In the U.S., California has, by statute, created one of the clearest definitions of insurance. The California Insurance Code states:
Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.
The California Legislature, by Insurance Code Section 22, merely codified three centuries of common law defining insurance. This definition should apply in most states. Whether codified, or only part of the state's common law, there can only be insurance if there is an agreement to indemnify against a contingent or unknown event.
Many states have different definitions of the word "insurance" but each has the same essential elements:
- It must be a written contract.
- One party (the insurer) agrees with the other (the insured).
- The insurer, for consideration (payment of a premium) agrees to indemnify the insured.
- The promise to indemnify is limited to certain identified risks of loss arising from a fortuitous, contingent or unknown event.
Without a fortuitous event, there can never be insurance. Insurance must deal with an event which, so far as the parties to the contract are concerned, is dependent on chance. If an insured intentionally burns down a house with the intention to defraud the insurer, the fire is not fortuitous and no coverage applies. On the other hand, if the insured's neighbor, out of spite, burns down the same house, there is coverage because, as to the insured, it is a fortuitous event.
Now that we've defined an industry, it's time to examine the language it's built on. If you sell property insurance, these 10 terms are foundational to the work you do. How many of them do you know?
See also: Do you know these 10 claims terms?
additional living expense: An insurance coverage found in all homeowner's policies. It provides indemnity for expenses incurred for usual living expenses more than the amount normally expended. It does not pay all living expenses, only the expenses over the insured's normal expenses.
appurtenance: Something belonging or attached to property as an accessory or adjunct.
Image: This Wednesday, July 27, 2011 photo shows the entry door to Jane Merrill's apartment in the home of her son, William Merrill, in Carmel, Ind. The Merrill family had their two-car garage renovated to create a mother-in-law suite for Jane. (AP Photo/Darron Cummings)
consequential loss: A loss that results from direct damage to property. Such loss can occur when property becomes too hot, too cold, too wet, or too dry because an insured peril caused direct damage either to the premises or some remote facility that controls its environment. Consequential loss is usually specifically excluded by the Standard Fire Policy or coverages based on it.
Image: Lightning dances in the sky over a grain field on Gore Hill near Great Falls, Mont. on Thursday May 25, 2006. (AP Photo/Great Falls Tribune, Robin Loznak)
floater: This form of insurance provides coverage for those goods for which it is difficult to establish a specific location. Generally there is a territorial limit and coverage is provided at any location within that territory.
personal articles floater (PAF): Basic insurance for mobile or movable property. It provides coverage regardless of where the property is located within specified territorial limits. Such a floater may be personal or commercial. This form lists (schedules) the items to be covered along with a value for each item. These floaters generally provide broad all-risk coverage for items with considerable value.
proximate cause: Sometimes called the efficient, efficient moving, or predominant causes, it is the continuous or unbroken chain of events without which the end result would not have happened. If the proximate cause is a covered peril that damages property that is the subject of insurance, indemnity is owed. Such a cause is not necessarily the nearest in time or in the sequence of events. It must be the controlling factor which sets the others in motion.
recission: An equitable remedy where a contract is declared void from its inception because of mistake, concealment, misrepresentation or fraud.
See also: The 2014 insurance fraud hall of shame
salvage: In property insurance, this is a contract clause, which generally provides that the insurers can take title to damaged property after payment of a loss. Such salvaged goods are usually sold to help reduce the amount of the claim. If the insured was able to keep the salvage he or she would then recover the full indemnity.
scheduled personal property: Under the homeowners program, valuable items of personal property (furs, jewelry, antiques) can be afforded broad all risk coverage by endorsement. This is similar coverage to that provided under a separate personal articles floater (PAF).
waiver of subrogation clause: A policy provision sometimes included in property insurance contracts which states that the insurer waives its rights to subrogation under the contract if certain preconditions are met. Usually granted to landlords who do not wish their insurer to sue their tenant.
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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