Insurance Planning and Risk Management Vocabulary

Flashcards covering key concepts and terms in insurance, risk management, policy provisions, liability, and professional insurance.

Subrogation Clause

A provision in an insurance policy requiring that the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured.

Principle of Indemnity

A fundamental insurance principle stating that the insured is only entitled to compensation to the extent of their financial loss and cannot make a profit from an insurance contract.

Principle of Insurable Interest

A principle requiring that an insured must suffer a financial loss resulting from damage, loss, or destruction, closely aligned with indemnity to prevent financial gain.

Adverse Selection

The tendency of those who most need insurance to purchase policies, while those with the least perceived risk are less likely to pay the required premiums.

Peril

The immediate cause and reason for a loss occurring, such as a hurricane.

Agent

A legal representative of an insurance company, which includes general and independent agents.

Broker

A legal representative of an insured who acts in the best interest of the insured.

Producer

A comprehensive term used to encompass both insurance agents and insurance brokers.

Reinsurance

An arrangement where an insurance company transfers all or part of its risk to other insurance companies to reduce catastrophic financial risk.

Pure Risk

A category of risk that involves only the possibility of loss or no loss.

Speculative Risk

A category of risk that involves the possibility of profit, loss, or no loss.

Subjective Risk

A risk measure that differs based on an individual's perception of risk.

Objective Risk

A measurable risk that does not depend on an individual's perception.

Fundamental Risk

A type of risk that impacts a large number of individuals at one time and is difficult for an insurance company to insure.

Particular Risk

A type of risk that impacts a specific individual.

Probability of Loss

The chance of a loss occurring, measured as the long-run frequency with which an event occurs.

Law of Large Numbers

The principle stating that as exposure units increase, probable results are more likely to equal true results, helping reduce objective risk.

Moral Hazard

A hazard resulting from an individual's dishonesty or intentional wrongdoing, such as filing a false claim.

Morale Hazard

A hazard resulting from carelessness or indifference to loss, such as leaving a car unlocked.

Physical Hazard

Physical conditions that increase the likelihood or severity of a loss, such as icy roads, poor lighting, defective equipment, or poor eyesight.

Representation

Statements made by the insured to the insurer during the application process, where a material misrepresentation can void the contract.

Warranty

A promise made by the insured to the insurer, the breach of which serves as grounds for avoiding the insurance contract.

Concealment

The intentional failure of an insured to disclose a known material fact regarding the risk being considered.

Waiver

The voluntary relinquishment of a known legal right.

Estoppel

A legal process that prevents or denies a party from asserting a right they might otherwise be entitled to under the law.

Stock Insurer

An insurance company that issues stock and is owned by shareholders with the goal of earning a profit.

Mutual Company Insurance

An insurance company owned by its policyholders rather than by external shareholders.

NAIC

National Association of Insurance Commissioners; an organization made up of state insurance commissioners that provides oversight and a watch list of insurance companies.

Prudent Man Standard

A standard of conduct evaluating whether a defendant acted in the same manner as a prudent person would act under similar circumstances.

Contributory Negligence

A defense to negligence holding that if the injured person's own negligence contributed to the loss, they cannot recover any damages.

Comparative Negligence

A rule allowing an injured party whose own negligence contributed to a loss to recover a portion of the loss from another negligent party.

Last Clear Chance Rule

A rule permitting a plaintiff with contributory negligence to recover damages if they prove the defendant had a final clear opportunity to avoid the accident.

Res Ipsa Loquitur

A legal doctrine meaning 'the act speaks for itself,' which presumes negligence occurred simply because the accident happened.

Vicarious Liability

The legal doctrine holding one party legally responsible for the acts or actions of others.

Personal Liability Umbrella Policy (PLUP)

A policy providing liability coverage beyond underlying homeowner and auto limits for legal obligations arising from negligent acts, typically ranging between $1\text{ million}$ and $3\text{ million}$.

Malpractice Insurance

A type of professional liability coverage designed for situations where bodily injury may occur due to negligence.

Errors and Omissions (E&O) Insurance

Professional liability insurance covering losses arising from negligent acts, errors, and omissions for professionals like accountants, lawyers, engineers, and financial planners.

Occurrence Basis

A coverage structure that pays for events that occur while the insurance policy is actively in force.

Claims-Made Basis

A coverage structure that pays for claims made within the policy period or extended reporting period, regardless of when the event occurred.