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DECLARATION |
Part of a
property or liability insurance policy that states the name and address
of policyholder, property insured, its location and description, the
policy period, premiums, and supplemental information. Referred to as
the “dec page.”
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DEDUCTIBLE |
The amount
of loss paid by the policyholder. Either a specified dollar amount, a
percentage of the claim amount, or a specified amount of time that must
elapse before benefits are paid. The bigger the deductible, the lower
the premium charged for the same coverage.
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| DEFERRED
ANNUITY |
An annuity
contract that is purchased either with a single tax-deferred premium or
with periodic tax-deferred premiums over time. Payments begin at a
predetermined point in time, such as retirement.
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| DEFINED
BENEFIT PLAN |
A
retirement plan under which pension benefits are fixed in advance by a
formula based generally on years of service to the company multiplied by
a specific percentage of wages, usually average earnings over that
period or highest average earnings over the final years with the
company.
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| DEFINED
CONTRIBUTION PLAN |
An employee
benefit plan under which the employer sets up benefit accounts and
contributions are made to it by the employer and by the employee. The
employer usually matches the employee's contribution up to a stated
limit.
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| DEMAND
DEPOSIT |
Customer
assets that are held in a checking account. Funds can be readily
withdrawn by check, “on demand.”
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DEMUTUALIZATION |
The
conversion of insurance companies from mutual companies owned by their
policyholders into publicly-traded stock companies.
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DEPOSITORY INSTITUTION |
Financial
institution that obtains its funds mainly through deposits from the
public. Includes commercial banks, savings and loan associations,
savings banks, and credit unions.
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DEREGULATION |
In
insurance, reducing regulatory control over insurance rates and forms.
Commercial insurance for businesses of a certain size has been
deregulated in many states.
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DERIVATIVES |
Contracts
that derive their value from an underlying financial asset, such as
publicly-traded securities and foreign currencies. Often used as a hedge
against changes in value.
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DIFFERENCE IN CONDITIONS |
Policy
designed to fill in gaps in a business’s commercial property insurance
coverage. There is no standard policy. Policies are specifically
tailored to the policyholder’s needs.
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DIMINUTION OF VALUE |
The idea
that a vehicle loses value after it has been damaged in an accident and
repaired.
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| DIRECT
PREMIUMS |
Property/casualty premiums collected by the insurer from policyholders,
before reinsurance premiums are deducted. Insurers share some direct
premiums and the risk involved with their reinsurers.
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| DIRECT
SALES/ DIRECT RESPONSE |
Method of
selling insurance directly to the insured through an insurance company’s
own employees, through the mail, or via the Internet. This is in lieu of
using captive or exclusive agents.
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| DIRECT
WRITERS |
Insurance
companies that sell directly to the public using exclusive agents or
their own employees, through the mail, or via Internet. Large insurers,
whether predominately direct writers or agency companies, are
increasingly using many different channels to sell insurance. In
reinsurance, denotes reinsurers that deal directly with the insurance
companies they reinsure without using a broker.
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DIRECTORS AND OFFICERS LIABILITY INSURANCE/D&O |
Covers
directors and officers of a company for negligent acts or omissions, and
for misleading statements that result in suits against the company,
often by shareholders. Directors and officers insurance policies usually
contain two coverages: personal coverage for individual directors and
officers who are not indemnified by the corporation for their legal
expenses or judgments against them – some corporations are not required
by their corporate or state charters to provide indemnification; and
corporate reimbursement coverage for indemnifying directors and
officers. Entity coverage for claims made specifically against the
company may also be available.
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DIVIDENDS |
Money
returned to policyholders from an insurance company’s earnings.
Considered a partial premium refund rather than a taxable distribution,
reflecting the difference between the premium charged and actual losses.
Many life insurance policies and some property/casualty policies pay
dividends to their owners. Life insurance policies that pay dividends
are called participating policies.
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| DOMESTIC
INSURANCE COMPANY |
Term used
by a state to refer to any company incorporated there.
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| EARLY
WARNING SYSTEM |
A system of
measuring insurers’ financial stability set up by insurance industry
regulators. An example is the Insurance Regulatory Information System
(IRIS), which uses financial ratios to identify insurers in need of
regulatory attention.
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| EARNED
PREMIUM |
The portion
of premium that applies to the expired part of the policy period.
Insurance premiums are payable in advance but the insurance company does
not fully earn them until the policy period expires.
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EARTHQUAKE INSURANCE |
Covers a
building and its contents, but includes a large percentage deductible on
each. A special policy or endorsement exists because earthquakes are not
covered by standard homeowners or most business policies.
