Glossary of the most common terms you will find in your homeowners insurance policy. I’ve explained what they mean and where you would even encounter these terms.
A lot of the confusion surrounding homeowners insurance is mostly with the terms described in your policy.
You would generally see most of these terms listed on your declarations page and in the policy, but I will tell you where and any relevant information.
This glossary of homeowner’s insurance terms is taken from the NAIC website. The NAIC Research and Actuarial Department developed the NAIC website’s glossary of insurance terms. The additional commentary is my own.
You may also refer to your insurance policy that will list specific definitions of terms that are to be utilized in your unique situation. See my disclaimer, here.
The following definitions are listed in alphabetical order.
Actual Cash Value – repayment value for indemnification due to loss or damage of property; in most cases it is replacement cost minus depreciation
- Also, known as “ACV”. You will see this term during your loss settlement or on the estimate of damages provided by the adjuster.
- If you had a garage sale today, you would not receive what you paid for the items originally.
Adjuster – a person who investigates claims and recommends settlement options based on estimates of damage and insurance policies held.
- The adjuster can sit behind a computer and handle your claims over the phone, or they may be a field adjuster and come out to your property to investigate the claim.
- Field adjusters typically take photos and diagram your house. In some cases, the field adjuster reports directly to the assigned desk adjuster at the insurance company.
- The desk adjuster may be the one issuing the checks based on what the field adjuster provides them.
Agent – an individual who sells, services, or negotiates insurance policies either on behalf of a company or independently.
- The agent should be the one responsible for explaining to you exactly what type of policy you are purchasing.
- They can also be a resource for when you need help with reaching your insurance company.
All-Risk – also known as open peril, this type of policy covers a broad range of losses. The policy covers risks not explicitly excluded in the policy contract.
- For example, A HO-3 or HO 00 03 policy is an all-risk policy; it covers just about anything UNLESS it is listed as excluded in the policy or by an endorsement/restriction.
Builders’ Risk Policies – typically written on a reporting or completed value form, this coverage insures against loss to buildings in the course of construction. The coverage also includes machinery and equipment used in the course of construction and to materials incidental to construction.
- This policy is typically just for a home under construction and not occupied.
Burglary and Theft – coverage for property taken or destroyed by breaking and entering the insured’s premises, burglary or theft, forgery or counterfeiting, fraud, kidnap and ransom, and off-premises exposure.
- You would find this in your policy with a description of what is excluded under the coverage of burglary and theft.
- In a standard ISO HO-3 policy (common all peril policy), you would find special limits that would apply to your personal property in the event of a theft.
Catastrophe Loss – a large magnitude loss with little ability to forecast.
- This term is used during a national disaster or a determined catastrophic loss by the insurance company.
- Examples would be a named storm or a massive hailstorm that disrupts a large area.
Claim – a request made by the insured for insurer remittance of payment due to loss incurred and covered under the policy agreement.
- When something terrible suddenly and unexpectedly occurs to your home, you would file an insurance claim.
- Example: If a tree falls on your roof, you will file a claim with your insurance company for repairs to be covered.
Conditions – requirements specified in the insurance contract that must be upheld by the insured to qualify for indemnification.
- Your insurance policy lists certain conditions that you must meet for coverage to be afforded.
- You should find it towards the end of your policy.
Have questions? Contact me!
Deductible – Portion of the insured loss (in dollars) paid by the policyholder.
- Your deductible is on your dec page. More on that here.
- The deductible is subtracted from your loss estimate that is prepared by the adjuster.
- For example: if the total damages to your home total $5,000 and your deductible is $1,000, you would receive $4,000. The $1,000 deductible would be paid to the contractor so he could complete all $5,000 worth of repairs.
Direct Loss – Damage to covered real or personal property caused by a covered peril.
- If a tree falls on your roof while also pulling down your power lines, it’s a direct loss.
- The indirect loss would be the food in the refrigerator that spoiled from the power outage.
Earthquake – property coverages for losses resulting from a sudden trembling or shaking of the earth, including that caused by volcanic eruption. Excluded are losses resulting from fire, explosion, flood or tidal wave following the covered event.
- Earthquakes are most likely excluded from your policy and must be purchased individually.
- Check with your agent to get this coverage if you are at risk where you live.
Effective Date – date at which an insurance policy goes into force.
- The date when your insurance coverage starts.
Endorsement – an amendment or rider to a policy adjusting the coverages and taking precedence over the general contract.
- Endorsements are listed separately on your dec page. See more here.
- You will receive a separate policy document explaining what the additional coverage covers and what wording it may replace in your primary policy.
FAIR Plan – Fair Access to Insurance Requirements – state pools designed to provide insurance to property owners who are unable to obtain property insurance through conventional means.
- You may see a FAIR Plan charge on your dec page.
- Sample dec page here.
FEMA – Federal Emergency Management Agency – an independent agency, tasked with responding to, planning for, mitigating and recovery efforts of natural disasters.
- I think we all know what FEMA is, especially if you are from Louisiana.
Fire – coverage protecting the insured against the loss to real or personal property from damage caused by the peril of fire or lightning, including business interruption, loss of rents, etc.
