2- Property Insurance Basics Flashcards
Depreciation
reduction in value due to wear and tear
Earned Premium
the portion of premium paid in advance that now belongs to the insurer for providing coverage for a specified period of time
Exposure units
used as a measure of the rating units or the premium base of a risk .
Homogeneity
the degree to which items are similar
implied warranty
a legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyer’s expectation
Inception
the date at which the insurance policy goes into affect
Negligence
the failure to use the care that a reasonable, prudent person would under similar circumstances
Obsolescence
depreciation in the value of a property due to it becoming outdated.
Statute
a written law passed by a legislative body
3 Elements of Insurable Interest
- Financial ($$$)
- Blood (a relative)
- Business (business partner)
When must insurable interest exist in order to be utilized?
At the time of loss.
Accident
A sudden, unplanned & unexpected event resulting in injury or damage
Occurrence
Broader than accident. Losses caused by continuous or repeated exposure to conditions resulting in injury to persons or property.
What are the two causes of loss?
Named and open
Named peril
Listed and specific perils that are covered by a policy. The is no coverage for unlisted items.
Open peril
Protects against any risk of loss that isn’t specifically excluded
Direct loss
Physical damage to building or/or personal property. Includes damage from proximate cause of loss
What is an example of proximate cause of loss?
Water damage from putting out a fire.
Blanket policy
single policy that covers everything at once (ex: everything on one property is covered)
Specific policy
Covers specific pieces of property with specific amounts for each.
Basic types of construction are
Fire-resistive, frame, masonry, noncombustible, and joisted masonry.
Fire- Resistive Construction
building constructed entirely of masonry
Modified F.R. Construction
Buildings constructed with masonry and other materials
Masonry/ Noncombustible Construction
FR walls, with noncombustible (steel) roof and floors
Noncombustible Construction
constructed of materials that won’t ignite (steel)
Joisted-Masonry Construction
Masonry walls with combustible floors and roof.
Frame Construction
made with mostly combustible materials
Which are the best and worst rated types of Construction?
Best= Fire-resistive, worst= Frame
Loss valuation
a factor in determining the premium charged and the amount of insurance required
Actual Cash Value
Current replacement cost- Depreciation= ACV
Replacement cost
the cost to replace damaged property with like kind and quality at today’s cost, with no deduction for depreciation.
Functional Replacement cost
Replaces the damages property with less expensive and more modern construction or equipment
What is an example of functional Replacement cost?
Replacing a building with lath and plaster walls with drywall.
Just as functional, lower repair cost.
Market value
Value based on amount a willing buyer would spend. Seldom-used.
Agreed Value
provision agreed on by insured and insurer to amount insurance will pay.
Stated amount
Amount of insurance scheduled in a property policy. Is max insurer will pay.
When is Valued policy used?
When value is difficult to establish after a loss occurs.
Valued policy
Pays out full amount in event of a total loss without regards to actual value & depreciation.
** used in marine policies because it’s hard to quantify amount lost.
Underwriting
risk selection and evaluation process
Underwriter
evaluated applications and establishes terms, rates, and conditions
Loss ratio
(Incurred losses + adjusting expense)/ earned premium
Insurance rate
amount charged for a specific amount of coverage
Types of insurance rates
Class and Individual
Class rates
priced per unit based on a given set of characteristics (ex. age/gender of driver). Most common
Judgement rating
Used when there is a lack of statistics, often in Ocean Marine insurance.
Schedule rating
Applies a schedule of charges and credits to determine appropriate rate for individuals.
Experience rating
past-loss premium used as a factor to determine final premium
Retrospective rating
self-rating plan, where actual losses determine final premium
Merit rating
Common in auto. Based on probability of loss (using driving record)
What is included in the Declarations section of a policy structure?
Basic information, like names, addresses, amount of coverage and descriptions of locations.
What is included in the Definitions section of a policy structure?
Clarification of terms used in the policy.
What is included in the Agreement or Clause section of a policy structure?
