Insurance professionals will humbly admit that insurance policies are tough to read and understand, especially for those not in the industry. Policy language is more simple than in the past, but, the industry relies on many of the same words and phrases used decades ago. The meanings of these words have been hashed, rehashed and litigated. They are difficult to challenge as they have so much legal history behind them.
The National Association of Insurance Commissioners advocates understanding your insurance policy as an important consumer tool. As certain words will likely remain in your policies for years to come, we offer help with 10 insurance terms and their meanings.
1. Named Insured
When you purchase an auto or property policy, you become the “named insured.” Your name is listed on your Declarations Page and when your policy mentions “you” or “your” to warn of critical rights and duties, it is speaking to you and your spouse. Life insurance policies use the term “Owner” in a similar way.
2. Insurable Interest
Insurable interest is your financial stake in real or personal property. No matter how much insurance you purchase, you will receive no more than your financial interest. This may occur when you owe a lienholder or mortgage-holder more money than the value of your damaged property. You must also have an insurable interest to insure another person’s life.
The word “liability” appears numerous times throughout insurance policies – 65 times in the HO-3. It’s confusing because it has two meanings. Liability describes your insurance company’s legal duties and responsibilities to “You” as a named insured. It also refers to your legal responsibilities to others and the coverage for those exposures.
Your insurance company pays a claim only after the dollar value exceeds the deductible amount listed on your Declarations Page. Some commercial coverages have percentage-of-loss deductibles and time-based deductibles where coverage kicks in after a waiting period.
To make insurance coverage affordable, some perils, properties, and situations must be excluded from coverage. Exclusions are listed in policy “Exclusions” sections and scattered throughout your policies.
6. Replacement Cost
Replacement cost coverage in most policies applies to your building only and only if you meet policy conditions. You must insure your building to at least 80% of its replacement value or your company will apply depreciation to your property settlement.
For an additional cost, some carriers add replacement cost endorsements to your auto or personal property coverage.
7. Actual Cash Value
When your personal property is damaged or destroyed, many policies pay its actual cash value (ACV). This acknowledges that personal property loses value during ordinary use and also due to obsolescence and the availability of newer products and technologies.
Claims adjusters calculate personal property depreciation using average life expectancies. For example, a refrigerator that customarily lasts 10 years would be subject to a 10% percent per year depreciation factor.
9. Like Kind and Quality
Insurance policies are not meant to give you new property for old. When auto adjusters designate like kind and quality parts to repair your older auto, they are attempting to return you to your pre-loss condition. Used parts are one way of accomplishing this LKQ goal.
Insurance policy appraisal provisions outline the insurance company’s preferred method of handling disputes. When a claims adjuster uses the term “appraisal” it can have a different meaning. When an insurance company sends someone out to evaluate the damage to your auto or building, they refer to the process as an appraisal. The finished calculation of damages is also called an appraisal.
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