Risk Management Terms
Below is a list of common Insurance and Risk Management Terms you might find in our insurance specifications, proposals, reports, and other documents.
A-Side Coverage – A-Side coverage refers to a section of a directors and officers (D&O) liability policy that covers the individual directors and officers of an organization for allegations of “wrongful acts” such as mismanagement, misrepresentation etc. This portion of the policy carries a $0 deductible and triggers in the event that the insured company can not indemnify the D&O’s either by law or insolvency. Since the primary intent of a D&O policy is to protect the decision makers, the limits of a directors and officers liability policy should be allocated to this section first (aka via Priority of Payments Clause). In many cases companies purchase a separate “A-Side Policy” to increase the depth of protection for their D&O’s. These policy trigger when the underlying D&O Policy’s limits are exhausted and /or the insured company does not have the money indemnity the D&O’s.
Accrual – An accrual is fixed, mathematically projected, monetary measurement, used to reserve pending expenses. This term is often used when an insurance policy is auditable. In other words, a General Liability or Workers Compensation policy can be subject to additional or return premiums utilizing a basis of estimated versus actual payroll or revenue (ie. $15.23 per $1,000 of revenue) By using accruals, an insured can reserve for the year-end premium audit adjustment. Companies also use this technique to better price their product / services/bids.
Acts of Civil Authority Coverage – Coverage for loss of business income that results when access to a business location is prohibited by municipal authorities because of damage to property other then the Insured’s. For Example, if the Insured’s property is accessible only by going over a public bridge that leads to their parking lot, and the bridge is closed by a civil authority due to the possibility of collapse, Acts of Civil Authority coverage would apply and will provide business income coverage for a pre-determined period following the bridge shutdown for loss of income/extra expense.
Additional Insured – An Additional Insured is protected by an insurance policy for claims arising out of their negligence as long as the incident arose out of their work with the Named Insured. An additional insured does not have the same rights or obligations as a Named Insured. For example, an Additional Insured does not the right to make changes to the policy and is not obligated to pay for the policy. (See also, Named Insured / Primary Additional Insured).
Adhesive Contract / Contract of Adhesion – A contract that is designed and issued by one party that does not require a signature of the other party to be valid. In these cases, the courts will interpret any ambiguity in the contract in the favor of the party who accepted the contract rather than the one who constructed it. An insurance policy is an example of an adhesive contract and “a tie goes to the runner”.
Admitted Insurance – An insurance company that is licensed to do business in a given state or country. Admitted insurance is in contrast to non-admitted or surplus lines insurance. Admitted Insurance Companies rating structures, policy forms and endorsements are filed, reviewed and approved by the jurisdiction.
Auto Medical Payments Coverage – Coverage for reasonable medical expenses (up to 3 years). Provides medical payments and/or funeral benefits.
Average Daily Value – This is term used in Property and Boiler & Machinery Insurance policies. The average daily value works as a deductible for a Business Income loss caused by an equipment breakdown. This type of deductible is typically expressed as a number times the Average Daily Value and will be calculated based on the Business Income that would have been earned during the Period of Interruption, divided by the number of working days in that period.
The deductible on the Boiler & Machinery policy for Business Income Loss is 3 Times the Average Daily Value.
Business Operations are ceased and resulting in a Period of Interruption of 20 working days. If no loss had occurred the Business Income for those 20 days would have been $50,000 in total.
$50,000 / 20 = $2,500 ADV
3 X $2,500 = $7,500 Deductible for Business Income Loss
Amount Paid by Carrier is $50,000 – $7,500 = $42,500
Back Pay – The difference between what an employee was paid and what an employee should have been paid in the past. This term is also used to describe amount of lost compensation from time of termination to the point in time an employment practices liability claim is resolved.
Blanket Additional Insured – An enhancement to a policy that allows individuals or organizations to be added to an Additional Insured automatically if the Named Insured is required by contract (usually a written contract is required). Separate endorsements for each Additional Insured are not required in this case. There are many versions of this endorsement giving various levels of protection for the Additional Insured. Therefore, these endorsements must be read carefully to make sure that the protection offered is consistent with that which is expected by the Additional Insured to avoid further breach of contract litigation.
