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CAS Online Course 1 > Assignment 9: Underwriting Property and Liability Insurance > Flashcards

Assignment 9: Underwriting Property and Liability Insurance Flashcards

1
Q

COPE Model

A

A common tool underwriters use to evaluate exposures related to fire and other causes of loss. It stands for:
- Construction
- Occupancy
- Protection
- External Exposure

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2
Q

6 Insurance Services Office (ISO) Classes

A

Class 1: Frame Construction
Class 2: Joisted Masonry Construction
Class 3: Noncombustible Construction
Class 4: Masonry Noncombustible Construction
Class 5: Modified Fire-Resistive Construction
Class 6: Fire-Resistive Construction

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3
Q

Frame Construction

A

A class of construction that has load-bearing components made of wood or other combustible materials such as brick or stone veneer

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4
Q

Joisted Masonry Construction

A

A class of construction that has load-bearing exterior walls made of brick, adobe, concrete, gypsum, stone, tile, or similar materials; that has floors and roofs of combustible materials; and that has a fire resistance rating of at least one hour

It is also called ordinary construction, ordinary masonry, brick, wood joisted, and brick joisted and is typically used for buildings of three stories or fewer

An example is mill construction, which is rarely used today

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5
Q

Mill Construction

A

A subclassification of joisted masonry construction that uses heavy timber for columns, beams, supports, and ties; has a minimum two-hour fire-resistance rating on bearing walls; and has an absence of floor joists

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6
Q

Noncombustible Construction

A

A class of construction in which the exterior walls, floor, and roof of a building are constructed of, and supported by, metal, gypsum, and other noncombustible materials

Even though these structures are constructed of noncombustible material and do not provide fuel for a fire, their susceptibility to damage makes them only marginally safer from a fire underwriting perspective than joisted masonry or frame construction

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7
Q

Masonry Noncombustible Construction

A

Masonry construction or construction that includes exterior walls of fire-resistive construction with a fire resistance rating of not less than one hour

Low initial cost and low maintenance make this type of construction extremely popular

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8
Q

Modified Fire-Resistive Construction

A

A class of construction that has exterior walls, floors, and roofs of masonry or other fire-resistive materials with a fire-resistance rating of one to two hours

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9
Q

Fire-Resistive Construction

A

A class of construction that has exterior walls, floors, and roofs of masonry or other fire-resistive material with a fire-resistance rating of at least two hours

In addition to resisting fire damage, the strength of a fire-resistive structure gives it superior resistance to causes of loss such as windstorm, earthquake, and flood

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10
Q

Fuel Load (Fire Load)

A

The expected maximum amount of combustible material in a given area of a building, including both structural elements and contents, commonly expressed in terms of weight of combustibles per square foot

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11
Q

Building Characteristics to Consider

A
  • Construction Type (Class)
  • Construction Materials (Interior, Insulation, Roof, etc.)
  • Age
  • Height
  • Fire Divisions
  • Building Operations
  • Building Codes
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12
Q

High-Rise Building

A

The National Fire Protection Association (NFPA) defines this as a building that is at least 75 feet tall

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13
Q

Fire Division

A

A section of a structure so well protected that fire cannot spread from that section to another, or vice versa

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14
Q

Fire Wall

A

A floor-to-roof wall made of noncombustible materials and having no open doors, windows, or other spaces through which fire can pass

Generally it is 8+ inches of masonry material, but this varies, and it is also free standing

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15
Q

Parapet

A

A vertical extension of a fire wall that extends above a roofline; building codes typically specify this must be 18-36 inches above a combustible roof

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16
Q

Fender Walls

A

Extensions of the fire wall through the outer walls

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17
Q

Fire Stop

A

An element of fire-resistant construction, inserted in concealed spaces or between structural elements of a building, either a floor, wall, or roof area, that prevents the passage of flame from one point to another

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18
Q

Fire Doors

A

Classified based on ability to resist fire; must be automatically self-closing and unobstructed

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19
Q

Building Codes

A

Local ordinances or state statutes that regulate the construction of buildings within a municipality, county, or state

Effectiveness can be evaluated using ISO’s Building Code Effectiveness Grading Schedule (BCEGS) which has grades from 1 (best) to 10 (worst)

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20
Q

Occupancy

A

The type or character of use of the property in question

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21
Q

Occupancy Categories

A

Habitational, Office, Institutional, Mercantile, Service, and Manufacturing

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22
Q

Evaluating Loss Potential of an Occupancy

A
  1. Ignition Sources
  2. Combustibility
  3. Susceptibility
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23
Q

Ignition Sources

A

Provide the means for a fire to start and potential sources are in the following categories:
- Friendly fires that escape containment
- Friction that generates enough heat to ignite nearby combustible material
- Electricity that produces sparks or heat that can ignite exposed combustibles
- Certain chemical reactions, called exothermic reactions, that produce heat sufficient to cause ignition

