Insurance terms Glossary

OVERVIEW OF COMMON TYPES OF INSURANCE AND INSURANCE TERMS

The following is an alphabetical list of common insurance terms and types of insurance coverage:

• >>A-B :: C-F :: G-M :: N-R :: S-Z

GENERAL LIABILITY COVERAGE
General liability coverage protects the corporation for its liability for third party bodily injury and property damage caused through the operations of the corporation. Coverage is usually written on an occurrence basis thus providing protection whenever a claim is made as long as the incident that gives rise to the claim occurred during the policy period.

The language of the insuring agreement indicates that the insurance applies to the business operation of the insured (which will be described in the policy declarations) and that coverage is provided during the policy period.

One section of the policy typically provides “Products” coverage protecting the corporation against liability arising out of its products once sold and relinquished.

There are numerous extensions of coverage that should be included:

• Blanket Contractual;
• Personal Injury (Libel and Slander);
• Contingent Employers Liability;
• Employee Benefits Liability;
• Non-owned Automobile;
• Legal Liability for Damage to Hired Automobiles;
• Tenants Legal Liability; and, if appropriate,
• Liquor Law Liability;
• Innkeepers Liability; and
• Garage Automobile Liability.

Special attention to the limit of liability is essential, especially if the corporation is doing any form of business in the US irrespective of whether it involves the sale of product or an actual physical presence. Not only are the awards and defense costs much higher in the US but our dollar is worth a lot less.

Another important, yet often overlooked, aspect of the cover is the Territorial definition. Policies often restrict coverage to Canada or Canada and the Continental USA except for Products cover where the coverage is worldwide but suits must be brought in Canada or North America. If it is important for the insured to be able to respond to suits in other countries it is essential to either amend the wording or purchase a worldwide cover offering full defence costs in the country where the action is brought.

Umbrella Liability coverage can be purchased in order to obtain higher limits of liability over a number of liability coverages

HOST LIQUOR LIABILITY
This is coverage for liability arising out of the serving of alcoholic beverages at functions incidental to the insured’s operations, such as business parties.

HPR
This commonly used term means “Highly Protected Risk.” These risks are usually underwritten by specialist underwriters. A commitment to a high standard of risk management and dedication to the utilization of technology (e.g. sprinklers, alarms, etc.) is required.

KIDNAP AND RANSOM INSURANCE
As the name implies, this coverage provides funds for dealing with situations where officers or employees have been kidnapped and are being held for ransom. More importantly, this coverage provides access to certain specific companies who are experts in this field, and they assume responsibility for negotiations. This coverage is all too often overlooked and should be considered for any corporate executive who is often in the public eye. There have been Canadian situations involving business leaders and their families, including Belzberg and Pattison.

KEY MAN LIFE INSURANCE
Whether a corporation is large or small, there are invariably one or two people who are the heart of the corporation - they might be the president, the product designer, the financial investment wizard, or the unique sales person. A “key man” is a person whose absence would cause enormous financial harm to the corporation - perhaps even cause the company to fail.
This coverage is purchased by the corporation on the life of a key individual in one of its operations to provide funds to immediately be able to “buy” another senior executive following the death of the insured

LONG AND SHORT “TAIL”
Long and short “tail” describes the time factor in settling insured losses. In general, liability policies are considered to have “long tails” whereas property policies are considered to have “short tails.”

MERGER AND ACQUISITION INSURANCE
Various types of insurance have evolved in this area. The three principal types are as follows:

• Aborted bid cost insurance;
• Representations and warranty insurance; and
• Tax guaranty insurance.

NON-OWNED COVERAGES
These can be broken down into three distinct areas:

Non-Owned Automobile Liability:
The standard non-owned automobile liability policy insures against the liability imposed by law upon the insured for loss or damage arising from the use or operation of any automobile not owned in whole or in part by or licensed in the name of the insured and results in the bodily injury to or the death of any person or damage to property of others not in the care, custody or control of the insured. Some examples of a non-owned exposure are:

• An employee of the insured using their personal automobile; and
• A delivery company has been hired to deliver the insured’s product.

Non-Owned Watercraft Liability:
A commercial general liability policy usually excludes bodily injury or property damage arising out of the ownership, maintenance, use, operation, loading or unloading, or entrustment to others, by or on behalf of any Insured of any watercraft. As the exception to the exclusion is only applicable when the watercraft is less than 8 metres long, there is a possible gap in coverage and hence the need for non-owned watercraft liability.