Blanket Limit – A single limit of Insurance that applies over more then one location or more than one type of coverage or both. Blanket Limit is most often used in the context of commercial property insurance and applies to any one loss serving many separate locations. In other words, a $100 Million Blanket Limit can apply to a property schedule that has four (4) properties with a replacement cost value of $25 Million each. In the event of a loss that is determined to be in excess of $25 Million, the subject property can “borrow” limits from the Blanket Limit.
Boiler & Machinery Insurance – Coverage for loss caused by machinery breakdown and explosion of steam boilers other steam equipment, and any piece of machinery that can do “damage to its self”. This policy is not only needed to protect against an explosion of a steam boiler but also is important to protect against any type of electrical or mechanical sudden and accidental occurrence such as an arcing of electrical systems, short circuiting, or power surges. The electrical surge does not need to be artificially generated. It can also arise out of an electrical storm / lightening. The coverage is also known as Equipment Breakdown Insurance.
Builders Risk Insurance – This Inland Marine Insurance that provides coverage for an entire building project and its pending materials while being constructed. This coverage is similar to an Installation Floater Program.
Building Ordinance Coverage – This term should be broken down into several categories including:
Building Ordinance – Demolish of Undamaged Portion of the Building – This coverage available by endorsement when a community has a building ordinance(s) that states when a building is damaged to a specified extent (typically 50%), it must be completely demolished and rebuilt in accordance with current building codes rather then repaired.
Building Ordinance – Increased Cost of Construction – This coverage contemplates the increased cost of construction associated with complying with today’s building, zoning or land use laws. For example, if a building is destroyed in a fire, the municipality may require the building be equipped with a sprinkler system when it is replaced.
Building Ordinance – Time Element Coverage – This coverage contemplates the increased Business Interruption / loss of income caused by the compliance with today’s building, zoning or land use laws. For example, if a building is destroyed in a fire, the municipality may require the building be equipped with a sprinkler system when it is replaced. The increased amount of time that this upgrade has on the project represents an increased exposure to an insured’s Business Interruption loss.
Business Auto Coverage – Business Auto is a term used to describe insurance coverage for corporately owned vehicles that are subject to compulsory or financial responsibility law or other motor vehicle insurance law. Coverages usually include physical damage and liability. Various other coverages can be added to a Business Auto policy by endorsement, such as Auto Medical Payments, and Uninsured and Under-insured Motorists Coverage. These policies can also include coverage for trailers or semitrailers designed for travel on public roads.
Business Income Coverage – The sum of the net profit or loss that would have been earned or incurred if operations had not been suspended plus continuing normal operating expenses. Continuing operating expense can include Ordinary Payroll (if purchased). The amount of profit or loss that would have been earned or incurred if the suspension had not occurred must be estimated based on the past and prospective performance of the business. The continuing expenses can be determined during the suspension. Those expenses might include salaries of key employees, property taxes, and loan obligations.
Business Interruption Coverage – Coverage for Business Income and Extra Expenses resulting from a suspense in operations due to a covered peril (Such as a fire). Coverage applies during the time required to rebuild or repair the property (aka the Period of Restoration) plus an Extended Period of Indemnity Coverage that may be available in the policy.
Certificate of Insurance – A document providing evidence that certain general types of insurance coverage’s and limits have been purchased by the party required to furnish the certificate. Keep in mind, a certificate of insurance is merely proof that insurance is in place and is not adequate to establish what the insurance ACTUALLY covers. In addition, a certificate of insurance that leaves the “Description of Operations” section blank does not transfer the risk of the cert holder in any way.
Claims Made – A term describing an insurance policy that triggers coverage when claims are made (reported or filed). This is contrast to an Occurrence policy that triggers the policy that was in force when the alleged wrongful act/accident occurred regardless of when in the future the claim is made / lawsuit is filed.
Claims-made policies are policies commonly associated with professional liability policies, such as Directors & Officers, Employment Practices Liability and other miscellaneous professional liability policies including Lawyers Professional Liability.
