Basic Concepts
The study of insurance is full of jargon that is unique to the industry. It is important to know
these basic concepts since you will encounter them throughout your study of insurance.
Who
• Insured. Any person organization or company or a member of these specifically
designated by name as the one(s) protected by the insurance policy.
• Insurer. The party to an insurance arrangement who undertakes to indemnify for
losses, provide pecuniary benefits or render services. The word “insurer” is often used
instead of “carrier” or “company” since it is applicable without ambiguity to all types of
individuals or organizations performing the insurance function. The word insurer is
generally used in statutory law.
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What
• Loss. Generally refers to (1) the amount of reduction in the value of an insured’s
property caused by an insured peril, (2) the amount sought through an insured’s claim or
(3) the amount paid on behalf of an insured under an insurance contract
• Exposure. The state of being subject to loss because of some hazard or contingency.
Also used as a measure of the rating units or the premium base of a risk.
• Proximate Cause. The effective cause of loss or damage. It is an unbroken chain of
cause and effect between the occurrence of an insured peril or a negligent act and
resulting injury or damage
• Insuring Agreement (or Clause). That portion of an insurance contract which
states the perils insured against, the persons and/or property covered, their locations
and the period of the contract.
• Claim. A demand made by the insured or the insured’s beneficiary, for payment of the
benefits provided by the contract.
• Indemnify. To restore the victim of a loss to the same position as before the loss
occurred.
• Insurance. A formal social device for reducing risk by transferring the risks of several
individual entities to an insurer. The insurer agrees, for a consideration, to assume, to a
specified extent, the losses suffered by the insured.
• Insurable Events. Any contingent or unknown event, whether past or future, which
may dandify a person having an insurable interest, or create a liability against him, may
be insured against, subject to the provisions of the code.
• Indemnity. To restore the victim of a loss to the same position as before the loss
occurred.
Risk. Uncertainty as to the outcome of an event when two or more possibilities exist.
2) A person or thing insured. There are two specific types of risk that are necessary to
understand:
1. Pure Risk: No chance of gain or profit, and ONLY chance of loss.
Example: The risk of crashing a car and needing to replace it.
2. Speculative Risk: A chance of BOTH a gain or a loss
Example: The risk of gambling at a casino. Someone might win or lose.
NOTE: Speculative risks are NOT insurable.