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Insurance: What Exactly Does It Mean?

Written by Michele Wilmonen. Posted in Definitions Last Updated: 05/16/2011

Defining insurance, understanding the concept of indemnity and covered perils and how it relates to auto insurance.

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Insurance puts you back to where you were before a covered peril.

We all know what people mean when they are talking about insurance, but how many people can quote a solid definition?

The Webster’s dictionary description of insurance is: “Coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril”.  Do you understand now? If not, don’t worry we will explain further.

Indemnify After A Loss

As the definition says above, insurance is a contract to indemnify. The word indemnify is not a word that is used in everyday language, but it’s an important word here. Indemnify means to return someone to the condition that they were in prior to an incident happening.

As an example, if your auto insurance company were to indemnify you after you had an accident where you vehicle was a total loss, they would pay you for the worth of the vehicle prior to the accident. A lot of people get upset that their insurance company doesn’t pay them enough for their vehicle and believe they are actually in a worse place as they now have to go and get a new vehicle.

But remember this, your contract with your insurance company is to put you back into the very same place that you were prior to the accident, which means that they give you what the car is worth so that you can buy a replacement car that is similar.  If they were to pay you more so that you can get a better or a newer car, you are no longer being put back to where you were you as you are actually being put in a better position than you were in prior to the accident and this is not indemnification.

Specific Contingency or Peril

A specific contingency or peril is simply what you are purchasing the insurance policy to protect you against. If you purchase a commercial auto policy, you are purchasing protection for your vehicles that are used for your business. If you purchase health insurance, you are purchasing protection from high medical bills that you may have due to health issues. The policy that you purchase is specific to what you need protection for.

At the same time because this is specific, you cannot use one insurance policy to cover every single thing that you need protection for. A health insurance policy cannot protect your home from a fire and your commercial auto policy cannot protect your personal motorcycle in the case of an accident.

The insurance policy that you purchase also has specific perils that it does and does not cover. A peril is something bad that can happen and cause damage to the item that you are insuring. If you are concerned about a specific peril, you need to consult your insurance agent to make sure that you have coverage. If your basic policy does not provide the coverage that you need, they may be able to suggest additional coverage that you can add or a different insurance company that offers the coverage.

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Michele Wilmonen

Michele’s first introduction to insurance was working for a major insurance company as a file clerk and a mailroom supervisor in a regional office. She learned insurance directly from underwriters and claims adjusters from questions and also watching them do their job. Since then, she’s earned a number of insurance certifications from the Insurance Institute of America and also a Bachelor’s degree from the University of Idaho. She blogs at Car Insurance Guidebook.

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