- Fire should be found under your covered perils.
Flood – coverage protecting the insured against loss or damage to real or personal property from flood. (Note: If coverage for flood is offered as an additional peril on a property insurance policy, file it under the applicable property insurance filing code.)
- In Louisiana, for instance, most homeowner’s insurance does not cover flood, and you must purchase a separate policy.
- Depending on your geographic location, you may be required to possess flood insurance.
- Just check with your agent and make sure you are covered if needed!
Hazard – circumstance which tends to increase the probability or severity of a loss.
- The insurance company loves to know what hazards are lurking on your property.
- During a claim, your adjuster may take note and photograph possible hazards like dangerous animals or trampolines on your property.
- These are hazards that may cause an unnecessary loss for the insurance company.
- Another example would be a dead tree that could fall and damage your home.
Homeowners Insurance – a package policy combining real and personal property coverage with personal liability coverage. Coverage applicable to the dwelling, appurtenant structures, unscheduled personal property and additional living expense are typical. Includes mobile homes at a fixed location.
- If you are unsure what homeowners’ insurance is then I have a long way to go on this blog!
- If you own and currently reside on your property, you should have a homeowner’s policy to protect your most valuable asset.
Indemnity, Principle of – a general legal principle related to insurance that holds that the individual recovering under an insurance policy should be restored to the approximate financial position he or she was in prior to the loss. Legal principle limiting compensation for damages be equivalent to the losses incurred.
- In common person terms: The insurance company is required to get you back to your normal way of life and house condition that existed prior to the loss.
- The insurance company will not pay you over your specific limits that are listed on your dec page.
Independent Adjuster – freelance contractor paid a fee for adjusting losses on behalf of companies.
Independent Agent – a representative of multiple insurance companies who sells and services policies for records which they own and operate under the American Agency System.
Insurable Interest – A right or relationship in regard to the subject matter of the insured contract such that the insured can suffer a financial loss from damage, loss or destruction to it. (Bickelhaupt and Magee)
- Basically: Owning your home and paying your mortgage company means that you and your mortgage company are financially on the hook for the damages and could suffer if repairs are not complete.
Insurance – an economic device transferring risk from an individual to a company and reducing the uncertainty of risk via pooling.
Insured – party(ies) covered by an insurance policy.
- See Named Insured first. Insured could also be the children of the named insureds.
Keep reading for more common terms!
Insurer – an insurer or reinsurer authorized to write property and/or casualty insurance under the laws of any state.
- The insurer is your typically your insurance company.
Lapse – termination of a policy due to failure to pay the required renewal premium.
- No payment, no coverage!
Limits – maximum value to be derived from a policy.
- The limit is the absolute maximum amount of money your insurance company will pay you in the event of a loss under each coverage.
- See more here.
Loss – physical damage to property or bodily injury, Including loss of use or loss of income.
- You may hear phrases like a total loss when your home, for example, is completely damaged and must be demolished with no chance of individual repair.
Loss of Use Insurance – policy providing protection against loss of use due to damage or destruction of property.
- Includes additional living expenses for the shortest time required to repair your home. If you must live in a rental property while repairs are underway, the insurance company would pay for that as you also are on the hook for paying your mortgage.
Loss Payable Clause – coverage for third party mortgagee in case of default on insured property, secured by a loan, that has been lost or damaged.
- If you commit arson, you will not receive any money but your mortgage company might since they are financially responsible and have an insurable interest in your property.
Loss Reserve – the amount that insurers set aside to cover claims incurred but not yet paid.
- Your adjuster will typically advise the insurance company, more specifically, the desk adjuster, of the loss reserve, meaning the amount of money that they anticipate for damages.
Mobile Homes – Homeowners – homeowners insurance sold to owners occupying the described mobile home.
- Typically, mobile home policies will have their unique form number, or you may see it listed as a dwelling policy or DWG for short.
Mortgage – a note used to secure a loan for real property
Named Insured – the individual defined as the insured in the policy contract.
- You are an insured if you own your home and have an interest in the property.
- If your home is for rent (dwelling policy) and a tenant is living in your home, they are not considered an insured.
- You will see your name on the dec page.
Named Peril Coverage – insurance for losses explicitly defined in the policy contract.
- Some policies only cover what is in the policy; this is named peril coverage. If it is not listed, then it is not included.
National Association of Insurance Commissioners (NAIC) – the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally. NAIC members, together with the central resources of the NAIC, form the national system of state-based insurance regulation in the U.S.
- This is the organization that created these definitions. They are credited at the bottom.
Negligence – failure to exercise reasonable consideration resulting in loss or damage to oneself or others.
- Here is a homeowner’s insurance example: you knowingly allow a dead tree to remain on your property for an extended period.
- There is an apparent reason for you to be aware that the tree could fall and damage your property. If this is true, then you are negligent.
- If someone notifies you of potential and imminent hazards, and you do nothing, you may be considered negligent.
NFIP – National Flood Insurance Program – flood insurance and floodplain management for personal and business property administered under the National Flood Act of 1968. Encourages participation by private insurers through a flood insurance pool.