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| ECONOMIC
LOSS |
Total
financial loss resulting from the death or disability of a wage earner,
or from the destruction of property. Includes the loss of earnings,
medical expenses, funeral expenses, the cost of restoring or replacing
property, and legal expenses. It does not include noneconomic losses,
such as pain caused by an injury.
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ELECTRONIC COMMERCE / E-COMMERCE |
The sale of
products such as insurance over the Internet.
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ELIMINATION PERIOD |
A kind of
deductible or waiting period usually found in disability policies. It is
counted in days from the beginning of the illness or injury.
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| EMPLOYEE
DISHONESTY COVERAGE |
Covers
direct losses and damage to businesses resulting from the dishonest acts
of employees. (See
FIDELITY BOND)
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| EMPLOYEE
RETIREMENT INCOME SECURITY ACT / ERISA |
Federal
legislation that protects employees by establishing minimum standards
for private pension and welfare plans.
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EMPLOYER’S LIABILITY |
Part B of
the workers compensation policy that provides coverage for lawsuits
filed by injured employees who, under certain circumstances, can sue
under common law. (See
EXCLUSIVE REMEDY)
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EMPLOYMENT PRACTICES LIABILITY COVERAGE |
Liability
insurance for employers that covers wrongful termination,
discrimination, or sexual harassment toward the insured’s employees or
former employees.
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ENDORSEMENT |
A written
form attached to an insurance policy that alters the policy’s coverage,
terms, or conditions. Sometimes called a rider.
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ENVIRONMENTAL IMPAIRMENT LIABILITY COVERAGE |
A form of
insurance designed to cover losses and liabilities arising from damage
to property caused by pollution.
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| EQUITY |
In
investments, the ownership interest of shareholders. In a corporation,
stocks as opposed to bonds.
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| EQUITY
INDEXED ANNUITY |
Non-traditional fixed annuity. The specified rate of interest guarantees
a fixed minimum rate of interest like traditional fixed annuities. At
the same time, additional interest may be credited to policy values
based upon positive changes, if any, in an established index such as the
S&P 500. The amount of additional interest depends upon the particular
design of the policy. They are sold by licensed insurance agents and
regulated by state insurance departments.
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| ERRORS
AND OMISSIONS COVERAGE / E&O |
A
professional liability policy covering the policyholder for negligent
acts and omissions that may harm his or her clients.
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| ESCROW
ACCOUNT |
Funds that
a lender collects to pay monthly premiums in mortgage and homeowners
insurance, and sometimes to pay property taxes.
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| EXCESS
AND SURPLUS LINES |
Property/casualty coverage that isn’t available from insurers licensed
by the state (called admitted insurers) and must be purchased from a
non-admitted carrier.
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| EXCESS
OF LOSS REINSURANCE |
A contract
between an insurer and a reinsurer, whereby the insurer agrees to pay a
specified portion of a claim and the reinsurer to pay all or a part of
the claim above that amount.
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EXCLUSION |
A provision
in an insurance policy that eliminates coverage for certain risks,
people, property classes, or locations.
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EXCLUSIVE AGENT |
A captive
agent, or a person who represents only one insurance company and is
restricted by agreement from submitting business to any other company
unless it is first rejected by the agent’s company. (See
Captive agent)
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EXCLUSIVE REMEDY |
Part of the
social contract that forms the basis for workers compensation statutes
under which employers are responsible for work-related injury and
disease, regardless of whether is was the employee’s fault and in return
the injured employee gives up the right to sue when the employer’s
negligence causes the harm.
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| EXPENSE
RATIO |
Percentage
of each premium dollar that goes to insurers’ expenses including
overhead, marketing, and commissions.
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EXPERIENCE |
Record of
losses.
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| EXPOSURE |
Possibility
of loss.
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| EXTENDED
COVERAGE |
An
endorsement added to an insurance policy, or clause within a policy,
that provides additional coverage for risks other than those in a basic
policy.
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| EXTENDED
REPLACEMENT COST COVERAGE |
| Pays a
certain amount above the policy limit to replace a damaged home,
generally 120 percent or 125 percent. Similar to a guaranteed
replacement cost policy, which has no percentage limits. Most homeowner
policy limits track inflation in building costs. Guaranteed and extended
replacement cost policies are designed to protect the policyholder after
a major disaster when the high demand for building contractors and
materials can push up the normal cost of reconstruction.
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FACULTATIVE REINSURANCE |
A
reinsurance policy that provides an insurer with coverage for specific
individual risks that are unusual or so large that they aren’t covered
in the insurance company's reinsurance treaties. This can include
policies for jumbo jets or oil rigs. Reinsurers have no obligation to
take on facultative reinsurance, but can assess each risk individually.