Non-Owned Aircraft Liability:
A standard commercial general liability policy excludes liability arising from the ownership, use or operation of any aircraft. The definition of aircraft includes fixed wing aircraft and helicopters. By virtue of the exclusion it becomes necessary to purchase non-owned aircraft liability insurance. Dependant on the exposure and circumstances involved, it may be sufficient to be added as an additional insured to the aircraft owners’ policy.

OCCURRENCE LIABILITY POLICIES
Coverage applies as long as the claim arises during the term of the policy. For example, 50-year-old policies are being called upon to support claims involving asbestos as well as “sexual exploitation” claims.

PERSONAL INJURY
Personal injury provides coverage for exposures such as false arrest, detention, libel, slander, wrongful entry, or eviction.

PERSONAL LINES
This coverage is mentioned because of the importance of the cover to business owners and executives. All too often great care is exercised in ensuring adequate coverage for the business and the personal side is ignored. All homeowners’ policies contain coverage and property restrictions but the following are of note:

• earthquake coverage is purchased separately and should be purchased on both your home and the contents of the home;
• flood coverage is NOT available; and
• low dollar loss limits are applicable to many kinds of property including: jewelry, silver and gold, bicycles, coin and stamp collections.

There can be significant differences in the wording used by different underwriters. For example, some insurers do not require that replacement structures be on the same site, although most do. Similarly, some insurers do not require you to actually replace contents after a loss before they reimburse you for the replacement cost, although again, most do. Some underwriters have no additional limit on living expenses, which can be significant if, for example, your home is destroyed in a fire and will take many months to replace.

PRODUCT RECALL COVER
Any large corporation with significant sales should investigate this form of coverage. Any error in the manufacturing process or a government requirement to recall a product will cause enormous costs and potential loss of reputation.

PROFESSIONAL LIABILITY INSURANCE
In the case of a lawsuit alleging negligence in the services a professional provides or claiming breach of contract, professional liability coverage protects the named professional from financial loss. There are many different forms of this coverage, including:

Errors and Omissions
Typically, insurance brokers, accountants, lawyers, architects and engineers carry this cover.

Malpractice
This cover is designed for the medical field.

Publishing
All publishers should be alert to this form of cover, ranging from newspapers and magazines to technical and fictional works.

Producer’s Liability
A cover designed for protecting movie and documentary producers against suits for title and copyright infringement, plagiarism, and the like.

While the General Liability coverage is normally written on an occurrence basis, Professional Liability coverage, as with Directors and Officers Liability, is always written on a “claims made” basis - coverage begins on the effective date of the policy and expires on the last day of the policy (i.e. all coverage ceases on that day). Any and all incidents that may give rise to a claim must be reported to the insurer prior to expiry. Great care must be taken whenever changing underwriters to ensure continuity of coverage.

PROPERTY INSURANCE
The protection of a corporation’s physical assets includes buildings, stock, equipment, and tenant’s improvements.

N.B. Earthquake deductibles can vary from 2% to 10% (or more) of the value of property insured not a percentage of the claim,

Property insurance includes Business Interruption and Extra Expense cover.

Deductibles should be affordable by the corporation but outside of the “usual” type of business occurrences or incidents. If the deductibles are low the premium monies will be wasted, as they will simply be being “traded” with underwriters (this comment is true for ALL types of insurance).

RECIPROCALS
Reciprocals are gaining favour once again and provide a looser arrangement than captives. Reciprocals occur where a number of organizations or businesses in similar industries band together to insure each other’s losses. One of the best-known reciprocals is the Universities Reciprocal across Canada.

REPLACEMENT COST AND ACTUAL CASH VALUE (“ACV”)
Replacement cost provides, as the name implies, new for old on buildings and equipment.
Actual cash value, on the other hand, provides insurance for the depreciated value of the property insured.

SELF INSURANCE
A major corporation may, for one or more of the following reasons, consider self-insurance:

1. To exercise greater control over costs and expenses normally associated with traditional risk transfer through the purchase of insurance policies;
2. To avoid the unpredictable and cyclical nature of the Insurance market place; and
3. To address exposures for conventional insurance is unavailable.

