INSURED – A person or a corporation who contracts for an insurance policy that indemnifies (protects) him against loss or damage to property or, in the case of a liability policy, defend him against a claim from a third party.

NAMED INSURED – Any person, firm or corporation specifically designated by name as an insured(s) in a policy as distinguished from others who, though unnamed, are protected under some circumstances. For example, a common application of this latter principle is in auto liability policies wherein by a definition of “insured”, coverage is extended to other drivers using the car with the permission of the named insured. Other parties can also be afforded protection of an insurance policy by being named an “additional insured” in the policy or endorsement.

ADDITIONAL INSURED – An individual or entity that is not automatically included as an insured under the policy of another, but for whom the named insureds policy provides a certain degree of protection. An endorsement is typically required to effect additional insured status. The named insureds impetus for providing additional insured status to others may be a desire to protect the other party because of a close relationship with that party (e.g., employees or members of an insured club) or to comply with a contractual agreement requiring the named insured to do so (e.g., customers or owners of property leased by the named insured).

CO-INSURANCE - The sharing of one insurance policy or risk between two or more insurance companies. This usually entails each insurer paying directly to the insured their respective share of the loss. Co-insurance can also be the arrangement by which the insured, in consideration of a reduced rate, agrees to carry an amount of insurance equal to a percentage of the total value of the property insured. An example is if you have guaranteed to carry insurance up to 80% or 90% of the value of your building and/or contents, whatever the case may be. If you don’t, the company pays claims only in proportion to the amount of coverage you do carry.

The following equation is used to determine what amount may be collected for partial loss:

Amount of Insurance Carried x Loss

Amount of Insurance that = Payment

Should be Carried

Example A Mr. Right has an 80% co-insurance clause and the following situation:

$100,000 building value

$ 80,000 insurance carried

$ 10,000 building loss

By applying the equation for determining payment for partial loss, the following amount may be collected:

$80,000 x $10,000 = $10,000

$80,000

Mr. Right recovers the full amount of his loss because he carried the coverage specified in his co-insurance clause.

Example B Mr. Wrong has an 80% co-insurance clause and the following situation:

$100,000 building value

$ 70,000 insurance carried

$ 10,000 building loss

By applying the equation for determining payment for partial loss, the following amount may be collected:

$70,000 x $10,000 = $8,750

$80,000

Mr. Wrong’s loss of $10,000 is greater than the company’s limit of liability under his co-insurance clause. Therefore, Mr. Wrong becomes a self-insurer for the balance of the loss– $1,250.

PREMIUM – The amount of money paid by an insured to an insurer for insurance coverage.

DEDUCTIBLE – The first dollar amount of a loss for which the insured is responsible before benefits are paid by the insurer; similar to a self-insured retention (SIR). The insurer’s liability begins when the deductible is exhausted.

SELF INSURED RETENTION - Acts the same way as a deductible but the insured is responsible for all legal fees incurred in relation to the amount of the SIR.

POLICY LIMIT - The maximum monetary amount an insurance company is responsible for to the insured under its policy of insurance.

FIRST PARTY INSURANCE - Insurance that applies to coverage for an insureds own property or a person. Traditionally it covers damage to insureds property from whatever causes are covered in the policy. It is property insurance coverage. An example of first party insurance is BUILDERS RISK INSURANCE which is insurance against loss to the rigs or vessels in the course of their construction. It only involves the insurance company and the owner of the rig and/or the contractor who has a financial interest in the rig.

THIRD PARTY INSURANCE - Liability insurance covering the negligent acts of the insured against claims from a third party (i.e., not the insured or the insurance company – a third party to the insurance policy). An example of this insurance would be SHIP REPAIRER’S LEGAL LIABILITY (SRLL) – provides protection for contractors repairing or altering a customer’s vessel at their shipyard, other locations or at sea; also covers the insured while the customer’s property is under the “Care, Custody and Control” of the insured. A Commercial General Liability policy is needed for other coverages, such as slip-and-fall situations.

