2/F - Common Policy Provisions

Question 1

Common Policy Provisions

Answer 1

• Insurance policies are standardized forms, most of which are created by ISO or AAIS
• Provisions within the policy establish terms of the agreement

By the end of this module you should be able to define many of the policy provisions commonly found in standard policy forms

What are ISO and AAIS?

• National organizations
• Produce standardized insurance forms for insurers to use
• Collect statistical data
• Provide rating information
• Work with state regulators on behalf of subscribing insurers

Question 2

Cancellation and Nonrenewal

Answer 2

• Sets rights and duties of both insurer and insured if either cancels
• Policyholder can cancel anytime with notice
• Insurer’s right to cancel is subject to state insurance laws
• Generally, insurer must provide written notice for cancellation or nonrenewal
• Insurer can cancel with fewer days’ notice for non-payment of premiums

Question 3

Unearned Premiums

Answer 3

• Policyholder pays premiums before receiving full coverage
• If policy is canceled early, insurer must pay back any money it received for coverage it never gave
• Insurer counts unearned premiums among liabilities

Question 4

Changing a Policy and the Liberalization Clause

Answer 4

Changing a Policy
Policy changes added by endorsement and agreed upon by both insurer and insured

Liberalization Clause
If insurer broadens policy coverage in course of business, policies already issued must include this increase if the change:
- Occurred during the policy period (or even shortly before policy period for some policies)
- Did not raise the policy premium

Question 5

Representations

Answer 5

• Policy coverage is based on information the insured provided
• If insured gives false information, the insurer can void the policy

Question 6

Concealment, Misrepresentation, and Fraud

Answer 6

• Protects the insurer from the dishonesty of the insured

- Insured cannot omit or misrepresent material facts

Question 7

Rescission

Answer 7

Policy Rescission

• Rescinding a policy means declaring that it was never a valid agreement
• Can only be done under certain circumstances, such as material, intentional, or fraudulent misrepresentation

An insurer can rescind a policy if the policyholder:

1. Lied or concealed information in the application
2. Made a mistake in the application that significantly affects the insurer
3. Made a fraudulent claim to get benefits

Question 8

Assignment

Answer 8

Assignment Provision
Policy is non-transferable unless insurer agrees

Exception: death
If insured dies, coverage transfers to the decedent’s legal representative

Question 9

Additional Insured

Answer 9

Person or organization that is added to the policy at the First Named Insured’s request and who benefits from policy, but may not make changes

Question 10

Other Insurance

Answer 10

Other Insurance/Apportionment

• Guidelines for settling claims when more than one policy covers the damages
• Enforces principle of indemnity by keeping people from “double recovering” for a loss

Question 11

Primary vs. Excess

Answer 11

• Primary: policy pays up to the limit, regardless of presence of another policy
• Excess: policy only pays once the primary policy’s limits have been exhausted

Question 12

Contribution of Equal Shares

Answer 12

• Each policy pays an equal share of the loss up to the lowest policy limit
• Process repeats until loss is paid in full or all policy limits have been reached

Question 13

Pro Rata

Answer 13

Policies split the loss, based on percentage of each coverage each policy provides

Question 14

Nonconcurrency

Answer 14

The situation in which two or more policies covering the same risk have different inception and expiration dates

Question 15

Overinsurance

Answer 15

The amount of insurance covering a risk which exceeds the insurable value of that risk

• Insurer will only pay up to the insurable value
• Fraudulent intent voids the contract

Question 16

Restoration/Non-reduction of Limits

Answer 16

Common options:

• Restore limits to original level
• Loss does not reduce limits at all
• Total loss payout ends policy coverage and excess premiums returned to insured

Question 17

Legal Action Against an Insurer

Answer 17

Sets requirements the insured must meet before suing the insurer:

• Insured must comply with all policy obligations
• Insurer is not liable for damages above policy limit

Liability Policies:

• No one can join the insurer in lawsuit against insured
• No one can sue insurer until insurer’s obligation is determined

Question 18

Duties in Event of Loss

Answer 18

Insured’s Duties in the Event of a Loss:

• Notify the police if the loss may have involved a crime
• Notify the insurer about what property was involved, and the circumstances surrounding the loss
• Submit a description of how, where, and when the loss occurred
• Try to prevent further damages, and keep track of expenses incurred doing this
• Give insurer a list of damaged property (Commercial policies may ask for a list of damaged and undamaged inventory, too)
• Submit to examination under oath
• Sign a sworn proof of loss for the insurer, if requested
• Let the insurer appraise damages to covered properties by inspecting them (including any company records or books when dealing with commercial policies)
• Cooperate in all investigation and settlement procedures

Question 19

Purpose of Exclusions

Answer 19

Exclusions serve many purposes:

• Remove coverage for uninsurable losses
• Manage moral and morale hazards
• Eliminate duplication of coverages
• Remove coverages that typical consumers don’t need
• Remove coverages that need special treatment
• Lower premiums