In the context of 1 above, it is important to understand the true meaning of the “cost of risk” and not just focus on the actual policy premiums. In addition to premiums, the annual cost of policy deductibles for claims made and the expense involved in the administration of the insurance program including claims handling must be considered.

Some simple examples of self-insurance are:

• Deductibles;
• Self Insured Retentions;
• Reimbursement Agreements;
• Total risk retention with no insurance policy protection;
• Primary risk limits provided by an insurance policy with excess self retained; and
• Captive Insurance Company.

Assuming that risk has been identified and quantified, it is unusual for a corporation to self-insure for 100% of the risk. In all probability, a program would be designed following a risk management approach that would combine an element of self-insurance and traditional risk transfer through the purchase of some insurance protection.

STATED AMOUNT COINSURANCE
A Stated Amount clause eliminates the co-insurance penalty associated with a percentage co-insurance requirement. The insurance company will agree to drop the percentage co-insurance clause if the insured provides a signed statement indicating the replacement cost values and purchase coverage for the full declared value. In most cases an appraisal of the property to be insured will be requested by the insurance company.

STRIKE COVER
It is possible to purchase insurance to protect against a long strike adversely affecting the corporation’s revenue streams. This coverage is expensive.

SUBROGATION
The doctrine of subrogation has long been used by insurance companies who are obligated under their policies to pay their insured for property damage or for liability losses that the insured has sustained. In situations where the damages appear to have been caused by the negligence or fault of third parties, insurance companies have traditionally exercised their right of “subrogation” to pursue claims against the alleged negligent parties (tortfeasors). The insurance company’s right to subrogation is granted under the Insurance Act, R.S.B.C. 1996, c. 226, at law, and under the “Additional Conditions” clauses contained in all insurance policies.

Whereas the basic premise of subrogation is contained in all insurance policies, there are other clauses contained in various insurance policy forms that effectively abrogate this without specifically saying so. A property policy makes provision for the insured to enter into a release prior to loss without affecting the insured’s right to recovery of their own claim. The Commercial General Liability policy, under the policy condition typically headed “Transfer of Rights of Recovery Against Others to Us,” also usually includes the phrase, “If the Insured has rights to recover,” which suggests that rights can be waived by the insured prior to a loss.

As a general rule, it is always advisable for any insured, before entering into any form of release with a third party, to request the insurer issue an endorsement to the policy specifically waiving subrogation rights against the third party. This eliminates the potential for disputes, and ensures that the full ramifications of the particular situation are fully understood by all parties prior to a loss.

TERRORISM
It is not possible to summarize all the different endorsements and wordings that underwriters are using in excluding this peril.

TRADE DISRUPTION INSURANCE
This coverage provides for lost earnings or extra expense incurred as a result of trade delay or non-delivery of product at any point during the supply chain. This coverage is normally written as an adjunct to a marine stock policy.

UMBRELLA LIABILITY
Umbrella Liability is sometimes referred to as Excess Liability, but this is misleading as the Umbrella Liability policy is designed to provide more than pure excess limits. A true umbrella policy is subject to its own terms and conditions and consequently it is not “Follow Form” cover, meaning that coverage can be broader than the primary underlying policies.
The purpose of Umbrella Liability is to ensure that all exposures are captured under one policy that can include general liability, automobile liability, non-owned aviation and watercraft liability.

There are three coverage aspects:

• To provide coverage up to the policy limits once the limits of the applicable underlying insurance has been exhausted;
• To respond to any erosion of underlying aggregate limits; and
• To cover a claim for which no coverage is afforded by the applicable underlying insurance.

In the event that the third point is applicable, the policy contains a retained limit or self-insured retention which requires the insured to contribute a fixed dollar amount to the claim.

WORKERS’ COMPENSATION INSURANCE
This coverage is a schedule of benefits that is payable to an employee by a board (government agency) or an insurer without regard to liability. Some extremely large corporations do self-insure. It is important to note the enormous differences that occur in this area between Canada and the United States. The main differences are as follows:

• In Canada, Workers’ Compensation is “insured” by government agencies, whereas in most states, protection is through insurance companies; and
• Coverage in Canada is absolute and, with virtually no exceptions, workers injured “on the job” are NOT permitted to sue their employer for damages. In the USA, suits by employees are frequent and very expensive, both in terms of awards made and defense costs incurred.