4.2 - Key Policy Forms and Clauses in Property Insurance Flashcards
Key Policy Forms
The Homeowners forms:
-IBC 1151 Homeowners basic Form
>named perils, including theft, glass breakage and transportation
-IBC 1153 Homeowners Broad Form
>all risks on the dwelling building and detached private structures; the same named perils as insured by the basic form on the personal property
-IBC 1155 Homeowners Comprehensive Form
>all risks on all items
-although three distinct forms, they have commonalities in the general organization of their coverage, the way minimum amounts of insurance are determined for each coverage, and how the premium for them is calculated
-also have similar forms for tenants and condo owners
-each package policy provides property, crime and liability insurance
-homeowner selects an amount for the building, and the amounts for DPS, personal property and additional living expenses are each fixed percentages of the limit of insurance on the building. A tenant selects the amount of insurance for personal property
-form names may differ between insurers, however tend to reflect the types of perils that are being insured:
>limited (least), standard and comprehensive (most)
>basic, broad, comprehensive
Key Clauses in Property Insurance
- Limitations of Liability
a. Deductibles
b. Coinsurance
c. Special Limits of Insurance - Additional Interests
a. Loss Payees
b. Leaseholders - Mortgagees
a. Mortgage clauses - Rateable Contribution
Key Clauses in Property Insurance:
1.a. Limitations of Liability - Deductibles
-an insured’s portion of a covered loss. Helps to prevent insureds from making small, frequent claims
Common Applications of a deductible:
>Separate Items - if the total amount of insurance is subdivided into more than one item, the deductible may apply separately to the amount recoverable under each item
>Occurrence Basis - deductible may apply to each occurrence. The most common deductible basis
>Loss paid in Full if Over Deductible - policy may provide that no loss be paid below a specified amount (the deductible) but that a loss greater than this amount be paid in full. A variation on this specifies a deductible and a loss amount beyond which no deductible applies - ex. ded of $500 for losses under $5000, over $5000, paid in full
Key Clauses in Property Insurance:
1.b. Limitations of Liability - Coinsurance
-most losses are partial losses. Insureds may be inclined to purchase amounts of insurance far below the total value of their property - but adequate for their estimate of the size of loss they are likely to incur
-a coinsurance clause in a fire insurance policy obliges the insured to maintain a specified minimum amount of insurance in relation to the value of the property insured or else share with the insurer any partial or total loss - becoming in effect, a coinsurer of the loss.
-coinsurance formula: (amount of insurance carried/minimum amount of insurance required) * Amount of loss = Amount recoverable by insured
>amount recoverable can never be more than the amount of insurance carried
>If the loss is very small, coinsurance may be waived by the insurer and not applied
-if insured suffers a total loss when too little coverage purchased, the recovery will be limited by the amount of insurance carried rather than by the coinsurance penalty
-generally coinsurance clause requires the insured to maintain an amount of insurance equal to at least 80% (may also be 90 or 100%) of the actual cash value of property insured. Insureds can buy more, just not less
-if the insurance under a policy is divided into two or more items, the clause is applied separately to the insurance under each item
-clause usually stipulates that the policy premium reflects the insured’s undertaking to insure to at least the specified percentage of the property value; that is, the rate is lower than it would be without coinsurance
-insureds should consider inflation on property values when choosing how much insurance to buy
Key Clauses in Property Insurance:
1.c. Limitations of Liability - Special Limits of Insurance
-used to limit the insurer’s exposure to certain types of personal property that would otherwise be covered under the blanket PP limit.