Lists parties to the contract, renewal dates, perils, and obligations of insurance co.
What is included in the Additional/Supplementary Coverage section of a policy structure?
Provides additional amount of coverages for specific loss expenses at no additional premium.
What is included in the Conditions section of a policy structure?
Generals rules of procedures an insurer and insured agree to follow under terms of the policy
What are examples of conditions of a policy?
- Inspections of location or books
- Changes to the policy made in writing
What is included in the Exclusions section of a policy structure?
States perils that are not insured against in the policy.
Ex: earth movement and water damage
What is included in the Endorsements section of a policy structure?
Printed addendums that change the policy’s original terms.
Named insured
Individual(s) whose name appear on the policy.
First named insured
Individual whose name appears first on the policy and is the only one who may cancel or change the policy.
Cancellation
Termination of an insurance policy by either insurer or insured before the expiration date shown on the policy
Nonrenewal
Termination of insurance policy at the expiration date
What is a deductible?
The dollar amount an insured must pay on a claim before the insurance policy provides higher coverage.
Higher deductible = lower premium
What is the coinsurance clause?
States that insured agrees to maintain a minimum amount of insurance on property. In event of loss, insurance only pays the amount they cover, instead of the amount that should have been carried.
Coinsurance Formula
(Insurance carried/Insurance required) X Loss amount = Loss payment
Noncurrency
refers to other insurance written on the same risk, but not on the same coverage basis.
Pro Rata
Provision found in some policies the provide for sharing loss with other insurance
Limits of Liability
The maximum amount of money an insurance company will pay for a particular loss or within a period of time.
Per Occurence
A sublimit of liability that puts a limit on payment for all claims that arise from a single occurrence
Per Person
A sublimit of liability that puts a limit on payment of bodily injury to a single person in an accident
Aggregate Limit
The maximum limit to coverage available under a liability policy during a policy year, regardless of the number of claims made or the number of accidents that occur.
Split Limit
separately stated limits of liability for different coverages. Common in auto policies.
Policy limits/limitations
the maximum amount an insured may collect or for which an insured is protected
Vacancy
refers to insured structure in which no people have been living or working and where no property has been stored for a period of time stated in a policy (60 days typical)
Unoccupancy
insured structure in which no people have been living or working, but where property has been stored.
What are the insured’s duties after loss?
- Protect the damaged property from further damage;
- Prepare an inventory of damaged property;
- Cooperate with insurer;
- Notify police in the case of theft;
- Submit signed sworn proof of loss
Assingment
the transfer of a legal right or interest in an insurance policy
Abandonment
the relinquishing of insured property into the hands of another
Liberalization clause
allows for adjustments to be made to existing coverage in order to comply with changes to relevant laws and regulations
Subrogation
Insurer’s legal right to seek damages from third parties, after is has reimbursed the insured for the loss.
Salvage
The amount of money realized from the sale of damaged merchandise
What are the four claim settlement options?
- Value of the lost of damaged property
- Cost of repairing
- Cost of appraised value
- Cost of repairing/replacing with other property same value
Third Party Provisions
address the rights of a third part that may have secured financial interest in the insured propertyq
Standard Mortgage clause
In event of damage to real property, insurance pays to both insured and mortgagee as their insurable insurance appears.
Loss Payable Clause
used to cover the interest of secured lender in personal property.
Damages
comprised of bodily injury or property damage
Special damages
out-of-pocket expenses for medical, misc., or loss of wages expenses
General damages
compensate for pain and suffering, mental anguish, or disfigurement
Punitive damages
punishment for extreme behavior, gross negligence, or willful intent
Strict liability
liability assigned without regard of negligence or fault (ex. Manufacturers)
Vicarious liability
liability imposed on one party as a result of another
Binder
A temporary agreement issued by an agent to provide temporary coverage
The pro rata liability clause is designed to protect the principle of what?
Indemnity.
Each policy pays a percentage of a loss directly to the amount of insurance that was provided.