A claims-made policy states that a claim must be made during the policy period or the extended reporting period (ERP), if applicable. Because no two policies are exactly the same, a basic knowledge of the claims-made policy, including the definition of a claim, the definition of a wrongful act and the claim reporting provisions, is essential to understanding this type of coverage.
However, this is not as simple as it sounds because there are ]two distinct types of claims-made forms. One is the “Claims-Made & Reported Form” and the other is the “Pure Claims-Made Form.”
“Claims-Made & Reported” form
The first and most widely used claims-made form today is the “Claims-Made & Reported Form.” This policy requires that the “claim” be made during the policy period or ERP, and reported during this same period of the policy currently in force at the time. A typical policy declaration page of this type may read: “This is a Claims-Made Policy. This Policy covers only those Claims first made and reported against the Insured during the Policy Period or ‘ERP,’ if applicable.”
The key words to look for are “… and Reported.” This is significant because it stipulates that it must be reported within a designated time frame.
“Pure Claims-Made” form
In contrast, the less commonly used “Pure Claims-Made” Form still requires that a claim be made during the policy period or the “ERP.” However, the major distinction between this form and the “claims-made and reported form” is that insured needs only report the claim “as soon as practicable,” or promptly, and not necessarily during the policy term which, in essence, can be anytime in the future. This form is more frequently used with directors and officers liability policy type policies.
A sample of this wording may read: “This is a claims-made policy which applies to ‘claims’ first made during the policy period or any extended reporting period.”
The difference between Claims Made & Reported vs. Pure Claims Made
While the differences of the policies seem subtle, not knowing those differences can have a dramatic impact on the coverage. Also, the answers may vary depending on the insurance company issuing the policy.
In the professional liability insurance community, “claims-made” terminology is generically used whether it is a “claims-made and reported” form or a “pure claims-made” form. Don’t be misled! Many policies declare they are “Claims-Made,” when in reality, they are the “Claims-Made & Reported.” Some policy forms incorporate either bold wording on the declaration page or a statement within the insuring agreement proclaiming the policy is a “Claims-Made & Reported” policy.
Be careful–if this wording is absent, do not assume that the form is a “pure” claims-made form. You need to dig deeper into the policy and examine the “Notice of Claim” reporting provisions of the policy. This is where you will find additional reporting conditions and restrictions. If it is a “claims-made and reported” form, it will generally state that the claim must be reported within the policy period or another specific time frame, which can be as many as 60 days after the policy expiration. It is also important to point out that the “pure claims-made” form has no such restrictions.
The wording may read something like this: “The Insured shall, as a condition precedent to the obligations of the Company under this Policy, give written notice to the Company of any Claim made against the Insured as soon as practicable during the Policy Period. There shall be no coverage for any Claim reported to the Company later than 60 days after the expiration of this Policy or after the expiration of any applicable Extension Period.”
The “wrongful act” starts the sequence of events that ultimately leads to a claim. A wrongful act is any actual or alleged error, omission or negligence committed by the named insured. However, the definition of wrongful act varies depending on the type of professional liability policy purchased. For example, the most common definition of “wrongful act” in an EPL policy includes “sexual harassment, discrimination or wrongful termination.”
Conversely, the definition of “wrongful act” in a D&O policy can be “any actual or alleged breach of duty, misstatements or misleading statements committed by the insured.” Therefore, the “Wrongful Act” serves as the “claim trigger” under a claims-made policy.
Clinical Trial Insurance – Clinical trial liability coverage is uniquely formatted to fit clinical testing and covers bodily injury and/or property damage resulting from the insured’s negligence while testing the product. This type of Insurance is limited to the clearly specified trials of clearly listed products and for no other tests or products. Claims Made policy forms are used due to the high risk exposure. The insured can typically chose whether the coverage should include defense within or outside the policy limits.
Collaboration – This term is utilized by KMRD Partners, Inc. to illustrate our unique approach of establishing a open forum for client, carrier, broker and communication on all aspects of work.
Collision Coverage – This term describes the form of auto insurance that reimburses for loss to a covered automobile due to it’s colliding with another vehicle, object, or the overturn of an automobile. This term should not be confused with Comprehensive Physical Damage Coverage.
