A compilation of the most common insurance and risk management terms.
- Aggregate Limit of Liability
An Aggregate Limit of Liability is an insurance contract provision limiting the maximum liability of an insurer for a series of losses in a given time period — for example, a year or for the entire period of the contract. It’s also sometimes referred to an “annual aggregate limit.”
- Allocated Loss Adjustment Expense (ALAE)
An ALAE refers to loss adjustment expenses that are assignable or allocable to specific claims. Fees paid to outside lawyers, experts, and investigators used to defend claims are examples of ALAE. See LAE below.
- Basic Rate
Basic Rate is pretty much just what it says — the manual rate shown in an insurer’s rate manual at basic limits, before adjustment for such factors as increased limit of liability. Since the advent of loss cost rating, this term is somewhat obsolete as respects rating manuals published by independent rating organizations.
- Business Owner’s Policy (BOP)
A Business Owner’s Policy is a package policy that provides both property and liability coverage for eligible small businesses. BOPs are written on special coverage forms that are generally very similar to their monoline property and liability form counterparts. But they typically have some unique features that make them especially advantageous for businesses that qualify.
A Claim refers to a demand received by an insured for money or services, or the service of a suit or the initiation of an arbitration proceeding against the insured that seeks damages arising out of a wrongful act. It also includes any wrongful act of which an insured is aware and which the insured knows, or should reasonably have known, might give rise to a demand for money or services, or the service of suit or arbitration proceeding against an insured.
- Claim Expenses
All reasonable legal fees, costs and expenses incurred by the Company or at the Company’s direction in the investigation, adjustment, defense or appeal of any Claim to which our Policy applies, provided they include expenses that the Company is required to pay, as applicable such as appeal bonds or the cost to furnish a lawyer as independent counsel, etc.
- Claims-Made Policy
A Claims-Made Policy provides coverage that is triggered when a claim is made against the insured during the policy period, regardless of when the wrongful act that gave rise to the claim took place. The one exception is when a retroactive date is applicable to a Claims-Made Policy. In such instances, the wrongful act that gave rise to the claim must have taken place on or after the retroactive date. Most professional, errors and omissions (E&O), directors and officers (D&O), and employment practices liability insurance (EPLI) are written as Claims-Made Policies.
- Commercial General Liability (CGL) Policy
A Commercial General Liability (CGL) Policy is a standard insurance policy issued to business organizations to protect them against liability claims for bodily injury (BI) and property damage (PD) arising out of premises, operations, products, and completed operations, and advertising and personal injury (PI) liability.
- Consent to Settlement Clause
A Consent to Settlement Clause is a provision (also known as the “hammer clause” and “blackmail settlement clause”) found in professional liability insurance policies that requires an insurer to seek an insured’s approval prior to settling a claim for a specific amount. However, if the insured does not approve the recommended figure, the consent to settlement clause states that the insurer will not be liable for any additional monies required to settle the claim or for the defense costs that accrue from the point after the insurer makes the settlement recommendation.
Damages include all sums which an insured is legally obligated to pay for any claim to which the policy applies, including judgements, settlements, final arbitration awards, and any taxes, fines or penalties incurred by a third party.
Deductible refers to the amount the insured must pay for damages and or claim expenses.
- What is included in Defense Within the Limits?
Defense Within the Limits is a liability policy provision in which amounts paid by the insurer to defend the insured against a claim or suit reduce the policy’s applicable limit of insurance. Defense within the limits is more common in professional liability policies.
- Defense Outside the Limits
Defense Outside the Limits does not erode the policy limits for settlement of an insurance claim. However, the benefit of the defense payment may offer an additional limit.
- Disciplinary Proceeding
Disciplinary Proceeding is a proceeding brought against an insured by a regulatory or disciplinary agency or official to investigate charges alleging professional misconduct in the performance of professional services.
- Engagement Letter
An Engagement Letter is one written by a professional, most often an accountant or lawyer, stating the scope of work that will be performed for a given client with regard to a specific project. Engagement letters are important because they establish the nature and scope of work a professional has agreed to provide. Deviation from what is stated in an engagement letter often forms the basis for a claim against the professional.
- Errors and Omissions (E&O) Insurance
Errors and Omissions (E&O) Insurance protects the insured against liability for committing an error or omission in performance of professional duties. Generally, such policies are designed to cover financial losses rather than liability for bodily injury (BI) and property damage (PD).
Exclusions are a provision of an insurance policy or bond referring to hazards, perils, circumstances, or property not covered by the policy. Exclusions are usually contained in the coverage form or causes of loss form used to construct the insurance policy.
- Extended Reporting Period
An Extended Reporting Period is the period of time after the end of the policy period during which claims involving wrongful acts committed prior to the end of the policy period may be reported, in accordance with all other policy provisions. This is also known as Tail Coverage.