By contrast, under treaty reinsurance, the reinsurer agrees to assume a
certain percentage of entire classes of business, such as various kinds
of auto, up to preset limits.
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| FAIR
ACCESS TO INSURANCE REQUIREMENTS PLANS / FAIR PLANS |
Insurance
pools that sell property insurance to people who can’t buy it in the
voluntary market because of high risk over which they may have no
control. FAIR Plans, which exist in 28 states and the District of
Columbia, insure fire, vandalism, riot, and windstorm losses, and some
sell homeowners insurance which includes liability. Plans vary by state,
but all require property insurers licensed in a state to participate in
the pool and share in the profits and losses. (See
Residual market)
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FARMOWNERS-RANCHOWNERS INSURANCE |
Package
policy that protects the policyholder against named perils and
liabilities and usually covers homes and their contents, along with
barns, stables, and other structures.
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| FEDERAL
FUNDS |
Reserve
balances that depository institutions lend each other, usually on an
overnight basis. In addition, Federal funds include certain other kinds
of borrowings by depository institutions from each other and from
federal agencies.
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| FEDERAL
INSURANCE ADMINISTRATION / FIA |
Federal
agency in charge of administering the National Flood Insurance Program.
It does not regulate the insurance industry.
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| FEDERAL
RESERVE BOARD |
Seven-member board that supervises the banking system by issuing
regulations controlling bank holding companies and federal laws over the
banking industry. It also controls and oversees the U.S. monetary system
and credit supply.
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| FIDELITY
BOND |
A form of
protection that covers policyholders for losses that they incur as a
result of fraudulent acts by specified individuals. It usually insures a
business for losses caused by the dishonest acts of its employees.
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FIDUCIARY BOND |
A type of
surety bond, sometimes called a probate bond, which is required of
certain fiduciaries, such as executors and trustees, that guarantees the
performance of their responsibilities.
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FIDUCIARY LIABILITY |
Legal
responsibility of a fiduciary to safeguard assets of beneficiaries. A
fiduciary, for example a pension fund manager, is required to manage
investments held in trust in the best interest of beneficiaries.
Fiduciary liability insurance covers breaches of fiduciary duty such as
misstatements or misleading statements, errors and omissions.
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FILE-AND-USE STATES |
States
where insurers must file rate changes with their regulators, but don’t
have to wait for approval to put them into effect.
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FINANCIAL GUARANTEE INSURANCE |
Covers
losses from specific financial transactions and guarantees that
investors in debt instruments, such as municipal bonds, receive timely
payment of principal and interest if there is a default. Raises the
credit rating of debt to which the guarantee is attached. Investment
bankers who sell asset-backed securities, securities backed by loan
portfolios, use this insurance to enhance marketability. (See
Municipal bond insurance)
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FINANCIAL RESPONSIBILITY LAW |
A state law
requiring that all automobile drivers show proof that they can pay
damages up to a minimum amount if involved in an auto accident. Varies
from state to state but can be met by carrying a minimum amount of auto
liability insurance. (See
Compulsory auto insurance)
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| FINITE
RISK REINSURANCE |
Contract
under which the ultimate liability of the reinsurer is capped and on
which anticipated investment income is expressly acknowledged as an
underwriting component. Also known as Financial Reinsurance because this
type of coverage is often bought to improve the balance sheet effects of
statutory accounting principles.
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| FIRE
INSURANCE |
Coverage
protecting property against losses caused by a fire or lightning that is
usually included in homeowners or commercial multiple peril policies.
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FIRST-PARTY COVERAGE |
Coverage
for the policyholder’s own property or person. In no-fault auto
insurance it pays for the cost of injuries. In no-fault states with the
broadest coverage, the personal injury protection (PIP) part of the
policy pays for medical care, lost income, funeral expenses and, where
the injured person is not able to provide services such as child care,
for substitute services. (See
No-fault;
Third-party coverage)
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| FIXED
ANNUITY |
An annuity
that guarantees a specific rate of return. In the case of a deferred
annuity, a minimum rate of interest is guaranteed during the savings
phase. During the payment phase, a fixed amount of income, paid on a
regular schedule, is guaranteed.
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| FLOATER |
Attached to
a homeowners policy, a floater insures movable property, covering losses
wherever they may occur. Among the items often insured with a floater
are expensive jewelry, musical instruments, and furs. It provides
broader coverage than a regular homeowners policy for these items.
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| FLOOD
INSURANCE |
Coverage
for flood damage is available from the federal government under the
National Flood Insurance Program but is sold by licensed insurance
agents. Flood coverage is excluded under homeowners policies and many
commercial property policies. However, flood damage is covered under the
comprehensive portion of an auto insurance policy. (See
Adverse selection)
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| FORCED
PLACE INSURANCE |
Insurance
purchased by a bank or creditor on an uninsured debtor’s behalf so if
the property is damaged, funding is available to repair it.