Combined Loss Ratio – A comparison of losses and expenses versus Earned Premiums. This is significantly different than an insurance company’s Loss Ratio because it also takes into consideration operating expenses (aka expense ratio). An insurance customer should keep in mind that although their Loss Ratio may be 70%, their combined loss ratio as seen by the carrier may be 100% and therefore deemed to be priced at an unprofitible level.
Comprehensive Physical Damage Coverage – Coverage under an automobile physical damage policy insuring against loss or damage resulting from numerous miscellaneous causes, such as fire, theft, windstorm, flood, and vandalism. This term should not be confused with Collision Coverage.
Concealment – A lie by omission; to prevent information from being known. Improving the perception of something by withholding truth that may change a decision; if the underwriter had wanted to know, he/she would have asked. Concealment may actually be an unintentional act. The concealment of a material fact results in a policy becoming void.
Continuity Date – The date in which an insured last answered the question the “Are there any circumstances that you are aware that may give rise to a claim?” This is known as a Warranty Question. This term is most often used in the context of a claims-made policy such as errors & omissions, employment practices and directors & officer’s liability insurance programs. The insured’s answer to this question could materially impact their ability to access coverage coverage if it is later found that they knew of a circumstance prior to the date in which the warranty question was answered. This term is often confused with Retro Date but it is not the same.
Contractors Equipment Coverage – A contractor’s equipment policy is an Inland Marine insurance program that provides insurance coverage for Mobile Equipment or tools while anywhere in the coverage territory, including in transit. In other words, the insurance coverage follows the equipment in contrast to a typical property policy that only applies to a scheduled location/address. The equipment that can be covered under a contractor’s equipment policy includes but is not limited to; cranes, tractors, bulldozers, scaffolding and other pieces of equipment that travel to various job sites. Coverage is most often limited to the equipment which is specifically scheduled on the policy along with a limited “All other equipment sublimit”.
Contractual Risk Transfer – A risk transfer technique that transfers one parties risk to another by means other than an Insurance policy. A contractual risk transfer technique can be accomplished through an agreement in which one party agrees that they will indemnify and hold harmless another party for that party’s negligence. Contractual Risk Transfer Techniques are the most efficient way to mitigate risk when formal insurance policies are not necessary.
Cost Benefit Analysis – A cost benefit analysis is a term used to explain a educated thought process when given the opportunity to increase premium dollars of an insurance program by increasing coverage’s or decreasing premium dollars by increasing retention levels.
Cost of Risk – To effectively and accurately calculate the True Cost of Risk the following six cost’s must be included in addition to just premiums paid; 1) Deductibles/Self-Insured Retentions; 2) The cost of uninsured and/or self-insured losses; 3) Legal costs; 4) Loss control and safety costs; 5) Claims management; and 6) Opportunity costs.
Comparative Negligence – Each party’s relative “fault” for the accident is compared and the injured party’s (plaintiff) ultimate damages award is reduced by their percentage of culpability. For example, if the plaintiff is found to be 40 percent at fault, the $1,000 damages awarded would be reduced to $600. Three variations of the comparative fault rule are utilized: 1) pure comparative fault; 2) modified comparative fault – 50 percent bar; and 3) modified comparative fault – 51 percent bar. In each variation, the damaged party’s award is reduced by the percentage of their own contribution to the incident.
Compensatory Damages – Payment for actual injury or economic loss. Compensatory damages are further divided into Special Damages and General Damages. Special Damages are specific and quantifiable to pay for medical costs, lost wages, repair costs and other such costs. General Damages “generally” have no basis for calculation and include pain and suffering, mental anguish or loss of reputation.
Constructive Total Loss – The property can be repaired, but the cost to repair the damaged property is greater than the value of the property after it is repaired (it would cost more to repair it than it would be worth when done). It is more economical for the insurance carrier to pay the insured the “value” of the property (its actual cash value or replacement cost, however the policy is set up) and recover as much in salvage value as possible.
