Insurance Terms You Need to Know

Insurance is confusing, to say the least. Between the legal jargon, fine print, and contractual language, you might be looking at a policy and wondering – “what?” Your lawyer (if you have one) could look at the policy and understand and interpret it, but do you want to pay their billable hours to have them explain it to you colloquially? Maybe…but here is a basic guide to insurance terms to give you some background and context. As an independent business owner, it’s important to understand what your insurance policy covers and what it doesn’t. Your policy may even cover situations or events that you would not expect or know about.

Here is a glossary of some of the most common insurance words, explained:

Actual Cash Value: the value of an insured piece of property, adjusted for its lifespan.

For example: The actual cash value of your 2-year-old laptop would be the price of a replacement laptop, multiplied by the percentage of the useful life that remained (of the laptop you are replacing). It would not be the price of a brand new laptop.

Appraisal: An assessment of the current value of your property, as determined by a professional.

Fun fact! Most insurance policies have an “appraisal clause,” which allows the policy owner to hire an independent appraiser if they disagree with the appraisal amount determined by the insurance company.

Binder: Temporary paperwork indicating the presence of an insurance policy in the event that official policy documents are not yet prepared.

Business Interruption Insurance: This type of insurance policy covers expenses incurred during a business interruption. The interruptions include anything that might interrupt your business – hurricanes, tornados, volcanic eruptions — you name it.  It also covers interruptions for theft and vandalism.

For example: If your storefront gets destroyed in a storm, your business interruption insurance will cover the cost of a temporary location and fixed costs of business during the interruption, like rent. This insurance does not cover the cost of repairing or replacing the building itself (see: property insurance).

Business Owners Policy: This policy combines property insurance and liability insurance in one policy, at a discounted price for small business owners.

Claim: The formal request submitted to the insurance company for compensation.

Commercial Auto Insurance: this type of insurance covers your business vehicle in the event of an accident.

Fun fact! If you are a small business owner and use your personal car for business purposes, you need a separate commercial auto insurance policy in the event of an accident while the car is being used for business purposes.

Cyber Extortion: A digital crime in which a hacker threatens to damage business and/or steal client information unless you pay a ransom.

Cybersecurity Insurance: this type of insurance protects your company in the event of a data breach. Cybersecurity insurance can provide coverage through many stages of the breach, including alerting the affected customers, covering the cost of PR expenses, and the costs of improving the security of your data.

Deductible: The amount of money that you, the insurance policyholder, must pay out of pocket before the insurance will kick in.

Errors and Omissions Insurance: This policy provides coverage in the event of a professional oversight, error, or act of negligence. This can also be known as professional liability insurance.

For example: Errors and Omission Insurance would cover the legal fees and any payouts that might need to be made in the event of a lawsuit over an error or omission, such as falsely labeling artisanal cheese at your grocery store.

Exclusions: Specific cases and events that are not covered by your insurance policy. Often, there is the option to purchase additional insurance to protect against these added risks.

For example: Your property insurance may have an exclusion for flood coverage, especially if your business is located in a high-risk area. In this case, you would have to purchase additional flood insurance.

Grace Period: The period of time after the policy period during which you will still receive coverage, as long as you pay your premium by the end of the month.

For example: If your policy period provides coverage from January 1st, 2018 to December 31st, 2018 and you have a one month grace period, you can file a claim in January 2019 and receive coverage, as long as you renew coverage for 2019 and pay your premium on time.

Indemnity: The amount of money that you owe to an injured party.

Insurance Broker: People that sell insurance.

Insurance Company: The organization that provides insurance.

Legal Liability: A part of criminal and civil law that requires you pay your debts.

Named Perils: The losses covered by your insurance that are explicitly stated in your insurance policy.

Policy Period: The period of time your policy provides coverage for.

Premium: The monthly (or yearly) payments you make to the insurance company for coverage.

Property Insurance: This policy helps business owners to replace or repair damaged business property.

Important! Depending on your location, some property insurance policies will not cover certain weather events, such as earthquakes and hurricanes. Be sure to read your policy carefully and determine if you should invest in additional extreme weather coverage.

Quote: An estimate of the cost of your premium for a certain type of insurance.

Important! Quotes are not guaranteed prices, and can change when a policy is purchased.

Rider: This is an addendum to an insurance policy, indicating the presence of additional coverage.

Underwriting: The process by which your insurance company determines your likely risk, a factor in your quote.

Worker’s Compensation Insurance: Required by most states, this type of policy provides coverage for expenses that you may incur as a result of an employee suffering a work-related injury.

For example, if one of your employees gets injured while stocking shelves, your worker’s compensation insurance will pay for their medical expenses, and necessary medications or procedures, and their wages while they are injured.

Insurance coverage is extremely important as a small business owner. In order to make sure you’re getting the most out of your insurance policy and have complete coverage, be sure to read through your insurance policies carefully, specifically looking out for any exclusions. If you’re not sure what is and isn’t covered by your policy, make you sure you get informed. Not knowing about a gap in coverage can lead to a personal financial responsibility.