinances can impact insurance coverage for property development and renovation.
Zero Balance Account (ZBA):
A banking account that maintains a zero balance by transferring funds to or from a master account. ZBAs help insurers manage cash flow and liquidity.
This glossary is a foundational tool for understanding the complex language of the Canadian insurance industry. By familiarizing yourself with these terms, you will be better equipped to navigate the intricacies of insurance policies, engage in informed discussions, and enhance your professional expertise.