Contributory Negligence – Application of the contributory negligence common law doctrine states that if the injured person was even 1 percent culpable in causing or aggravating his own injury he is barred from any recovery from the other party. This is an absolute defense in the jurisdictions that apply this principle; some jurisdictions require the defendant (the one “most at fault”) to prove the negligence of the plaintiff (the one “most damaged”), while others require the plaintiff to disprove any negligence. Only five jurisdictions still apply pure contributory negligence: Alabama, the District of Columbia, Maryland, North Carolina and Virginia.
Crumbling Skull – A legal theory sometimes used as a defense to or argument against application of the “Eggshell Skull” rule. The principle behind this defense is that the result would have been the same whether or not the accused wrongdoer was involved. Best exampled in medical practices: the patient was dying; the doctor attempted some radical measures to maintain life and did not succeed and in fact were the proximate cause of death. Crumbling skull principles would not hold the doctor responsible for causing a foregone conclusion. To protect the doctor, the death would have to have been certain within approximately the same time frame.
Crime Insurance – This term describes an insurance coverage available for money and securities against a wide rage of perils and property other then money and securities against various crime perils such as employee dishonesty burglary, robbery, theft, and extortion. There are two coverage forms available on a commercial crime policy. Discovery form covers loss that is discovered during the policy period even though they may have occurred before the policy period. The Loss sustained form covers the losses that are actually sustained during the policy period and discovered no later then one year after policy expiration.
Damages – Serves a dual purpose: 1) as a monetary remedy for a person, persons or entity against whom a wrong has been committed; this amount may only be a part of 2) the sum imposed on a tortfeasor for the violation of a duty owed. Combined, these are two sides of the same coin, so to speak. There must be a duty owed or created (tort, contract or statute), a breach and resulting injury. There are several types of “damages” including Compensatory, Punitive and Liquidated damages.
Deductible – A deductible is the portion of an otherwise insured loss borne by the insured. In property insurance, the entire policy limit typically applies once the deductible is met. In liability insurance, the deductible amount typically reduces the policy limit.
Diminution of Value – The difference in the fair market value of personal property (chattel) following damage and repair, and what the property would have been worth had no damage occurred. The theory is based on the market belief that personal property which has suffered damage and been repaired is worth less than similar property which has never been damaged, even when the damaged property has been restored incorporating parts of like kind and quality. Most often associated with physical damage to automobiles.
Differences in Conditions (DIC) Insurance – An property insurance policy that is typically purchased in addition to a named perils property insurance policy to obtain coverage for perils not insured against in the named perils policy.
Directors & Officers Liability – Insurance designed to protect Directors and Officers from liability claims arising out of the alleged errors in judgment, breaches of duty, and other wrongful acts related to their organizational structure.
Earned Pemium – The amount of premium earned by the insurance company. This is often confused with the amount of premium paid by a customer. For example,. if a company pays $120,000 for it’s insurance policy on January 1, the insurance company earns that premium over the policy year and therefore as of January 31st, the insurance company has earned only $10,000 of the premium. Insurance companies use earned premium when calculating Loss Ratios.
EE01 (Employer Information Report) – A government form that requires certain employers to provide a count of their employees by job category, ethnicity, race, and gender. Employers with 100 or more employees or federal government contractors and first tier subcontractors with 50 or more employees and a contract amounting to $50,000 or more are required to file the EE01. The form must be filed by September 30 of the current year and it must use employment numbers from any period in July through September of that year. The EE01 report is submitted to both the Department of Labor (DOL) and the Office of Federal Contract Compliance Programs (OFCCP).
Employment Practices Liability Insurance – Insurance that covers an organization, its directors and officers, and its employees against claims alleging damages because of wrongful employment practices such as wrongful termination, and unlawful discrimination.
Endorsement – A document attached to the policy which modifies the policies original terms.
