Important Errors and Omissions Insurance terms you should know.
Deductible: The deductible on an insurance policy is the portion of any loss that is covered by the insured before the insurance policy begins to pay. In general, the lower the deductible, the higher the cost of the insurance policy. A policy that has no deductible is called a “first dollar” insurance policy because it pays on the first dollar of the loss. Deductibles can be either per occurrence – which means that the insured pays the deductible for every loss, no matter how many occur within the policy period – or they can be calculated based on the policy period, which means there is a maximum amount that the insured will usually pay over the course of the policy.
Risk: A risk can either be the uncertainty that arises from the possible occurrence of certain events (such as the chance that an insured business professional will or will not be sued), or it can refer to the actual insured person, business, or property to which a particular insurance policy is related.
Exclusions: Exclusions are provisions of an insurance policy that refer to specific risks, hazards, perils, or occurrences that are not covered by the policy. Exclusions are usually part of the insurance policy form and delineate the details of what is not covered by the policy. In some cases the exclusions can be extremely broad (such as “war”) and apply to many different types of policies, while in other cases they may be specifically tailored to a certain type of policy.
Limits: The limits of an insurance policy are the total amount of losses that will be paid by the policy. In some cases the limit is determined on a per occurrence basis which means that the limit can potentially be paid out for each claim that is filed no matter how many are filed during the policy period. For example, an insurance policy with a “per-occurrence limit” of $1 million could pay $1 million for one occurrence in January and then pay another $1 million for another occurrence in June. Other limits are determined on an aggregate basis which means that there is a total amount of losses that will be paid for the entire policy period and once that limit is reached no more losses will be paid. For example, an insurance policy with a $1 million aggregate limit could pay a $1 million claim in January, but would not pay any other claims for the remainder of the policy year because the limit had been exhausted.
Liability: A liability is any legally enforceable obligation. For insurance purposes, a liability is the obligation that an individual or other entity has to pay money for an injury or damage caused by one’s actions. At its essence, insurance is a way to protect against liabilities.
Premium: The premium is the amount of money that the purchaser of an insurance policy pays an insurance company in exchange for insurance coverage through the policy. Premiums may be paid on an annual basis, monthly, or through some other type of plan. Premiums are determined through underwriting, in which the insurance company assesses the risk presented by a client’s liabilities and determines how much money the insurance company needs to charge to adequately provide for taking a gamble by covering those risks.
Rider (Endorsement): A rider or endorsement is a special form that is attached to an insurance policy that alters the policy in some way. One of the common uses for a rider or endorsement is to provide additional insurance coverage that is not provided in the body of the policy. This insurance could include coverage for additional risks, or higher limits of insurance, that could change the scope of the policy. Insurance policy endorsements can also be used to limit or restrict the insurance coverage in some way, to clarify the way the coverage applies to a specific exposure, or to add other parties or locations to the insurance policy. In general, any changes that a business owner or individual wants or needs to the basic policy coverage form will be expressed through an endorsement to the policy. Depending on the details of the endorsement it can either cost an additional premium or decrease the premium costs of the policy to the insured.
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