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Important Insurance Terms: Explained

Understanding the key insurance terms used can help to ensure you are making an informed decision. Your insurance broker will also be able to further explain these definitions and how they relate to your own circumstances.

Act of God
An act of God (also known as a ‘Force Majeure’) refers to a natural catastrophe that could not have been prevented and outside human control, such as a flood, earthquake, or tsunami.

Adjustor
An adjustor (also known as a Claims Adjustor) is a person who investigates claims to determine the true extent of the insurer’s liability. An adjustor may also make recommendations on the amount to be paid on a claim.

Arbitration
Arbitration describes the system that manages legal disputes between the insured and the insurer – often through a private tribunal outside of the courts.

Broadform
Broadform is a type of insurance that extends beyond the basic coverage and can apply to almost any kind of asset. It usually includes rare events that may be of serious risk to the insured.

Business Pack
A business pack is a combination of multiple different policies. A business pack policy typically includes public liability insurance, product liability insurance, and general property insurance, but will vary depending on the insurer.

Cedant
A cedant is an insurer that transfers a risk or exposure from a policy to another insurer under a reinsurance agreement.

Certificate of Currency
A certificate of currency is a document that shows that the insured is currently covered, the date range they are covered for, and the total sum insured. They are also known as a Certificate of Insurance.

Claim
A claim is essentially a formalised request to the insurer from the insured, asking for compensation based on the terms of their insurance policy.

Cover Note
A cover note is a temporary document issued by an insurer that provides coverage until the final documents are issued to the insured. They are also known as an Interim Contract of Insurance under Section 38 of the Insurance Contracts Act.

Deductible
A deductible represents the contribution the insured is required to pay towards a claim. A deductible is sometimes referred to as ‘excess’.

Dispute Resolution Process
Any Australian Financial Services License (AFSL) holders are required to have a dispute resolution process in place. The process must include both an Internal Dispute Resolution system and an External Dispute Resolution system.

Duty of Disclosure
The insured’s duty of disclosure means that when the insured applies for insurance, they must disclose all relevant information to the insurer before entering the contract.

Endorsement
An endorsement is a document that reflects an amendment or an addition to an existing insurance policy. An endorsement typically alters the terms of the insurance policy.

Financial Services Guide
The Financial Services Guide (FSG) provides an overview of services and products offered by a financial institution, and aims to help the insured decide whether or not to utilise any of those products or services.

Excess
An excess represents the contribution the insured is required to pay towards a claim. Generally, if the insured pays a higher excess then the premiums will be reduced, as more of the risks are absorbed by the insured.

Exclusions
An exclusion is a provision in an insurance policy that removes coverage for certain types of risk. Exclusions may vary between policies and are at the discretion of the insurer. Exclusions are typically found in the insurance policy wording.

Fortuitous Loss
A fortuitous loss is any loss that is unforeseen or unexpected that happens by chance. It indicates that a loss is beyond the control of and could not have been anticipated by the insured.

Gross Premium
The gross premium is the sum of the net premium, any commissions, operating expenses and other expenses.

Insurer
An insurer (also known as an underwriter) is an entity that the insured transfers nominated risks to. The insurer receives premiums in exchange for absorbing these risks, and gives the insured compensation according to the policy.

Insurance Broker
An insurance broker is enlisted to help identify any potential risks associated with the insured’s business. They then negotiate competitive premiums with the insurer and may also assist with technical advice in the case that a claim arises.

Liability
Liability refers to the responsibility for the consequences of certain actions or omissions by the insured, an employee or the organisation.

Limit
A limit refers to the maximum amount that an insurer will pay for any covered losses over the period of the policy.

Loss
A loss is another word used by insurers to describe a claim.

Loss Ratio
The loss ratio is the difference between the premiums paid to an insurer and the claims paid by the insurer, usually expressed as a percentage.

Non-disclosure
Non-disclosure is the practice of not making information known to an insurer, that would have impacted the policy or coverage provided. The insured must always disclose any facts to the insurer that are relevant to the risk for which they are seeking cover.

Policy Schedule
A policy schedule (also known as a schedule of insurance) outlines the cover that will be provided in a policy. It typically shows the limits, excess, sums insured, dates of coverage, and details of the policyholder.

Policy Wording
Policy wording is the terms and conditions of coverage as defined in the insurance policy document.

Premium
The premium is the fee the insured pays to the insurer for taking on their risk.

Product Disclosure Statement
The Product Disclosure Statement is a disclosure document issued by an insurer, which ASIC states ‘must include information about the product’s key features, fees, commissions, benefits, risks and the complaints handling procedure’.

Reinsurance
Reinsurance is the practice of transferring part or all portions of risk to other parties. This helps insurers recover some or the entire amount they pay to claimants – it is often described as insurance for the insurers.

Risk
Risk refers to the likelihood that a particular event will occur. Often the probability of an event occurring is known (for example, a fire burning down a building) but the actual mode of the event is not (if the fire will definitely happen in that particular building).

Run-off
Run off insurance is purchased by companies that are either being acquired, merging, or ceasing operation. It provides liability coverage against any future claims against the directors or officers of the company.

Sum Insured
The sum insured is the maximum amount an insurer will pay in case of an event leading to a loss. Another term used to describe the sum insured is the limit of liability.

Underwriter
An underwriter determines whether an insurance agency should absorb the risk of insuring a particular client, and if so what the cost of the premium should be. An underwriter can be a business or a person.

Void
Something that is void is considered to not be valid or legally binding.

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