- First Dollar Defense
First Dollar Defense is a coverage feature of liability policies in which retentions do not apply to defense costs, even if no indemnity payments are made in conjunction with a claim. Thus, if an insurer were to expend $10,000 on defense of a claim and nothing for indemnity, the insured would not be required to pay any out-of-pocket costs for defense.
- Full Prior Acts Coverage
Full Prior Acts Coverage refers to a type of claims-made liability policy that does not contain a retroactive date and therefore covers claims arising from acts that took place at any time prior to the inception date of the policy — regardless of how far in the past.For example, assume that an insured has a claims-made policy that includes a January 1, 2000, retroactive date and a January 1, 2014-15, term. If a claim is made against the insured on July 1, 2014 and the claim arose from a wrongful act that took place on January 1, 1998, there would be no coverage under the policy. This is because the wrongful act took place prior to the January 1, 2000, retroactive date.Now assume that another insured has a policy written with the same January 1, 2014-15, policy term, but the policy contains no retroactive date.If a claim were made against the insured on July 1, 2014, from a wrongful act that took place on January 1, 1998, coverage would apply because the absence of a retroactive date means that regardless of how far in the past a wrongful act giving rise to a claim took place, the claim will be covered (as long as it is made against the insured during the policy period).Full prior acts coverage is most likely to be granted when an applicant already has coverage in place at the time it submits an application.On the other hand, underwriters generally do not provide full prior acts coverage to insureds that have not previously purchased liability insurance. This is because underwriters sometimes believe that an applicant’s desire to buy coverage at this juncture may be motivated by the applicant’s intention to report a claim under the new policy.
Insurance refers to a contractual relationship that exists when one party (the insurer) for a consideration (the premium) agrees to reimburse another party (the insured) for loss to a specified subject (the risk) caused by designated contingencies (hazards or perils).
Insured refers to the person designated as the named insured (but only with respect to the conduct of a law practice, of which the person is a solo practitioner), or the partnership, professional corporation, association, limited liability corporation designated as the named insured in the declarations.
- Liability Insurance
Liability Insurance is the insurance paying or rendering service on behalf of an insured for loss arising out of legal liability to others.
- Limits of Liability
Limits of Liability refers to the maximum amount that will be paid by the insurer in the event of a covered loss under an insurance policy.
- Loss Adjustment Expense (LAE)
A Loss Adjustment Expense (LAE) is the cost of investigating and adjusting losses. LAEs need not be allocated to a particular claim. If they are allocated to a particular claim, they are called “allocated loss adjustment expenses” (ALAE); otherwise, they are unallocated loss adjustment expenses (ULAE).
- Mutual Company
A Mutual Company is a corporation owned and operated by and for its insureds. Every owner of the company is an insured; every insured is an owner.
- Named Insured
Named Insured refers to any person, firm, or organization, or any of its members specifically designated by name as an insured(s) in an insurance policy, as distinguished from others that, although unnamed, fall within the policy definition of an “insured.”
- Name Partner
A Name Partner is a principal of the firm whose name appears in the firm’s legal name.
- Occurrence Policy
An Occurrence Policy is a policy covering claims that arise out of damage or injury that took place during the policy period, regardless of when claims are made. Most commercial general liability (CGL) insurance is written on an occurrence form. Contrast with Claims-made coverage trigger; Claims-made policy.
- Policy Period
A Policy Period is the period of time from the effective date of the policy to the expiration date or, if earlier, the date upon which the cancellation of the policy takes effect but does not include any extended reporting period.
- Policy Conditions
Policy Conditions refers to the section of an insurance policy that identifies general requirements of an insured and the insurer on matters such as loss reporting and settlement, property valuation, other insurance, subrogation rights, and cancellation and nonrenewal. The policy conditions are usually stipulated in the coverage form of the insurance policy.
- Predecessor Firm
A Predecessor Firm refers to any law firm which, prior to the effective date of the policy is dissolved and from which the named insured has retained at least 50% of the lawyers who were owners, partners, associates, employees or shareholders, or any firm which qualified as a predecessor firm under a policy previously issued by the Company immediately preceding this Policy.
- Pre-Judgment Interest
Pre-Judgment Interest refers to interest accruing on the amount of a legal award from the time of the injury or damage to the time the judgment is entered by the court. Pre-judgment interest, when awarded as part of a judgment against the insured, is covered by the supplementary payments provision of standard general liability policies.
- Prior Acts Date
Prior Acts Date refers to the first date on or after which a wrongful act giving rise to a claim may be covered during the policy period.
- Private Practice of Law
Private Practice of Law refers to professional services rendered by an insured as solo practitioner or as a lawyer of the named insured.
