Earthquake Insurance Glossary of Terms
Actual Cash Value
Cost of replacing damaged or destroyed property with comparable new property, minus depreciation and obsolescence. For example, a 10-year-old sofa will not be replaced at current full value because of a decade of depreciation.
Actuary
A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics. (Americanism: In most other countries the individual is known as “mathematician.”)
Admitted Company
An insurance company which is licensed in the state in which the policy is purchased. Admitted carriers in the state of California must follow guidleines set forth by the California Department of Insurance. In addition, they are required to file all forms and rates for approval from the DOI.Admitted carriers are part of the CAlifornia Insurance Guarantee Assocication (CIGA) which provides up to $500,000 in prtection for policy nholders should their carrier go out of business.
Agent
An individual who sells and services insurance policies.
There are two types of Insurance Agents:
1. An Independent Insurance Agent – represents at least two insurance companies and (at least in theory) services clients by searching the market for the most advantageous price for the most coverage. The agent’s commission is a percentage of each premium paid and includes a fee for servicing the insured’s policy.
2. Direct or career agent – represents only one company and sells only its policies. This agent is paid on a commission basis in much the same manner as the independent agent. These agents are somtimes referred to as “captive agents” because they are unable to sell policies form any other company except for the one they represent.
Aggregate Limit
Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.
A.M. Best
A company similar to a Standard and Poor’s or Moody’s that rates an insurance company’s ability to pay claims.
The ratings scale includes six “secure” ratings:
* A++, A+ (Superior)
* A, A- (Excellent)
* B++, B+ (Good)
The scale also includes ten ratings for companies deemed “vulnerable”:
* B, B- (Fair)
* C++, C+ (Marginal)
* C, C- (Weak)
* D (Poor)
* E (Under Regulatory Supervision)
* F (In Liquidation)
* S (Rating Suspended)
A.M. Best also assigns five Not Rated Categories (NR) to insurers that the company may, nonetheless, follow and report on in other respects:
* NR-1: Insufficient Data
* NR-2: Insufficient Size and/or Operating Experience
* NR-3: Rating Procedure Inapplicable
* NR-4: Company Request
* NR-5: Not Formally Followed
Bare Walls Coverage
When the condominium association’s master policy only provides coverage to the common area and stops at the drywall of the unit.
Blanket Deductible
This is a deductible that applies to all buildings or locations covered by a policy.
Broker
Insurance salesperson that searches the marketplace in the interest of clients, not insurance companies.
Broker Agent
Independent insurance salesperson who represents particular insurers but also might function as a broker by searching the entire insurance market to place an applicant’s coverage to maximize protection and minimize cost. This person is licensed as an agent and a broker.
Broker of Record Letter
A broker of record letter is a written statement signed by an insured advising an insurer that a particular broker or agent shall act as the insured’s representative.
Building Code and Ordinance Coverage
An additional line of protection that pays for items that need to be added as part of the rebuilding process in order to bring the property up to current building codes.
California Earthquake Authority (CEA)
The major provider of earthquake coverage for 1-4 family homes in the California. It was established after the Northridge earthquake as an alternative to private earthquake insurance for personal lines risks. This is the earthquake coverage that is offered to 85% of all homeowners in the state of California in conjunction with their homeowners insurance.
Captive Agent
Representative of a single insurer or fleet of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.
Catastrophe
An event that causes major losses to many insureds at the same time. Examples of these types of losses are earthquakes, hurricanes, and wildfires.
Ceded Reinsurance Leverage
The ratio of the reinsurance premiums ceded, plus net ceded reinsurance balances from non-US affiliates for paid losses, unpaid losses, incurred but not reported (IBNR), unearned premiums and commissions, less funds held from reinsurers, plus ceded reinsurance balances payable, to policyholders’ surplus. This ratio measures the company’s dependence upon the security provided by its reinsurers and its potential exposure to adjustment on such reinsurance.
CIGA – California Insurance Guarantee Association
The State Reinsurance program that protects insureds from admitted insolvent carriers for up to $500,000.
Commission
Fee paid to an agent or insurance salesperson by an insuraqnce carrier figured as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods.
Coverage Amount
The dollar amount of protection provided by an insurance company, towards the replacement of the insured’s property.
Deductible
The amount that the insurance company takes away from a claim settlement and the insured is responsible paying for. This can either be a fixed dollar amount or a percentage of the total insurable value of the building.
Difference in Conditions
This is the official term used by insurance companies for the contract used to write earthquake insurance. The reason for this name is that the contract is generic and fills in the items that are excluded from a standard special form contract that the insured wishes to have coverage for.
DOI – Department of Insurance
The branch of California government in charge of regulating insurance companies that do buisiness in CA.
Earthquake Zones
An area that is designated as the territory most likely to be affected if an earthquake occurs along a fault located in this area.
Endorsement
A change to the policy that modifies the coverage provided.
Exposure
Measure of vulnerability to loss, usually expressed in dollars or units.
Extended Replacement Cost
This option extends replacement cost loss settlement to personal property and to outdoor antennas, carpeting, domestic appliances, cloth awnings, and outdoor equipment, subject to limitations on certain kinds of personal property; includes inflation protection coverage.
