When I go shopping for a computer, I tend to get frustrated with salespeople because I cannot understand a word they are saying. I know I need it, I know what I want, I just don’t know the right terminology. It is a common problem across many industries. Because so much of insurance is based on legal principles, the terminology can be quite daunting for the layperson. But some very critical issues are hiding behind those ten dollar words, important definitions and concepts to know, especially when it comes time to make a claim.
The Insured: That’s you. Or the owner of the policy. This is not necessarily the owner of the thing being insured – as is sometimes the case in health or life insurance.
Insurable Risk: This is also sometimes called an Insurable Peril. This is something that can wreck your stuff (or you) that your policy protects you against – fire, theft, accident, etc. There are some risks that are not insurable in almost every case and situation – acts of God, property damage resulting from war or attack, etc.
Insurable Interest: In most cases, you cannot get a policy or make a claim for something that you do not have an insurable interest in. To have an insurable interest, you must be at some financial risk should something happen to that person or thing. My next door neighbour doesn’t stand to lose anything if I were to crash my car, so they cannot take out a policy on my car. On the other hand, the bank still owns a portion of it, so they do, and can take out a policy, or benefit from my policy in order to protect their insurable interest.
Insurance Policy: This seems really basic, but many people do not understand exactly what an insurance policy is or means. At its most basic, an insurance policy is a contract between the Insured and the company. In exchange for you paying a premium (fee), they are required to fulfill that contract. Both parties have responsibilities as outlined in the contract in order – and it is important to know what your responsibilities as an insured person are in the event of a claim.
Underwriting: In order to assess a fair premium, the insurance company will assess the risk or chance that you will need to file a claim, and how much that claim will cost. Different types of insurance will take into account different factors, but the principal is the same. Assessing whether a policy can be issued, and at what price, is called underwriting.
Indemnity/Indemnify: To indemnify, generally speaking, means to pay them or give them some benefit. When dealing with a set value insurance policy, say for life insurance, this is a simple concept as the terms spell out the exact payment. In property, liability, and other forms of insurance, indemnity is a bit more complicated. To indemnify in these terms, means to return a person to the position they were prior to the insured peril occurring. This may mean repairs, replacement, or cash settlement, whatever it takes to return your home or car, for example, to the condition it was in prior to the fire, accident, break-in etc.
Depreciation: Everything has a life span – you, me, and all of our stuff. Depreciation is a term used in both accounting and insurance in order to assess a true value to assets. The value of the item is averaged out over its expected life span, and each year, the value of the amount of life span ‘used up’ is deducted from the total value of the asset. Items with a shorter lifespan depreciate (or go down in value) more quickly than something with a longer lifespan. For example, a computer has a pretty short lifespan before it wears out or becomes obsolete. If the lifespan of a computer is about 5 years, and it cost $1000 brand new, it will depreciate by 20% or $200 every year. When you buy it, its worth $1000; after 1 year, $800; the second, $600, and so on. For something with greater value, like a house or an office building, the lifespan may be 50 years or more, so it depreciates more slowly. Individual parts and components may have different rates of depreciation – your car’s engine has a longer life span, in most cases, than you tires, so your tires will decrease in value faster than your engine does.
Actual Cash Value – When you file a claim for property damage, your insurance policy, in most cases, is only required to return your property to the condition it was in before the loss, not replace it with something brand new. You are entitled to be made whole by your policy, not made better. As a result, your insurance company may take into account the depreciated value of your property before settling your claim. This is one of the most contentious issues that arises in the claim process, particularly with automobile claims. Your ten year old car may run like brand new, but it certainly isn’t and you will not get a settlement for that car that in anyway resembles the price of a new car. When repairs are made, the replacement parts may be used or you may have to pay a portion of the cost to compensate for the fact that you are getting something better than what you had in the first place.
Mitigation of Damages: To some degree, this boils down to common sense. Most policies require that, in the event of a loss, you must mitigate your damages. Basically, this means you have to take reasonable steps to prevent your stuff from getting even more damaged as a result of the loss. For example, if your home or car window gets broken, and you do not cover up the open window and it rains, more damage may result from the rain getting in.
Covering up the hole is a reasonable step to take to prevent further loss, so if you fail to do this, the additional damages from the rain getting in will not be paid for by the insurance policy. If you scrape your oil pan in your car and continue to drive without checking for leaks, and your oil light goes on, and still you drive until your car engine becomes a very large paperweight, your insurance company will not buy you a new one. It is your responsibility to do the reasonable thing and prevent more damage from occurring.
Release and Assignment: Now that you have filed a claim and been ‘indemnified’ by your insurance company, they will want you to sign something called a Release and Assignment. Sometimes the assignment part is written into your policy. What this means is that, in exchange for whatever they have paid to you or on your behalf, you agree not to sue them. That’s the release part. The assignment part means that you also give to the insurance company any right you may have to sue anybody else that may be at fault for your damages. This enables the insurance company to sue anyone who may be at fault for your claim and recover the money that they spent. But if you have assigned your rights, you most likely will be prevented from suing them yourself to recover any amounts over and above what the insurance company paid you. This is one of the reasons why those annoying personal injury attorney ads tell you not to sign anything without checking with them first. Many people do not understand that once they have settled with their insurance company, they may not have the right to pursue anyone else in court for further damages.
Exclusions – An exclusion to a policy is usually spelled out in the contract, and includes anything that is not covered. This may be types of assets or equipment that are not covered under a basic policy, or it may be to exclude certain hazards or perils, such as uninsurable risks outlined above, intentional damage, etc.
Breaches – A breach of coverage is very different from an exclusion. In a breach situation, the insurance company is alleging that you have done something (or not done something) that invalidates your insurance policy. Failure to pay premiums generally does not constitute a breach of coverage. Most automobile policies will outline certain criminal charges such as driving under the influence of drugs or alcohol as being a breach of coverage.
Onus/Burden of Proof – In every aspect of law, be it contract law, criminal law, civil law, etc, someone has to prove that something happened in order to proceed to the next step of the case. The other party does not have to prove anything unless the person with the burden of proof succeeds in proving their case first. In insurance claims, this burden flips back and forth between the insured and the insurer.
To start with, the insured must prove that they have a loss, a valid insurance policy, and that both the asset that has loss or damage and the cause of the loss or damage are covered by the policy. The insured also has the burden of proving the amount of the loss. The insurance company may provide an appraisal or estimate as a service, but in actuality it is the insured’s responsibility. Then the burden of proof flips over to the insured. They either pay the claim, or if they do not, they have the burden of proving that they have a legally valid reason for not paying the claim – i.e. a breach of coverage, excluded peril, etc.
This are just a few of the terms you commonly come across in the world of property insurance. They are important to know – not knowing may come back to haunt you if you need to file a claim.