Enterprise Risk Management – An approach to managing all of an organizations key business risks and opportunities with the intent of maximizing shareholder value. Enterprise Risk Management classifies risk into the following categories:
- Strategic Risks, which are those uncertainties associated with the organizations overall long term goals and management
- Operational Risks, which are those uncertainties associated with the organizations operations
- Financial Risks, which are those uncertainties associated with organizations financial activities
- Hazard Risks, which are those uncertainties associated with the organizations reduction in value resulting from the effects of accidental losses
Equipment Breakdown Insurance – See Boiler & Machinery Insurance
ERISA Bond – A policy that insures a companies retirement plans from employee theft. ERISA requires that you purchase employee dishonesty coverage (aka ERISA BOND) to protect your plan assets with a limit equal to 10% of your plan’s assets or $500,000 whichever is less. This is often confused with Commercial Crime Insurance and Fiduciary Liability. This policy DOES NOT provide Fiduciary Liability coverage.
Expense Multiplier – A term used in the workers compensation environment to describe the factor insurance company applies to a state determine estimated loss rate per 100 hours of payroll. When applied, these two factors result in a company’s base workers compensation rate. The expense multiplier portion of the rate includes the insurance company’s estimate of the expenses needed to provide claims and loss controls services, overhead and profits.
Experience Mod – The purpose of an experience mod is to compare your loss experience with other “similar” companies in size and scope. It compares your most recent three years of loss experience (not including the current year) to what the Bureau statisticians determined to be the average losses for “similar” companies. In simpler terms it is calculated as follows:
Your Actual loss experience for three (3) policy years – Divided by-The state’s calculation of expected losses for the same period using “similar” companies from an operational and size perspective.
This factor may be either a debit or credit and will therefore increase or decrease the standard premium in response to past loss experience. When applied to the manual premium, the experience modification produces a premium that is more representative of the actual loss experience of an insured.
Extended Period of Indemnity – Additional Business Income Coverage for a period of days (30 is the standard) after the full restoration of a business that has been previously interrupted due to a covered cause of loss (such as fire). This coverage is necessary because a property policy’s business interruption coverage ceases when the period of restoration is complete. For example, a company may not be operating as efficiently as they were prior to the catastrophe immediately after operations have been restored. Often, it takes 30 days or even longer to restore the company’s pre-loss profitability.
Extra Expense Coverage – Coverage for expenses in excess of normal operating expenses that are incurred to continue operations and minimize a company’s ultimate loss of income after a catastrophe. For example, a company may elect to purchase a component of their product from another source or even from a competitor at a higher cost in order to maintain their customers over the longer term. Another example includes the extra expense of paying a higher rent for a temporary building after a loss to accommodate the operations after a loss ($30 per s.f. versus $25 per s.f. = Extra Expense of $5 per s.f.) .
Fiduciary Liability Insurance – An insurance policy that provides coverage for the personal liability of fiduciaries for allegations of “lack of particular care” when managing a pension / 401 (K) and other retirement programs.
Flood Zone – A property that is susceptible to a Flood. What do the different flood zones mean? List of FEMA Flood Zone Designations
Eggshell Skull – A legal term based in tort and criminal law that states that tortfeasors take the injured party as they find them. Also known as the “thin skull” rule, it states that if the injured party has a condition that predisposes them to greater injury than the normal human, the tortfeasor is not relieved of any of the costs resulting from the bodily injury just because of the condition. All injury and the costs associated with such injuries are assigned to the individual that committed the initial wrongful act, regardless of the ability to foresee the results or the fact that that the injury is made worse by a preexisting condition or predisposition to injury.
Fraud – A false statement or act intentionally committed by one to gain advantage over or induce another to a particular action to the detriment of the second (the defrauded individual). This is a catch-all category commonly tied in with “concealment” and “misrepresentation.” The main distinction with “fraud” is that it is an outright intentional act by the defrauding party. Fraud of a “material” nature will void coverage and may also be a criminal act.
Front Pay – The future wages and benefits an employee would have received if he/she was not terminated or forced to resign. In contrast, see Back Pay.
Horizontal & Vertical Exhaustion Rules
Horizontal Exhaustion Rule – A legal theory / state precedent situation which requires all applicable primary policies to apply prior to triggering / invoking the available excess/umbrella liability policies.
