We’re not saying that reading an insurance policy has the same degree of difficulty as an IRS Form 1040 or anything by Thomas Pynchon. But on the scratch-your-head-cuz-you-don’t-get-it scale of 1 to 10, it’s rightup there. But since we do believe that understanding jargon is a big part of grasping almost anything here’s PartTwo of Essential Insurance Terms You Need to Know. If knowledge for its own sake doesn’t motivate you to read on, we’ll remind you that the more you know, the more you may be able to save when you shop for insurance quotes online.
Peril. In insurance-speak, a peril is anything that directly causes a loss. Could be fire, earthquake, flood, vandalism, Act of God or any other potentiality that can harm you or your property. Property and casualtyinsurance policies are either written as named peril or open peril. Under a named peril policy, your losses are only covered for the items that are specifically spelled out in the Insuring Agreement section of your policy. If it’s not there, it’s not covered. By contrast, an open peril policy (aka all risk and open coverage) covers you for everything except items that are specifically spelled out in the Exclusions section. Earthquake and flood are two typical exclusions under open peril. Open peril is usually more expensive than named peril because the insurance company is willing to assume broader exposure to the risk of loss.
Hazard. A hazard increases the likelihood that a peril will actually result in a loss or that any loss will be more severe because the hazard exists. For example, let’s say you’re training pit bulls in your backyard. Regardless of the fact that you’re a better dog whisperer than Cesar Milan, to an insurance underwriter, you’re increasing the hazard of someone being bitten while on your property. Because they’re pit bulls instead of Papillions, the bites could be really nasty. Insurance companies don’t like hazards. If they agree to write a policy, they’ll charge you a premium commensurate with the hazard. You decide you don’t want to pay more, so you don’t bother to mention that hazard on your application. If the insurance company finds out, they have the right to deny a claim, amend your policy to exclude dog bites or even suspend or terminate your coverage.
Types of Hazards. There are three types of hazards: physical, moral and morale. A physical hazard is anything that increases the likelihood of physical damage or property loss, like the aforementioned pit bulls or manufacturing handmade fireworks in your basement. A moral hazard is conduct that demonstrates a lack of character like lying on an insurance application or exaggerating the value of a loss on a claim. Ifyou’ve got a record of this kind of activity, your insurance company will assess your premium or insurability accordingly. A morale hazard has to do with personal behavior that could increase the probability of a loss. Simply put, it’s having a careless attitude about safety because, hey, you’re insured. Morale hazards can include not locking your home’s doors and windows or driving drunk. Insurance companies attempt to deal with morale hazards by offering incentives that reward good behavior (e.g., home security system and safe driver discounts) and putting conditions on coverage.
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