- Professional Liability
Professional Liability is a type of liability coverage designed to protect traditional professionals (e.g. accountants, lawyers) and quasi-professionals (e.g. real estate brokers, consultants) against liability incurred as a result of errors and omissions in performing their professional services.Although there are a few exceptions (e.g., physicians, architects, and engineers), most professional liability policies only cover economic or financial losses suffered by third parties, as opposed to bodily injury (BI) and property damage (PD) claims. This is because the latter two types of loss are typically covered under commercial general liability (CGL) policies. The vast majority of professional liability policies are written with claims-made coverage triggers.
- RDI Coverage
RDI Coverage (retrodate and policy inception date) is a provision found in many claims-made policies that eliminates coverage for claims produced by wrongful acts that took place prior to a specified date, even if the claim is first made during the policy period.For example, a January 1, 2010 retroactive date in a policy written with a January 1, 2010-2011, term would bar coverage for claims resulting from wrongful acts that took place prior to January 1, 2010, even if claims (resulting from such acts) are made against the insured during the January 1, 2010-2011 policy period.There are two purposes of retroactive dates: (1) to eliminate coverage for situations or incidents known to insureds that have the potential to give rise to claims in the future and (2) to preclude coverage for “stale” claims that arise from events far in the past, even if such events are unknown to the insured.In the former case, the retroactive date preserves the principle of “fortuity”—that is, the insurer should not be called upon to cover the so-called burning building. In the latter instance, the retroactive date makes policies more affordable by precluding coverage for events that, while insurable, are remote in time.
- Social Inflation
Social Inflation is the latest buzzword given to the phenomenon of unexpected rising insurance claim costs because of societal trends and views toward litigation. While social inflation as a concept is not new, it recently has become very popular in the insurance press and now appears frequently in the general press.Nearly every insurance company CEO is talking about social inflation and how claims costs are increasing in ways that were not anticipated. Social inflation is similar to any emerging risk, except that social inflation is not an actual risk but a driver of the increased costs to address risks.Like emerging risks, the effects of social inflation may skew reinsurance contracts by significantly altering the economic underpinnings of the reinsurance contract from when originally written.
- Step Rating
Step Rating is an insurance policy that has built-in rate increases that are based on the insured reaching a certain number of years in practice.
Subrogation is the assignment to an insurer by terms of the policy or by law, after payment of a loss, of the rights of the insured to recover the amount of the loss from one legally liable for it.
- Supplementary Payments
Supplementary Payments is a term used in liability policies for the costs associated with the investigation and resolution of claims. They are normally defined to include such items as first aid expenses, premiums for appeal and bail bonds, pre- and post-judgment interest, and reasonable travel expenses incurred by the insured at the insurer’s request when assisting in the defense of a claim. Actual settlements/judgments are considered damages rather than supplementary payments. Lawyers’ fees may be considered as either damages or supplementary payments, depending on the policy.
Underwriting refers to the process of determining whether to accept a risk and, if so, what amount of insurance the company will write on the acceptable risk, and at what rate. Underwriters are companies, individuals, or insurance companies that carry on this critical activity for their own account or for that of others.
- Umbrella Liability Policy
Umbrella Liability Policy is a policy designed to provide protection against catastrophic losses. It generally is written over various primary liability policies, such as the business auto policy (BAP), commercial general liability (CGL) policy, watercraft and aircraft liability policies, and employers liability coverage.The umbrella policy serves three purposes: it provides excess limits when the limits of underlying liability policies are exhausted by the payment of claims; it drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted by the payment of claims; and it provides protection against some claims not covered by the underlying policies, subject to the assumption by the named insured of a self-insured retention (SIR).
- Vicarious Liability
Vicarious Liability is liability on the part of an insured as a result of professional services rendered by a person or entity for whose conduct such insured is legally responsible.
- Workers’ Compensation
Workers’ Compensation refers to the system by which no-fault statutory benefits prescribed in state law are provided by an employer to an employee (or the employee’s family) due to a job-related injury (including death) resulting from an accident or occupational disease.
- Workers’ Compensation and Employers’ Liability Policy
Workers’ Compensation and Employers’ Liability Policy refers to an insurance policy that provides coverage for an employer’s two key exposures arising out of injuries sustained by employees. PartOne of the policy covers the employer’s statutory liabilities under workers compensation laws, and Part Two of the policy covers liability arising out of employees’ work-related injuries that do not fall under the workers’ compensation statute. In most states, the standard workers’ compensation and employers’ liability policy published by the National Council on Compensation Insurance (NCCI) is the required policy form.
- Wrongful Act
Wrongful Act refers to any actual or alleged negligent act, error, or omission in the rendering of or failure to render Professional Services, including Personal Injury, committed by an Insured in the course of rendering Professional Services; or any actual or alleged negligent act, error or omission in an Insured’s capacity as a director or officer of any bar-related professional legal association or the governing board thereof.