Occurrence – an accident, including injurious exposure to conditions, which results, during the policy period in bodily injury or property damage neither expected or intended from the standpoint of the insured. (Bickelhaupt and Magee)
- Let’s say you have a fire destroy your house on 1/1/10. A few days later, someone steals the belongings in your fire-damaged home.
- These are two separate occurrences.
- Insurance companies vary and based on my example, may pay under one occurrence; however, I have never seen that happen.
Owner Occupied – homeowners insurance sold to owners occupying the described property.
- On the contrary, if you do not plan to occupy the property, then your agent may sell you a dwelling policy.
- Typically, if you plan to have tenants living in the property, you will most like have a dwelling policy.
- Always be clear with your agent about your living situation.
Peril – the cause of property damage or personal injury, origin of desire for insurance. “Cause of Loss”
- Examples: Fire, water, lightning, theft, hail, hurricane, vandalism.
Personal Property – single interest or dual interest credit insurance (where collateral is not a motor vehicle, mobile home, or real estate) that covers perils to goods purchased or used as collateral and that concerns a creditor’s interest in the purchased goods or pledged collateral either in whole or in part; or covers perils to goods purchased in connection with an open-end credit transaction.
- See my blog post here.
Policy – a written contract ratifying the legality of an insurance agreement.
- Can be different types such as homeowners, dwelling, renters, auto
Policy Period – time period during which insurance coverage is in effect.
- You will find your policy period on your dec page.
Premium – Money charged for the insurance coverage reflecting expectation of loss.
- The premium is on your dec page. This is what you pay your agent in exchange for coverage.
Property – coverage protecting the insured against loss or damage to real or personal property from a variety of perils, including but not limited to fire, lightening, business interruption, loss of rents, glass breakage, tornado, windstorm, hail, water damage, explosion, riot, civil commotion, rain, or damage from aircraft or vehicles.
- Property is your house, fence, shed, and contents.
Provisions – contingencies outlined in an insurance policy.
- You will find several provisions in your policy, all of which are detailed.
Public Adjuster – independent claims adjuster representing policyholders instead of insurance companies.
- Some homeowners feel compelled to hire a public adjuster to represent them during a claim.
- The public adjuster would write their estimate and submit to your insurance company’s adjuster.
- I have my own opinion about public adjusters, but I think you should perform extensive research on public adjusters before hiring one.
Renters Insurance – liability coverage for contents within a renter’s residence. Coverage does not include the structure but does include any affixed items provided or changed by the renter.
- It’s crucial that if you have tenants living in your property/ rental home that they have renter’s insurance.
- Your insurance will not cover any damage to their personal property in the event of a loss.
Replacement Cost – the cost of replacing property without a reduction for depreciation due to normal wear and tear.
- Also known as RCV. Replacement cost is what it says- the current price to replace an item in full.
- The term relates to both building materials for the home and personal property.
Risk – Uncertainty concerning the possibility of loss by a peril for which insurance is pursued.
- If you live near a body of water that causes flooding, your risk would be considered higher than someone living inland.
Salvage – value recoverable after a loss.
- Example of Salvage (commercial insurance example but you get it): A water line busts at a clothing store, causing the clothing to become wet.
- The store can not sell “damaged” clothing and requests reimbursement for the cost.
- The insurance company figures that they can clean the clothes then donate them. In return for the donation, they get a write off for taxes.
- The write off is a type of value the insurance company can receive.
Subrogation – situation where an insurer, on behalf of the insured, has a legal right to bring a liability suit against a third party who caused losses to the insured. Insurer maintains the right to seek reimbursement for losses incurred by insurer at the fault of a third party.
- Basic terms: You hire a professional tree service to remove a tree of your property.
- The tree service accidentally cuts the tree in a manner that causes the tree to fall onto your roof.
- You could file a claim with your insurance company so you can get paid quickly for your damages and allow the insurance company to go after the tree service.
- In the event of subrogation, you are most likely to receive your deductible amount leaving you with no money out of pocket!
Subrogation Clause – section of insurance policies giving an insurer the right to take legal action against a third party responsible for a loss to an insured for which a claim has been paid.
- Basic terms: Insurance policy states that they have the right to do the above (under subrogation).
Term – period of time for which policy is in effect.
- You will find “term” on your dec page.
Third Party – person other than the insured or insurer who has incurred losses or is entitled to receive payment due to acts or omissions of the insured.
Underwriter – person who identifies, examines and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate.
- See below underwriting first. The underwriter is the person who does the underwriting.
Underwriting – the process by which an insurance company examines risk and determines whether the insurer will accept the risk or not, classifies those accepted and determines the appropriate rate for coverage provided.
- Adjusters will sometimes document underwriting risk and notify the underwriter.
- Underwriting risks include foundation issues, hazards, pools, having an older home, not keeping the house in good repair, and running a daycare or business out of your home.
- The reason they will document this is that it could affect your premium as it puts you in a higher risk analysis.
CREDIT: https://content.naic.org/consumer_glossary.htm Take a look at their webpage for more terms!