-original list of special limits concerned types of property that could be covered under other policy form. also helps prevent the skewing of the blanket limit by a few higher-valued articles
-Special Limits that apply to loss caused by any insured peril (except concerning watercraft):
>Money, including cash cards, gift certificates, or bullion
>Securities
>Watercraft, their furnishings, equipment, accessories and motors [in homeowner comp form, coverage is limited to specified perils and theft or attempted theft, so coverage is identical for basic, broad and comp forms]
>Garden-type tractors, including attachments and accessories
>wine and spirits
>spare automobile parts
>business property
>Cannabis in all consumable forms and cannabis plants, whether for recreational or medicinal use
-Special Limits effectively apply only to loss caused by theft:
>works of art
>jewellery, gems, precious or semi-precious stones, pearls, and watches
>fur garments, garments trimmed with fur, and all other fur items
>numismatic property, manuscripts, stamps, and philatelic property
>collectible cards (such as sports personality cards)
>collections not subject to any other limitation
>bicycles, their equipment and accessories
Key Clauses in Property Insurance:
2. Additional Interests
-a term used to include parties not listed as named insureds but who would be financially prejudiced by the loss or destruction of insured property
-where other parties have an interest in the property, they may - independently of the insured - advance their claim. When indemnity is appropriate, the interests of the other parties should be reflected in the payment. Failure to do this may require the insurer to pay the other interested parties’ claims and pursue the insured for any overpayment
Key Clauses in Property Insurance:
2.a. Additional Interests - Loss Payees
-“Loss Payee” is a generic term for a person or an entity other than the named insured to whom the proceeds of insurance will be paid
-lenders insist on evidence of fire insurance. Rather than issue separate policies to cover the respective interest of the borrower and lender, it is simpler to issue a single policy in the name of the borrower and include the lender’s interest.
-any cheque issued by the insurer to settle a claim will be drawn jointly in the names of the insured and the loss payee. The parties themselves will determine the disposition of the proceeds to reduce or discharge the loan
-only the named insured may instruct the insurer to show loss payable to the lender. The insurer may respond to a direct request from the lender only if it is accompanied by the insured’s written consent
-legislation protects the interest of the loss payees:
>insurer may not cancel or alter a policy to the detriment of a payee without prior written notice to the payee
>notice period and manner of giving notice to a loss payee are the same as for the insured
-if insurer fails to give notice as required, insurer’s obligations to the payee remain until the policy expiry date
>insured’s request to cancel should be accompanied by a signed release by the loss payee, without, the insurer should give written notice to the payee as required by law
-other than the legal requirements regarding changes prejudicial to the payee or premature termination of the contract, there is no separate agreement with the payee, so in many cases, the insured’s inability to recover under the policy would prevent the payee’s recovery also
Key Clauses in Property Insurance:
2.b. Additional Interests - Leaseholders
-leaseholders include not only private interests, which lease property to other private interest, but also the public interest as represented by the Crown in Right of Canada
-Leaseholders - The Crown in Right of Canada [crown land is public land owned by the federal or provincial governments
>control of public land rests with the Crown in Right of Canada and is administered by either the governor general, the lieutenant governors of each Prov. and Ter., or the federal government depts. Indigenous Services (ISC) and Crown-Indigenous Relations (CIRNAC). Most crown land located in the high Artic.
>some Crown land is leased to individuals who build a cottage or home on it, many located in aboriginal reserves and are leased by non-natives. Leases may run for 99 years (newer ones are shorter). As long as cottage owner fulfills the terms of the lease, they are entitled to occupy the land as if they owned it
>leases outline insurance requirements. Many require “Her Majesty the Queen in Right of Canada”, “The Crown in Right of Canada”, or other legal entities. this has caused problems for the insurance industry to provide to this “insured” the same coverages. Some Provinces it is becoming difficult to obtain insurance for leased Crown land
-Other Leaseholders - there are residences owned by other persons or commercial entities who lease property to individuals for use as a residential property
-key to providing insurance for leaseholders is to read and understand the lease
Key Clauses in Property Insurance:
3. Mortgages
-property is often used as security for a loan
-a loan secured by an interest in property is called a mortgage
-the term mortgage is used in particular where the security is real property (land or buildings)
-“Chattel Mortgage” - any property other than freehold land and leasehold interests in land (property other than land or buildings)
Key Clauses in Property Insurance:
3.a. Mortgages - Mortgage Clauses
-only applies to those payees whose interest in the insured property is secured by a mortgage
-a mortgage clause creates a separate contract between the insurer and the mortgagee and so protects the mortgagee even if the named insured is unable to recover because a condition of the policy has been breached
-mortgagors had difficulty because the insurer may refuse to add the special mortgage clause, so a mortgage clause was devised by Insurance Bureau of Canada and was accepted by almost all lending institutions in Canada
-mortgage clause amends Stat Cond. 8 permitting the mortgagee to give notice of loss immediately on becoming aware of it and proof of loss as soon as practicable.
