Do you know the difference between a dwelling form and a homeowners form?
Ever wonder about buying insurance on the voluntary market versus the shared market?
How about the difference between open perils and named perils?
As with any endeavor, knowledge is power. The information provided in this guide gives you the power to properly assess your insurance needs, so in the event of a natural disaster, you and your family will not be left out in the cold. To that end, the following Glossary defines many of the key terms used in the insurance industry, and will aid in your understanding of the information presented in this guide.
Actual Cash Value – is the cost to replace the damaged property reduced by an allowance for depreciation.
Availability – Reference to “insurance availability” generally means when insurance is obtainable by consumers in the general marketplace.–
Building Code Effectiveness Grading Schedule (BCEGS) – A program of the Insurance Services Office, Inc. (ISO)®, is a tool used to measure the effectiveness of a jurisdiction’s building code enforce- ment. The BCEGS program measures the adoption and enforcement of a community’s building codes with special emphasis on reduction of losses from natural hazards.
Beach and Windstorm Plans – These plans exist in the coastal states, in the hurricane zones of the Gulf, and along the South Atlantic coasts. Windstorm Plans provide the coverage that is often excluded from voluntary insurer policies. Each coastal state from Texas to North Carolina has a beach and windstorm pool to provide windstorm coverage in the coastal areas. The way these plans are funded and coverage provided varies from state to state.
Claim Settlement Provision – The provision in your insurance policy that defines the method that will be used to determine the amount of money (claim payment) the insured will receive as a result of a claim. (See Actual Cash Value, Replacement Cost).
Coinsurance Provision – A provision in the policy that affects the amount of total damage that will be covered in the event of a loss. For example, if the coinsurance provision is “80% coinsurance” that means that the property must be insured for at least 80% of the full estimated replacement value. If less insurance is purchased, there will be a deduction at the time of loss payment to reflect this.
Community Rating System Discounts – Provides premium discounts in those communities that undertake floodplain activities beyond the basic requirements of the National Flood Insurance Program.
Coverage – The extent of protection afforded by an insurance policy.
Deductible – The portion of loss paid by the policyholder. A deductible may be a specified dollar amount, a percentage of the insured amount, or a specified amount of time that must elapse before benefits are paid. The bigger the deductible, the lower the premium charged for the same coverage.
Direct Response System – No agents are used and insurance is sold through direct mail, telephone, or the Internet.
Direct Writer System – Sales agents who are employees of the insurance companies.
Dollar Deductible – The dollar value the insured must pay before the insurance company will pay the
remainder of the claim.
Dwelling Form – Provides building coverage for residential buildings of no more than four families or single-family homes (including manufactured homes) including limited coverage for detached garages.
Earthquake Insurance – Covers a building and its contents in the event of an earthquake. A special policy or endorsement exists because earthquakes are not covered by standard homeowners or most business policies.
Exclusive Agency System – Independent contractors who may only represent a single insurance company.
Exposure – Possibility of loss.
FAIR Plans – FAIR ACCESS TO INSURANCE REQUIREMENTS Plans. Insurance pools that sell property insurance to people who can’t buy it in the voluntary market because of high risk over which they may have no control. FAIR Plans, which exist in 28 states and the District of Columbia, insure fire, vandalism, riot, and windstorm losses, and some sell homeowners insurance which includes liability. Plans vary by state, but all require property insurers licensed in a state to participate in the pool and share in the profits and losses.
Flood Insurance – Coverage for flood damage is available from the federal government under the National Flood Insurance Program but is sold by licensed insurance agents. Flood coverage is excluded under Homeowner’s policies and many commercial property policies. However, flood damage to automobiles is covered under the comprehensive portion of an automobile insurance policy.
Functional Replacement Cost – (Market value coverage) Repairs are made using common, modern materials and methods without deduction for depreciation; if a total loss, the payment amount will be the market value of the home.
Homeowners Form – Combines property coverage with liability coverage.
