Insurance Words

This industry uses many confusing terms. Some words have multiple meanings, which, without context, are fairly useless, and some words don't mean what people think they mean. When you’re in the business every day, it is sometimes easy to forget the importance of taking time to explain to clients what these words mean.

Here are a few that sometimes cause confusion:

Blanket: This is simple. For 99% of humans, this means some kind of warming device, usually placed on a bed. When you ask someone if they want “blanket” coverage, they may not admit out loud that they don’t understand why you’re asking if they want to insure their blankets. Take a moment to explain the insurance meaning, just in case.

Owned/Non-Owned Auto: Many first-time purchasers, and sometimes repeat purchasers, wonder, “Why in the world do I want to insure someone else’s auto?” This is a great example of taking time to explain coverages because there is absolutely nothing in the term that is self-explanatory to insureds.

Replacement Cost: Don’t use this term. To normal people, if they buy replacement cost coverage, they assume the extra money they’re paying means they’ll have their buildings fully replaced. And that is a reasonable conclusion.

But “replacement cost” only means replacement cost within a narrow window. First, not all replacement cost coverages are the same. Some are expansive and some are basically worthless. Second, replacement cost has limitations such as co-insurance requirements.

As an aside, it is unethical, and it should be illegal for agents to tell insureds something like, “I can save you money by only insuring your building to X% of its actual replacement cost and then adding a replacement cost endorsement that will make up the difference.” Policies with co-insurance requirements typically will not make up the difference. Even if someone structures this perfectly to 80%, it does account for inflation, resulting in less than 80%, especially in a catastrophe. Any carrier that supports this approach is either a dupe, is being duped by their agents, or lacks adequate audit procedures. Or they are complicit, which makes their rate filings illusory.

Moving on, replacement cost does not include ordinance coverage. Many insureds are mightily upset when their claim check arrives for far less than necessary because they had replacement cost but inadequate ordinance coverage. Do not tell clients they have replacement cost without sharing the caveats and triple-checking their ordinance coverage.

Guaranteed Replacement Cost: See above, and under no circumstances use this term unless you enjoy creating E&O exposures.

Brokers: What in the world is a broker?

• We have retail brokers.

• We have wholesale brokers. These are materially different because the licenses, markets, and jobs are materially different.

• We have “the brokers,” which usually means the publicly traded insurance intermediaries. These brokers, though, are usually wholesale brokers combined with retail brokering, retail agents, and a host of other revenue streams.

• We have “retail brokers” that are really agents. It is interesting to me that most health insurance company contracts list the agent as a broker, but most P&C company contracts list the agent as an agent. The exception is mostly in California, where these terms have been replaced by “Producer,” but no one really knows the definition of a producer.

• We have agents that tell insureds they are brokers when they are really agents. All else being equal, brokers have a higher standard of care than agents. Some agents become brokers without knowing it. This arguably happens when they begin charging fees.

  
  

Co-Insurance: This term is rather confusing because I doubt the insured ever thinks of themselves as an insurer side by side with the insurance company. It’s not as though the insured thinks of themselves as partnering with the company to insure their building.

Claims Made: All policies pay based on a claim made against the insurance company, right?

Claims Occurrence: Doesn’t a claim have to occur to have a claim? There is absolutely nothing intuitive about these terms. Don’t use them without explaining them. The differences in coverage are immense, so insureds deserve an explanation.

Words have meanings, and using them incorrectly does not benefit your clients while increasing an agent’s exposures, and definitely a broker’s exposures, to E&O claims. All too often, I see people, especially producers, throwing out terms and using similar ones as if synonymous, when they are not. Choose your words carefully and help your clients understand what they are buying.

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NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.