INSURABLE INTEREST - Any interest in something that is the subject of an insurance policy or any legal relationship to that subject that will trigger a certain event causing monetary loss to the insured. Example of insurable interest – ownership of a piece of property or an interest in that piece of property, e.g., a shipyard constructing a rig or vessel. (See BUILDERS RISK above)

LIABILITY INSURANCE - Insurance coverage that protects an insured against claims made by third parties for damage to their property or person. These losses usually come about as a result of negligence of the insured. In marine construction this policy is referred to an MGL, marine general liability policy. In non marine circumstances the policy is referred to as a CGL, commercial general liability policy. Insurance policies can be divided into two broad categories:

First party insurance covers the property of the person who purchases the insurance policy. For example, a home owner’s policy promising to pay for fire damage to the home owner’s home is a first party policy. Liability insurance, sometimes called third party insurance, covers the policy holder’s liability to other people. For example, a homeowners’ policy might cover liability if someone trips and falls on the home owner’s property. Sometimes one policy, such as in these examples, may have both first and third party coverage.
Liability insurance provides two separate benefits. First, the policy will cover the damage incurred by the third party. Sometimes this is called providing “indemnity” for the loss. Second, most liability policies provide a duty to defend. The duty to defend requires the insurance company to pay for lawyers, expert witnesses, and court costs to defend the third party’s claim. These costs can sometimes be substantial and should not be ignored when facing a liability claim.

UMBRELLA LIABILITY COVERAGE - This type of liability insurance provides excess liability protection. Your business needs this coverage for the following three reasons:

It provides excess coverage over the “underlying” liability insurance you carry.
It provides coverage for all other liability exposures, excepting a few specifically excluded exposures. This subject to a large deductible of about $10,000 to $25,000.
It provides automatic replacement coverage for underlying policies that have been reduced or exhausted by loss.

NEGLIGENCE – The failure to use reasonable care. The doing of something which a reasonably prudent person would not do, or the failure to do something which a reasonably prudent person would do under like circumstances. Negligence is a ‘legal cause’ of damage if it directly and in natural and continuous sequence produces or contributes substantially to producing such damage, so it can reasonably be said that if not for the negligence, the loss, injury or damage would not have occurred.

GROSS NEGLIGENCE - A carelessness and reckless disregard for the safety or lives of others, which is so great it appears to be almost a conscious violation of other people’s rights to safety. It is more than simple negligence, but it is just short of being willful misconduct. If gross negligence is found by the trier of fact (judge or jury), it can result in the award of punitive damages on top of general and special damages, in certain jurisdictions.

WILLFUL MISCONDUCT – An intentional action with knowledge of its potential to cause serious injury or with a reckless disregard for the consequences of such act.

PRODUCT LIABILITY – Liability which results when a product is negligently manufactured and sent into the stream of commence. A liability that arises from the failure of a manufacturer to properly manufacture, test or warn about a manufactured object.

MANUFACTURING DEFECTS – When the product departs from its intended design, even if all possible care was exercised.

DESIGN DEFECTS – When the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design, and failure to use the alternative design renders the product not reasonably safe.

INADEQUATE INSTRUCTIONS OR WARNINGS DEFECTS – When the foreseeable risks of harm posed by the product could have been reduced or avoided by reasonable instructions or warnings, and their omission renders the product not reasonably safe.

PROFESSIONAL LIABILITY INSURANCE – Liability insurance to indemnify professionals, (doctors, lawyers, architects, engineers, etc.,) for loss or expense which the insured professional shall become legally obliged to pay as damages arising out of any professional negligent act, error or omission in rendering or failing to render professional services by the insured. Same as malpractice insurance.

Professional Liability has expanded over the years to include those occupations in which special knowledge, skills and close client relationships are paramount. More and more occupations are considered professional occupations, as the trend in business continues to grow from a manufacturing-based economy to a service-oriented economy. Coupled with the litigious nature of our society, the companies and staff in the service economy are subject to greater exposure to malpractice claims than ever before.