Scenario…KMRD’s client borrowed their customer’s van (not recommended) to assist in moving inventory to another warehouse killing a pedestrian. Our client “had permission to drive a covered auto” and therefore their customer’s auto policy was primary. Since the KMRD customer’s policy provided “any auto” coverage, State precedence invoked our clients primary auto policy prior to invoking the customer’s umbrella policy. The following chart describes how the ultimate settlement of $6 million was covered…
|KMRD Client’s Customer||KMRD Client||Total|
|Primary $1M Auto Policies||$1,000,000
KMRD Client = $10M
Customer = $5M
Prorata 10/15th Split of remaining $500,000
Prorata 5/15th split of remaining $500,000
Vertical Exhaustion Rule – This application of this rule is rare and as of 2017 only applies in the State of New Jersey. Unlike Horizontal Exhaustion, Vertical Exhaustion applies a continuous trigger of both the primary and excess liability policies. In the scenario described above the application of the Vertical Exhaustion Rule would create the following prorata allocation of of the loss.
|KMRD Client’s Customer||KMRD Client||Total|
|Primary $1M Auto Policies||$1,000,000
KMRD Client = $10M
Customer = $5M
Prorata 11/17th of the Settlement
Prorata 6/17th of the Settlement
Why could this be important to the structure of your insurance and contractual risk transfer program? Call Us..
Installation Floater – An Inland Marine Insurance that provides coverage for materials while stored on a jobsite and being installed. This coverage is similar to Builders Risk Insurance.
Loss Cost Rate – The “Loss Cost Rate” is the basis for the pricing of Worker’s Compensation programs. It represents the Bureau’s actuarialy derived estimate of losses per $100 of payroll. Insurance companies apply anexpense multiplier to the loss cost rate to establish “base rates”. The carrier subsequently applies various other factors such as scheduled credits/debits, experience mods, premium discounts and taxes which ultimately is blended into what KMRD provides it’s clients as “Suggested Accruals”.
Loss Ratio – A comparison of losses versus premiums paid (Claims paid and reserved / Earned Premiums= Loss Ratio). A loss ratio below 100% indicates that the company is making Underwriting Profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums. This is not to be confused with Combined Loss Ratio.
Named Insured (aka Additional Named Insured or Named Additional Insured) – An insurance policy is typically written with one “Primary Named Insured” which appears on the first page of the policy’s declarations and is the recipient of any correspondence. Additional Named Insureds / Named Additional Insureds) have the same rights and obligation as the Primary Named Insured. These terms are often confused with “Additional Insured” noted above.
Occurrence Trigger – An Occurrence policy that triggers coverage according the date in which the alleged wrongful act / accident occurred regardless of when in the future the claim is made / lawsuit is filed. This is contrast to a claims-made policy that triggers coverage according to the date the claim is made/ filed regardless of when the wrongful act allegedly occurred.
Ocean Cargo Insurance – This insurance written to cover property against perils of navigable waterways/sea (and/or Air Transit). The policy is almost always on an open basis, where all shipments are automatically covered and reported to the insurer as they are made. Insurance is usually extended to cover from the original point of shipment until arrival at the final destination and may apply to both imports and exports. In simple terms, this policy plugs a gap in a typical transit policy that only covers goods in transit while inside the continental United States.
Material Fact – Information or data supplied by the insured, the truth and accuracy of which the insurer relies on to make an underwriting decision. Three tests are applied when deciding if a fact is material or merely informational. A fact is material if:
- The underwriter would have made a different underwriting decision. For example, the decision was made to offer coverage, but if “X’ had been known, coverage would not have been offered;
- The underwriter would have charged a different premium. The building is located in a protection class 7, not the 4 that was reported which will result in an increase in premium when corrected.
- The underwriter would have applied different terms and conditions. Theft coverage would have been excluded had the underwriter known that the alarm was recently disconnected.
- Concealment or misrepresentation of a material fact by the insured (or the agent) will generally lead to the voidance of a policy.