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| FOREIGN
INSURANCE COMPANY |
Name given
to an insurance company based in one state by the other states in which
it does business.
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| FRAUD |
Intentional
lying or concealment by policyholders to obtain payment of an insurance
claim that would otherwise not be paid, or lying or misrepresentation by
the insurance company managers, employees, agents, and brokers for
financial gain.
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FREE-LOOK PERIOD |
A period of
up to one month during which the purchaser of an annuity can cancel the
contract with no penalty. Rules vary by state.
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FREQUENCY |
Number of
times a loss occurs. One of the criteria used in calculating premium
rates.
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| FRONTING |
A procedure
in which a primary insurer acts as the insurer of record by issuing a
policy, but then passes the entire risk to a reinsurer in exchange for a
commission. Often, the fronting insurer is licensed to do business in a
state or country where the risk is located, but the reinsurer is not.
The reinsurer in this scenario is often a captive or an independent
insurance company that cannot sell insurance directly in a particular
country.
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| FUTURES |
Agreement
to buy a security for a set price at a certain date. Futures contracts
usually involve commodities, indexes or financial futures.
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| GAP
INSURANCE |
An
automobile insurance option, available in some states, that covers the
difference between a car’s actual cash value when it is stolen or
wrecked and the amount the consumer owes the leasing or finance company.
Mainly used for leased cars. (See
Actual cash value)
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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES/GAAP |
Generally
accepted accounting principles (GAAP) accounting is used in financial
statements that publicly-held companies prepare for the Securities and
Exchange Commission. (See
Statutory accounting principles / SAP)
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| GENERIC
AUTO PARTS |
Auto crash
parts produced by firms that are not associated with car manufacturers.
Insurers consider these parts, when certified, at least as good as those
that come from the original equipment manufacturer (OEM). They are often
cheaper than the identical part produced by the OEM. (See
Crash parts;
Aftermarket parts;
Competitive replacement parts;
Original equipment manufacturer parts / OEM)
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| GLASS
INSURANCE |
Coverage
for glass breakage caused by all risks; fire and war are sometimes
excluded. Insurance can be bought for windows, structural glass, leaded
glass, and mirrors. Available with or without a deductible.
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GRADUATED DRIVER LICENSES |
Licenses
for younger drivers that allow them to improve their skills. Regulations
vary by state, but often restrict night time driving. Young drivers
receive a learner’s permit, followed by a provisional license, before
they can receive a standard drivers license.
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GRAMM-LEACH-BLILEY ACT |
Financial
services legislation, passed by Congress in 1999, that removed
Depression-era prohibitions against the combination of commercial
banking and investment-banking activities. It allows insurance
companies, banks, and securities firms to engage in each others’
activities and own one another.
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| GROUP
INSURANCE |
A single
policy covering a group of individuals, usually employees of the same
company or members of the same association and their dependents.
Coverage occurs under a master policy issued to the employer or
association.
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GUARANTEE PERIOD |
Period
during which the level of interest specified under a fixed annuity is
guaranteed.
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GUARANTEED DEATH BENEFIT |
Basic death
benefits guaranteed under variable annuity contracts.
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GUARANTEED INCOME CONTRACT / GIC |
Often an
option in an employer-sponsored retirement savings plan. Contract
between an insurance company and the plan that guarantees a stated rate
of return on invested capital over the life of the contract.
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GUARANTEED LIVING BENEFIT |
A guarantee
in a variable annuity that a certain level of annuity payment will be
maintained. Serves as a protection against investment risks. Several
types exists.
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GUARANTEED REPLACEMENT COST COVERAGE |
Homeowners
policy that pays the full cost of replacing or repairing a damaged or
destroyed home, even if it is above the policy limit. (See
Extended replacement cost coverage)
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| GUARANTY
FUND |
The
mechanism by which solvent insurers ensure that some of the policyholder
and third party claims against insurance companies that fail are paid.
Such funds are required in all 50 states, the District of Columbia and
Puerto Rico, but the type and amount of claim covered by the fund varies
from state to state. Some states pay policyholders’ unearned premiums –
the portion of the premium for which no coverage was provided because
the company was insolvent. Some have deductibles. Most states have no
limits on workers compensation payments. Guaranty funds are supported by
assessments on insurers doing business in the state.
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| GUN
LIABILITY |
A new legal
concept that holds gun manufacturers liable for the cost of injuries
caused by guns. Several cities have filed lawsuits based on this
concept.
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