ERRORS AND OMISSIONS – Same as malpractice or professional liability insurance.

HOLD HARMLESS AGREEMENT - A contractual arrangement whereby one party assumes the liability inherent in the situation, thereby relieving the other party of responsibility. For example, a lease of premises may provide that the lessee must “hold harmless” the lessor for any liability from accidents arising out of the premises.

INDEMNIFY – To restore the victim of a loss, in whole or in part, by payment, repair, or replacement.

INDEMNITY AGREEMENTS – Contract clauses that identify who is to be responsible if liabilities arise and often transfer one party’s liability for his or her wrongful acts to the other party.

WARRANTY – An agreement between a buyer and a seller of goods or services detailing the conditions under which the seller will make repairs or fix problems without cost to the buyer.

Warranties can be either expressed or implied. An EXPRESS WARRANTY is a guarantee made by the seller of the goods which expressly states one of the conditions attached to the sale e.g.,”This item is guaranteed against defects in construction for one year”.

An IMPLIED WARRANTY is usual in common law jurisdictions and attached to the sale of goods by operation of law made on behalf of the manufacturer. These warranties are not usually in writing. Common implied warranties are a warranty of fitness for use (implied by law that if a seller knows the particular purpose for which the item is purchased certain guarantees are implied) and a warranty of merchantability (a warranty implied by law that the goods are reasonably fit for the general purpose for which they are sold).

DAMAGES OR LOSS – The monetary consequence which results from injury to a thing or a person.

CONSEQUENTIAL DAMAGES – As opposed to direct loss or damage — is indirect loss or damage resulting from loss or damage caused by a covered peril, such as fire or windstorm. In the case of loss caused where windstorm is a covered peril, if a tree is blown down and cuts electricity used to power a freezer and the food in the freezer spoils, if the insurance policy extends coverage for consequential loss or damage then the food spoilage would be a covered loss. Business Interruption insurance, extends consequential loss or damage coverage for such items as extra expenses, rental value, profits and commissions, etc.

LIQUIDATED DAMAGES – Are a payment agreed to by the parties of a contract to satisfy portions of the agreement which were not performed. In some cases liquidated damages may be the forfeiture of a deposit or a down payment, or liquidated damages may be a percentage of the value of the contract, based on the percentage of work uncompleted. Liquidated damages are often paid in lieu of a lawsuit, although court action may be required in many cases where liquidated damages are sought. Liquidated damages, as opposed to a penalty, are sometimes paid when there is uncertainty as to the actual monetary loss involved. The payment of liquidated damages relieves the party in breech of a contract of the obligation to perform the balance of the contract.

SUBROGATION – “To stand in the place of” Usually found in property policies (first party) when an insurance company pays a loss to an insured or damaged to the insureds property, the insurer stands in the shoes of the insured and may pursue any third party who might be responsible for the loss. For example, if a defective component is sold to a manufacturer to be used in his product and that product is damaged due to the defective component. The insurance company who pays the loss to the manufacturer of the product may sue the manufacturer of the defective component.

Subrogation has a number of sub-principles namely:

The insurer cannot be subrogated to the insureds right of action until it has paid the insured and made good the loss.
The insurer can be subrogated only to actions which the insured would have brought himself.
The insured must not prejudice the insurer’s right of subrogation. Thus, the insured may not compromise or renounce any right of action he has against the third party if by doing so he could diminish the insurer’s right of recovery.
Subrogation against the insurer. Just as the insured cannot profit from his loss the insurer may not make a profit from the subrogation rights. The insurer is only entitled to recover the exact amount they paid as indemnity, and nothing more. If they recover more, the balance should be given to the insured.
Subrogation gives the insurer the right of salvage.

About this Author

In its history of providing insurance services to its clients for over thirty years, Nausch Hogan & Murray has provided coverage for all areas of liability – both on land and at sea.

Over the years Nausch Hogan & Murray has found it helpful to draft a glossary of useful insurance terms that come up time and again in discussions with an insured concerning their coverage needs. We hope these help you as well.