Insurance was created to spread risk from individuals to multitudes. Spreading the risk from one person to many is the essence of insurance. The risk-spreading model has taken many forms over the centuries.

In the days of sailing ships and galleys powered by slaves pulling on oars, merchants found shipping to be inherently risky. The risks of shipping by sea were clearly too much for an individual merchant to bear. The loss of one ship could bankrupt a merchant, so the merchants spread the risk of their business enterprises among each other. With rudimentary insurance, the risk of shipping was equitably spread among those subscribing to the loan, and no single merchant suffered when a ship was lost at sea.

Originally, insurers were merely merchants who occasionally invested in insurance. As the volume of trade increased in the seventeenth century, some merchants specialized and became the first professional insurers.

Today, if you earn a living from insurance, language is important — for the sales process, during underwriting, and also at the point of claim. How well do you know your claims terminology? Keep reading to test your knowledge.

average: A term used in settlement of claims. It may have originally come from the French word avarie, meaning loss or damage. There are both general and particular average clauses. Average clauses are the precursor of co-insurance clauses. They refer to any partial loss or damage due to insured perils. It requires the insured to maintain coverage equal to a stated percentage of the actual cash value of the subject of the insurance, otherwise the insured must pay a part of the loss.

bordereau(x): A detailed report of insurance premiums or losses affected by reinsurance or insurance. A loss bordereau contains a detailed list of claims and claims expenses outstanding and paid by the managing general agent, third party administrator or reinsured during the reporting period, reflecting the amount of indemnity applicable thereto.

cause of action: A statement in a lawsuit of a claim against the defendant. Modern lawsuits in the U.S. usually state multiple causes of action or “counts” against the defendant. A multiple cause of action suit may seek damages for negligence, intentional infliction of emotional distress, negligent infliction of emotional distress, trespass, assault, battery, and breach of contract.

constructive total loss (CTL): An instance in which the cost of recovering and/or repairing damaged goods would exceed the insured value.

Image: Burned-out vehicles stand in view of a house still standing following a wildfire several days earlier, Tuesday, Sept. 15, 2015, in Middletown, Calif. The fire that sped through Middletown and other parts of rural Lake County, less than 100 miles north of San Francisco, has continued to burn since Saturday despite a massive firefighting effort. (AP Photo/Elaine Thompson)

ex gratia payment: A claim payment not necessarily covered by the terms and conditions of an insurance policy but made as a commercial accommodation by the insurer to the policyholder.

fortuity doctrine: An insurance contract insures against the risks of loss that are neither intended nor expected from the standpoint of the insured. Intentional acts done with the intent to recover insurance proceeds are never insured. The fortuity doctrine requires that the loss be accidental to be covered. The rule embodies a fundamental and significant public policy interest that in some contexts is sufficiently important to preclude coverage claims even when there are explicit agreements to the contrary.

Loss In Progress Rule: Insurance can only indemnify an insured against risks of loss that are both unkown and unexpected. If a loss is already in progress at the time the policy is acquired, the loss is no longer fortuitous but is rather a certainty. The Loss In Progress Rule prohibits recovery for a non-fortuitous loss.

prima facie case: When a party establishes all of the evidence necessary to prove a case. The plaintiff, who always presents evidence first in a trial, must present a prima facie case before the defendant will be required to present evidence to defeat the plaintiff's claim. If the plaintiff fails to present a prima facie case the court will enter judgment in favor of the defendant and not require production of evidence to rebut the evidence presented by the plaintiff.

subrogation: An equitable remedy where a person who pays the debt of another is entitled to assume the rights of the person whose debt he or she paid. In insurance, when an insurer pays a claim, it assumes all of the rights of the person insured, to sue and recover the amounts paid from any third party who was responsible for the loss.

uberrimae fidei: A universally recognized defining characterization of insurance and reinsurance. Literally, utmost good faith. Among other differences from ordinary relationships, the nature of insurance and reinsurance transactions is dependent upon a mutual trust and a lively regard for the interests of the other party, even if detrimental to one's own. A breach of utmost good faith, especially in regard to full and voluntary disclosure of the elements of risk of loss, is accepted as grounds for any necessary reformation or redress, including rescission and tort damages in most jurisdictions.

These definitions were taken from Insurance Law, the most comprehensive, and yet practical, insurance law authority available today. Written by nationally-renowned insurance coverage expert Barry Zalma, an insurance coverage attorney, consultant, expert witness and blogger, Insurance Law introduces the new insurance professional to the fundamental principles of insurance and provides the experienced litigator analyses of today's leading insurance law decisions nationwide.

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