Homeowners Insurance – The typical homeowners insurance policy covers the house, the garage and other structures on the property, as well as personal possessions inside the house such as furniture, appliances, and clothing, against a wide variety of perils including windstorms, fire and theft. The extent of the perils covered depends on the type of policy. The liability portion of the policy covers the homeowner for accidental injuries caused to third parties and/or their property, such as a guest slipping and falling down improperly maintained stairs. Coverage for flood and earthquake damage is typically excluded and must be purchased separately.
Hurricane Deductible – A percentage or dollar amount that must be paid by the policyholder in the event of a loss from a hurricane. Higher deductibles are instituted in higher risk areas, such as coastal regions. Specific details, such as the intensity of the storm for the deductible to be triggered and the extent of the high risk area, vary from insurer to insurer and state to state.
Independent Agency System – Independent contractors who are usually free to represent multiple insurance companies.
Insurance-to-Value Ratio – The relationship of the amount of insurance purchased to the replacement value of the property.
Involuntary Market Mechanisms – Sometimes referred to as “shared markets,” these have been developed to provide coverage for entities that do not qualify for coverage in the voluntary market.
Joint Underwriting Associations (JUA) – Insurers which join together to provide coverage for a particular type of risk or size of exposure, when there are difficulties in obtaining coverage in the voluntary market, and which share in the profits and losses associated with the program. JUAs may be set up to provide auto and homeowner’s insurance and various commercial coverages, such as medical malpractice.
Lines of Insurance – Types of insurance available for purchase (for example, homeowners, auto, renters, boatowners).
Loss Mitigation – Measures taken to reduce damage to property.
Loss of Use – When a loss occurs due to a covered peril and a dwelling becomes uninhabitable, the cost of additional living expenses are covered and defined as “Loss of Use.” Loss of Use coverage reimburses additional living expenses, up to a stated limit, that the insured incurs to maintain a normal standard of living after a covered loss.
Named Peril – Peril specifically mentioned as covered in an insurance policy.
National Flood Insurance Program – Federal government-sponsored program under which flood insurance is sold to homeowners and businesses.
Open Peril Policies – Policies will list what is excluded from coverage.
Package Coverage – A package policy, such as a homeowners or business insurance policy, that provides coverage against several different perils. It also refers to the combination of property and liability coverage in one policy.
Percentage Deductible – Percentage deductibles are based on the home’s insured value.
Peril – A specific risk or cause of loss covered by an insurance policy, such as a fire, windstorm, flood, or theft. A named-peril policy covers the policyholder only for the risks named in the policy in contrast to an all-risk policy, which covers all causes of loss except those specifically excluded.
Peril-Specific Coverage – Coverage that will be provided only in the event of a specific peril. For example, earthquake coverage provides coverage only in the event of an earthquake.
Policy – A written contract for insurance between an insurance company and policyholder stating details of coverage.
Preferred Risk Policies – The NFIP has a Preferred Risk Policy (PRP), using the Dwelling Form, for those properties in low-to-moderate flood risk areas.
Premium – The price of an insurance policy, typically charged annually or semiannually.
Prior Loss – Prior loss is one that has occurred to the home before you apply for insurance, whether or not the current homeowner was the owner at the time of the loss. The treatment of prior losses varies widely by insurer, and state. In certain areas, insurers may surcharge policies that have had a prior loss within a certain period of time.
Replacement Cost Coverage – Replacement cost is not the market value of your home, nor is it the tax-assessed value. It is the current cost to replace the damaged property, with no reduction for depreciation of the damaged property.
Residential Condominium Building Association Policy (RCBAP) – Provides building coverage for the residential condominium building, including all units within the building and improvements made within the individual units. Owners of individual units can purchase building and contents coverage through the Dwelling Form.
Special Payment – Loss is paid before the dwelling is repaired, rebuilt, or replaced.
Stated Value – The maximum amount paid at the time of loss is the value of the policy, even if the loss amount is larger than the value of the policy. In other words, a selected value is established by the insured, and this value is the limit of liability.
Voluntary Market – Refers to the insurance market that is available to everyone, at the consumer’s choice.