-clause also broadens Stat Cond. 3 to include the mortgagee and its assigns among those who, acquiring title to the insured property, are automatically entitled to be insured under the policy until it is cancelled or expires
-mortgagee obligations - must notify the insurer immediately on learning of any vacancy or non-occupancy beyond 30 days, any transfer of interest, or any increase in hazard (which the mortgagee must also pay, on reasonable demand, for any increased hazard
-under the clause, insurer having indemnified the mortgage for a loss, becomes subrogated to the rights of the mortgagee against the insured - only to the amount of the loss paid to the mortgagee
-if the insured’s claim is denied the insurer may still be obliged by the mortgage clause to indemnify the mortgagee. In such situation, the insured becomes a third party against whom action may be taken to recover the amount of the loss
-insurer’s subrogation rights remain subordinate to the mortgagee’s right to recover the outstanding balance of its loan to the insured. If the amount of insurance was inadequate to reimburse the mortgagee. Insurer may pay all amounts due to the mortgagee and take over the mortgage, together with all securities held as collateral to the mortgage debt. If the building is a total loss, insurer may acquire title to the land
-written notice to the mortgagee as specified in the mortgage clause - same requirements as the Stat Cond. require to insureds - registered mail with 15 days notice
-mortgage clause usually restricted to insurance on buildings. Insurer unlikely to agree with a Chattel mortgagee - this personal property is portable - the absence of this property would cause the undertakings by the mortgagee and the insurer’s option under the mortgage clause worthless
Benefits to and Obligations of Mortgagee under the Mortgage Clause
Benefits to Mortgagee
>policy covers mortgagee even if named insured is unable to recover because of a breach of a policy condition
>mortgagee is permitted to give notice of loss immediately and proof of loss as soon as practicable
>mortgagee and its assigns are included among those who, acquiring title to the insured property, are covered under the policy until it is cancelled or expires
>mortgagee to be notified of cancellation or any alteration of policy to the prejudice of the mortgagee
>same notice required to mortgagees as to insureds
Obligations of Mortgagee
>Mortgagee must notify insured on learning of: vacancy or unoccupancy over 30 consecutive days, any transfer of interest; or any increase in hazard
>Mortgagee must pay, on reasonable demnd, for any increased hazard from time it existed until policy is cancelled or expires
>Mortgagee, having been indemnified for a loss, relinquishes to the insurer its rights against the insured - though only to the amount of loss paid to the mortgagee
>mortgagee’s payment under policy may be limited by amounts payable to mortgagee under other valid insurance
Key Clauses in Property Insurance:
4. Rateable Contribution
-when more than one policy covers the same interest at the time of loss, each insurer is liable to the insured for its rateable proportion of the loss unless the insurers, in writing, agree otherwise. this requirement holds even if 1 or more of the policies contain an other insurance clause that specified the policy will not apply until after full or partial payment of a loss under any other policy
-insurance acts allow insurer to impose certain restrictions. An insurer’s liability under an insurance act for its rateable proportion of a loss does not overrule any divisions of the sum insured into separate items or limits of insurance on specified property; nor does it overrule any clause in an insurance act’s limitation of liability provisions or in any contract condition limiting or prohibiting other insurance
-the deductibles in rateable policies:
>one contract - where one contract contains a deductible, the insurer’s share of a loss will first be determined without regard to the deductible clause; then, the ded. will be applied only to determine the amount of the insured’s recovery under that contract
>two or more contracts - where more than one contract contains a deductible, the insurers’ shares of a loss will first be determined without regard to the ded clauses; then, the highest ded will be pro rated among the insurers that have deds, and those pro-rated amounts will be applied to determine the amount of the insured’s recovery under those contracts
-the provision does not require that policies were issues by different insurers, but does require that it covers the same interest (though can cover more interests too)
-where several policies cover the same interest, rateable contribution is based on their respective amounts of insurance as shares of the sum of their amounts of insurance
-where two policies cover the same interests, but only one of them specifically identifies the property that suffer LoD, that policy must respond first. The second policy, which includes the insured property without specifically describing it, will not contribute to the loss until the amount of insurance on the first policy is exhausted. The second policy will then contribute the balance of the loss up to its own amount of insurance