Fiduciary
Relating to or involving a confidence or trust. An insurance broker acts as a fiduciary on behalf of the insured. An agent is acting with a fiduciary responsibility towards the insurance company.
Hazard
A circumstance that increases the likelihood or probable severity of a loss. For example, the storing of explosives in a home basement is a hazard that increases the probability of an explosion.
Inspection
When an insurance company goes out and looks at a property to make sure that its current condition reflects what was given at the time the application was submitted.
Insurable Interest
Interest in property such that loss or destruction of the property could cause a financial loss.
Insurable Value
The potential amount the insured would lose if the and would need to be paid in order to replace an object if it was completely destroyed. In the case of real property it would be the value of the structures on the property without taking into account the land value of the property.
Interior Betterments
These are the items located within a condo unit. Examples of interior betterments are wall coverings, floor coverings, kitchen cabinetry, and bathroom fixtures.
Liability
Broadly, any legally enforceable obligation. The term is most commonly used in a pecuniary sense.
Liability Insurance
Insurance that pays and renders service on behalf of an insured for loss arising out of his responsibility, due to negligence, to others imposed by law or assumed by contract.
Loss Assessment
when an individual is part of a either a condominium or homeowners association this is the special assessment that will arise from a claim that was covered by the associations policy. This assessment covers both the deductible that the association owes as well as any part of a loss that was not covered because the loss exceeded the amount of coverage in the policy.
Loss Control
All methods taken to reduce the frequency and/or severity of losses including exposure avoidance, loss prevention, loss reduction, segregation of exposure units and noninsurance transfer of risk. A combination of risk control techniques with risk financing techniques forms the nucleus of a risk management program. The use of appropriate insurance, avoidance of risk, loss control, risk retention, self insuring, and other techniques that minimize the risks of a business, individual, or organization.
Loss Ratio
The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company’s underlying profitability, or loss experience, on its total book of business.
Loss Reserve
The estimated liability, as it would appear in an insurer’s financial statement, for unpaid insurance claims or losses that have occurred as of a given evaluation date. Usually includes losses incurred but not reported (IBNR), losses due but not yet paid, and amounts not yet due. For individual claims, the loss reserve is the estimate of what will ultimately be paid out on that claim.
Losses Incurred (Pure Losses)
Net paid losses during the current year plus the change in loss reserves since the prior year end.
Marshall and Swift
A company that compiles construction cost data across the country. Many times these Marshall and Swift computations are used to determine how much property insurance is necessary to cover all the costs associated with rebuilding should a loss occur.
Non-admitted Company
An insurance company that is not ‘authorized’ to do business in California by the state. This does not automatically mean the company is not financially sound. Rather, it often times means this insurance carrier has chosen not be subject to state regulations so they can enjoy more flexibity in regards to policy terms and pricing.
Occurrence
An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn’t have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected not intended by the insured.
Original Building Standard
The state of the interior betterments at the time the building was built or converted condominiums.
Peril
Something that can be the cause of a claim to arise. In property insurance they are events such as earthquake, hurricane or fire.
Premium
The money paid to an insurance company to have them provide coverage.
Probable Maximum Loss
On an actuary basis the most damage a building will sustain during an earthquake given its proximity to fault, construction type, and soil underneath the building.
Rating Factors
Those aspects of an item that are being insured change the likelihood of a loss occurring. For example in earthquake insurance rating factors would be the soil under the building, proximity to a fault, the type of construction and the construction materials used.
Replacement Cost
The cost of replacing an insured object such a building or furniture without taking into account any depreciation that might have occurred to the insured item
Replacement Cost Plus – (extended replacement cost)
When an insurance company provides for either abnormal inflation or demand surge which has caused an increase in the cost of replacing the object beyond the anticipated replacement cost.
Self Insured Retention
An arrangement where the insured is responsible for the a fixed amount before the insurance company is responsible to begin paying for a debt. It is similar to a deductible.
Short-Rate Cancellation
When the policy is terminated prior to the expiration date at the policyholder’s request. Earned premium charged would be more than the pro-rata earned premium. Generally, the return premium would be approximately 90 percent of the pro-rata return premium. However, the company may also establish its own short-rate schedule.
Soft Story Tuck Under Parking
A form of construction that stopped being used in 1976 because it was seismically unit. This construction refers to buildings that are held up with two by fours and small metal polls and ply wood makes up the first floor construction of the building. An extremely hard form of construction to place earthquake insurance for.
Surplus
The amount by which assets exceed liabilities.
Sublimit
An amount less than the full building value that is applied to certain aspects of coverage. An example of this would be when a building is insured for $1,000,000 and there is a $15,000 limit for mold damage. The limitation for mold damage is a sub limit.
Underwriter
The individual trained in evaluating risks and determining rates and coverages for them. Also, an insurer.
Underwriting
The process of selecting risks for insurance and classifying them according to their degrees of insureability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.
Unit Interior Coverage
The insurance coverage needed to protect the improvements from the drywall in on a condominium association.
