agreement by the seller of goods or services to satisfy for a stated period of time deficiencies in the item's quality or performance. Warranty terms may be included on the buyer's receipt. The warranty usually provides for repair or replacement of the item in the case of malfunctioning or poor workmanship. Typically, there is no additional charge during the warranty period. The seller records warranty expense and related estimated liability in the year of sale. A warranty percentage is usually based on prior experience. Assume sales for 2000 are $100,000. Estimated warranty cost is 2% of sales. The entry to record warranty expense is:

If on 1/25/2005, actual warranty services performed cost $500, the entry is:

policy taken out by the insured to pay the beneficiary a certain amount upon the insured's death. Proceeds on the death of the policyholder are includable in his or her gross estate under two sets of circumstances: (1) the insurance is payable to his or her estate and (2) the decedent possessed at least one incident of ownership in the policy. The latter means that the decedent either owned the policy until death, or transferred it but retained the right to change the beneficiary, borrow on the policy, and cancel it. o accomplish estate tax exclusion, transfer of the policy must occur more than three years prior to death.

statement regarding an insured's retention of low-severity risks because they are not catastrophic, and can be absorbed without having a dramatic effect on the financial structure of a business or individual. Insurance purchased for small-loss coverage is, in effect, swapping dollars with the insurance company, since the premium charged reflects the individual's expected losses plus loadings for the insurance company's expenses, profit margin, and contingencies.

payments in excess of the value of the loss-a prohibited practice. When an insured has more than one policy covering a risk, the full value cannot be collected from each policy if a loss occurs. The most that can be collected is each policy's pro rata share of the loss. For example, a home is insured under two policies of $100,000 each. If there is a fire loss of $100,000, the most that can be collected from each policy is $50,000.

a voluntary relinquishment of a right to property owned, claim against another's property, or to any legally enforceable right. In banking, the term has numerous meanings, such as an agreement not to charge a credit card annual fee during the first year after a new card is issued, or an agreement to forgo overdraft charges on bad checks.

intention to withhold or secrete information. If an insured withholds information on a material fact, about which the insurance company has no knowledge, the company has grounds to void the contract.

intent to defraud. An insured is required to answer truthfully all questions on the application. The insurance company can void a contract if it would not have issued a policy had it known the true facts. For example, on a Personal Automobile Policy (PAP) application, if the insured answers that the car is used only for pleasure (when in fact it is used in stock car races), the insurance company can void the policy.

Insurance: amount of money that the policyholders must pay out of their pockets before reimbursements from the insurance company begin. The deductible is usually set as a fixed dollar amount, though in some cases it can also be a percentage of the premium paid or some other formula. Some group health insurance plans set the deductible at a set percentage of the employee's salary, for example. In general, the higher a deductible a policyholder will accept, the lower insurance premiums will be. The insurance company is willing to lower its premiums because the company is no longer liable for small claims.
Taxes: see tax deductible.

compensation for loss. In a property and casualty contract, the objective is to restore an insured to the same financial position after the loss that he or she was in prior to the loss. But the insured should not be able to profit by damage or destruction of property, nor should the insured be in a worse financial position after a loss.

In life insurance the situation is totally different. By the payment of a single premium, the beneficiary of an insured can be placed in a much better financial position at the death of an insured than he or she was in prior to the death. However, the payment of a predetermined amount upon the insured's death does not make a life insurance policy a contract of indemnity.

In hospital indemnity and other health insurance plans, coordination of benefits is designed so that the insured cannot profit from an illness.

in property coverage, ratio of the amount of insurance to the value of an insured property. This ratio, multiplied by the amount of the loss, determines the indemnification payment.

restraint; a bar. Estoppel arises where a person has done some act that the policy of the law will not permit him to deny, or where circumstances are such that the law will not permit a certain argument because it would lead to an unjust result. In the context of contract law, for example, one is estopped from denying existence of a binding contract where one has done something intending that another rely on his conduct, and the result of the reliance is detrimental to that other person.

transfer of high severity risks through the insurance contract to protect against catastrophic occurrences. While insurance is generally not the most cost-effective means of recovery of minor losses, an insured cannot predict catastrophes and thus set aside enough money to cover losses on a mathematical basis or to selfinsure. Actuarial tables are based on the large loss principle: the larger the number of exposures, the more closely losses will match the probability of loss. In essence, a large number of insureds, each paying a modest sum into an insurance plan, can protect against the relatively few catastrophes that will strike some of their numbers.

agreement concerning an insured individual, not the insured's property. A property and casualty insurance contract cannot be assigned, since it follows the insured, not the property. For example, a homeowners insurance policy cannot be transferred with the home upon its sale because the insured no longer has an insurable interest (expectation of monetary loss) in the home. But a life insurance contract can be assigned (for example, to secure a line of credit for a business). Banks use the American Bankers Form for the assignment of life insurance policies pledged as security for a loan.

elements common to all life insurance policies. While state insurance laws do not prescribe the exact words that must be in a life insurance policy, certain standard provisions must be included to provide specified basic benefits for an insured, who cannot be charged extra for them. Additional benefits can be provided, if the insurance company desires. Standard provisions include the beneficiary; grace period; incontestable clause; nonforfeitability (cash surrender benefit, reduced paid-up benefit, extended term benefit); policy loanreinstatement; suicide clause; war exclusion clause.

section of property insurance and liability insurance policies giving an insurer the right to take legal action against a third party responsible for a loss to an insured for which a claim has been paid. For example, an insurance company pays a claim for $40,000 in damages to an insured storekeeper for losses caused by a negligent contractor working next door. The policy's subrogation clause gives the insurer the right to be subrogated to, or take on as its own, the storekeeper's claim and to sue the contractor for damages.