Question 20

Common Exclusions

Answer 20

• Intentional acts
• Neglect
• Normal wear and tear, or deterioration
• Ordinance or law (laws regulating the use, construction, repair, or demolition of a structure)
• Government or civil confiscation
• Off-premises power failure
• War
• Nuclear events

Covered in auto policies, but excluded in other property policies

• Earth movement (earthquakes, mudslides, landslides, etc.)
• Flood or water damage from water below the ground, above ground, or back up through sewers or drains

Question 21

Vacancy

Answer 21

• Defines “vacancy” for the purpose of coverage
• Specifies a time period (typically 60 days) and a condition, such as a dwelling that is unoccupied or a company that is not open for business
• Commercial buildings may be deemed vacant if less than 31% of the available square footage is occupied for the set time period

Question 22

Recovered Property

Answer 22

If one party recovers damaged property after the claimant was indemnified, that party must notify the other party

• If the insured wishes to keep the property, she must return the money to the insurer
• If the insured wishes to keep the money, she must forfeit her right to the property to the insurer

Question 23

Salvage

Answer 23

The portion or value of property that remains after a loss

Ways to handle salvage

• Insurer deducts salvage value from settlement amount
• Insurer takes ownership of damaged property after paying for the full value of the damaged property

Question 24

Abandonment

Answer 24

Abandonment Clause
- Insured may not force the insurer to take possession of damaged property for the purpose of repair or disposal

• Different than salvage, where the insurer chooses to take possession of the damaged property after paying to replace it

Question 25

Pair and Set

Answer 25

Pair & Set Provision Applies when part of a set or an instrumental part of a whole is lost or destroyed Pays either: - To replace, restore, or repair the set, or - The difference in actual cash value resulting from the loss

Question 26

Commercial Provisions

Answer 26

Premium Audit - Insurer accepts a deposit premium, based on estimate of risk - Then at end of policy term, insurer audits exposure and calculates actual premium Inspection and Surveys Insurer may inspect premises any time and recommend changes Examination of Books and Records Insurer has right to inspect business records up to three years after policy expires

Question 27

Loss Payment

Answer 27

Loss Payment Provision Claims will be paid: To Whom? - The policyholder(s), up to the amount of his insurable interest - Loss payees listed in declarations How? - The actual cash value (ACV) - The cost of repairing or replacing (RC) - The agreed or appraised value - The cost of repairing or replacing with "like kind and quality" When? Deadline for payment is regulated by state law and varies from state to state

Question 28

Company's Options

Answer 28

Company's Options (Standard Fire Policy) - Provision listing the insurer's claim settlement options - Insurer must notify claimant of its choices within 30 days of proof of loss

Question 29

Loss Payable Clause (or Loss Payee Clause)

Answer 29

- Lender listed as loss payee if a loss occurs - Protects lender's interest in insured property - Allows insurers to compensate a lender if a property, in which the lender has a financial interest, is damaged

Question 30

Mortgagee Clause

Answer 30

``` Mortgage Clause (a.k.a. Mortgageholders Condition) States the mortgagee's rights in relation to the insurance contract ``` Mortgagee: the bank or lender that holds the insured's mortgage The mortgagee has the right to: - Receive a portion of claims payments, based on their insurable interest in the property - Be notified if the policyholder fails to adhere to, or pay premiums on, the insurance contract - Pay premiums to keep the policy active without the insured's consent in order to continue protection The lender can still be indemnified, even if the insured intentionally damages the property (the insured would not get any money in this case).

Question 31

Recoverable Depreciation

Answer 31

- Applies to Replacement Cost policies - Insurer pays claim based on ACV - Once repairs are complete, claimant submits proof to insurer - Insurer pays remainder, based on actual replacement cost minus what it already paid - Insured typically must notify insurer of plans to repair or replace within 180 days of when the loss occurred

Question 32

Control of Property

Answer 32

- Protects property from damage caused by the negligent acts of persons other than the named insured - Protects property from damage caused on purpose by a non-policyholder - A breach in policy conditions only affects the property where the actual breach occurred

Question 33

No Benefit to Bailee

Answer 33

States that coverage does not benefit a third party that has custody or control of the insured's property Bailee: A business that holds the property of others for the purpose of storage, repair, or servicing

Question 34

Separation of Insureds

Answer 34

- Each insured is covered separately, even against other insureds - Also called "severability of interests" - Limits of policy still apply collectively

Question 35

Duties of the Claimant

Answer 35

Duties of the Claimant - Cooperate with insurer's investigation - Report claim promptly - Allow physical examinations Duties of Injured Person - Give insurer proof - Authorize access to medical records - Have a physical exam

Question 36

Bankruptcy

Answer 36

Bankruptcy of the Insured | Bankruptcy of insured does not relieve insurer of its obligations