Minimum & Deposit Premium – This term is used to describe the minimum cost of an insurance program despite the results of an audit of a insureds actual rating basis. For example, if an insured estimates revenues at $50M and the premium was derived using that estimate, the insured will not be able to collect a return premium if the actual audit of their sales after the end of the policy period determines that their actual sales were $45M. One rationale used to describe the need for a minimum is the fact that the insurance policy utilizes an Occurrence Trigger. Therefore the exposure to a loss is driven more by product that is being used as a result of past year’s sales and less driven by the sales that were made in the coming year. Often, a broker can negotiate a provision that softens this to a 75% -90% Minimum Premium. Insureds are then able to retrieve 25%-10% of their premium if their actual sales are less than projected. This term is often confused with Minimum Earned Premium.
Minimum Earned Premium – The term is used to describe the minimum cost of an insurance program regardless of whether the policy is cancelled mid-term or not. For example, if an insured purchases a policy for an annual cost of $100,000 with a 25% Minimum Earned Premium provision and cancels the policy after one month, the carrier will keep 3 months of premium (25% X 12 Months / 25% of the annual premium) and will only return 9 months (12 –3 Months) of premium. This is often seen in General Liability, Directors & Officers Liability, Errors & Omissions Liability and other claims-made insurance programs. This provision can range from 25% to 100%. This term is often confused with Minimum & Deposit Premium.
Ordinary Payroll Exclusion – This is one of two endorsements addressing the payroll coverage provided by business income coverage forms, the other being discretionary payroll expense. The Ordinary payroll exclusion limits or excludes coverage for employees other than management. If this payroll is not excluded completely, it can be limited to a set number of days (i.e., 90 days). This limitation or exclusion to payroll coverage allows the insured to purchase a lower limit of liability; therefore, lowering their premium. Clients should closely weigh the rewards with the consequences with this exclusion prior to making an insurance buying decision.
Period of Restoration – The period in which a company is not operatiing 100% after a loss. In other words the time in which the company is rebuilding its operation after a loss (such as fire).
Retro Date / Retro-active Date – On Claims-Made policies, a retro-active date removes coverage for any wrongful acts that occurred prior to the retroactive date. In other words, if a claims-made policy has a 1/1/09 retroactive date, any future lawsuits /claims that stem from a “wrongful act’ that occurred prior to 1/1/09 is not covered.
Subrogation – The assignment to an insurer by terms of the policy or by law, after payment of a loss, of the rights of the insured to recover the amount of the loss from one legally liable for it.
Tail Coverage – A provision found within a claims-made policy that permits an insured to report claims that are made against the insured after a policy has expired or been canceled, if the wrongful act that gave rise to the claim took place during the expired/canceled policy. Tail coverage requires that the insured pay additional premium.
For example, assume that a claims-made policy with a January 1, 2015-2016, term contains tail coverage with a term of January 1, 2016-2017. Also assume that the insured did not renew the policy when it expired on January 1, 2016. Under the tail coverage, the insured will be able to report claims to the insurer during the January 1, 2016-2017, period of tail coverage, provided the claim resulted from a wrongful act that took place during the expired January 1, 2015-2016, policy term.
Tail coverage, which is synonymous with extended reporting period provisions, includes several important features: (1) the coverage applies only if the wrongful act giving rise to the reported claim took place during the expired/canceled policy period. Thus, there is no tail coverage available for wrongful acts if committed during the period of tail coverage. (2) Tail coverage applies for a limited time period, generally 1 year. (3) Purchasing tail coverage for a specific time period does not reinstate the policy’s aggregate limit of liability.
Triangulation – A table of loss experience showing total losses for a certain period at various, regular valuation dates, reflecting the change in amounts as claims mature. Older periods in the table will have one more entry than the next youngest period, leading to the triangle shape of the data in the table. Can show paid losses or total incurred losses. Loss triangles can be used to determine loss development for a given risk.
Underwriting Profit – When an insurance company’s claims are less than the premiums they collect. This term is closely related to Loss Ratio and Combined Loss Ratio.
Vertical Exhaustion Rule – See Horizontal Exhaustion
Warranty Question – A question on an insurance application that reads… “Are there any circumstances that you are aware that may give rise to a claim?” The insured’s answer to this question could materially impact their ability to access coverage if it is later found that they knew of a circumstance prior to the date in which the warranty question was answered.