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24
Q

Combustibility

A

A content’s combustibility determines how quickly the material ignites, the rate at which a fire spreads, and the intensity or amount of heat a fire generates

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25
Q

Susceptibility

A

The extent to which fire and its effects, either direct or resultant, will damage personal property – either merchandise or materials – typical of the occupancy

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26
Q

Probable Maximum Loss (PML)

A

The largest loss that an insured is likely to sustain

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27
Q

Physical Hazards of an Occupancy:

A
  • Common Hazards
  • Special Hazards of the Class
  • Special Hazards of the Risk
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28
Q

Common Hazards

A

Some examples include improper handling of waste and trash, heating equipment, electrical equipment, and smoking

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29
Q

Special Hazards of the Class

A

A characteristic typical of all occupancies in a given class that can cause or aggravate a loss. An example is the hazard of cooking, common to the restaurant class

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30
Q

Special Hazards of the Risk

A

A condition that can cause a loss but that is not typical of an occupancy. An example is the use of a welding torch in an auto repair shop

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31
Q

Protection

A

Measures taken to prevent or reduce the damage done by fire

Fire protection is of two types:
1. Public or municipal fire protection provided by towns and cities
2. Private fire protection provided by the property owner or occupant

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32
Q

Public Fire Protection

A

Fire protection equipment and services made available through governmental authority to all properties within a defined area

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33
Q

Fire Protection Classifications

A
  • Protected
  • Partially Protected
  • Unprotected
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34
Q

Fire Protection Classification: Protected

A

A five tiered classification based on how far the building is from a responding fire department; to qualify for this classification, a building must be within 1,000 feet of a fire hydrant and within five road miles of a responding fire department

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35
Q

Fire Protection Classification: Partially Protected

A

Building is located more than 1,000 feet from a fire hydrant and is within five road miles of a responding fire department

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36
Q

Public Protection Classification (PPC)

A

A numerical grading system determined by ISO’s Fire Suppression Rating Schedule (FSRS); graded on a scale of 1 (best protection) to 10 (worst protection)

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37
Q

Private Fire Protection Systems - Types

A
  1. Prevention
  2. Detection
  3. Suppression
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38
Q

Private Fire Protection: Detection

A

Major detection systems include:
- Guard service with a clock system
- Private patrol service
- Smoke detectors
- Heat detectors

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39
Q

Local Fire Alarm System

A

A detection system, triggered by smoke or heat, that sounds a bell, siren, or another alert at the premises only

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40
Q

Central Station System

A

A private detection service that monitors the systems of multiple businesses and/or residences and that calls appropriate authorities or dispatches its own personnel when an alarm is activated

A disadvantage of this method is its relative cost

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41
Q

Remote Station System

A

Similar to a central station system, but directly signals the local police and fire stations

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42
Q

Proprietary Alarm System

A

Similar to a central station system, but directly signals a receiving station located on the protected premises

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43
Q

Private Fire Protection System: Suppression

A

Four categories:
1. Portable fire extinguishers
2. Standpipe and hose systems
3. Automatic sprinkler systems
4. Private fire brigades

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44
Q

Wet Pipe Sprinkler Systems

A

Automatic fire sprinkler systems with pipes that always contain water under pressure, which is released immediately when a sprinkler head opens

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45
Q

Dry Pipe Sprinkler Systems

A

Automatic fire sprinkler systems with pipes that contain compressed air or another inert gas that holds a valve in the water line shut until an open sprinkler head releases the gas and allows water to flow through the previously dry pipe to the sprinkler head

46
Q

Preaction Sprinkler System

A

An automatic fire sprinkler system with automatic and closed-type sprinkler heads connected to a piping system that contains air or nitrogen, with an additional fire detection system that serves the same area as the sprinklers

47
Q

Deluge Sprinkler System

A

A type of sprinkler system in which all the heads remain permanently open; when activated by a detection system, a deluge valve allows water into the system

48
Q

Fire Brigade

A

A private or temporary organization of individuals equipped to fight fires; typically used in businesses that are located far from municipal fire services

49
Q

Specialized Sprinkler Systems

A

Use gas extinguishing agents when water is inappropriate or ineffective

50
Q

External Exposure

A

A loss exposure outside the area owned or controlled by the insured; it is the most difficult to analyze because of its lack of information

51
Q

Single-Occupancy Loss Exposure

A

This exists when the property being underwritten consists of a single building, fire division, or group of buildings, all owned or controlled by the insured

Examples of exposures include close buildings and woodlands

52
Q

Multiple Occupancy Loss Exposure

A

This exists when persons other than the insured own or control portions of the fire division that contains the insured property

53
Q

Factors that Determine Insurer’s Payment Obligation

A
  • Insurable interest of all persons insured (most commonly outright ownership)
  • Policy provisions for establishing the value of insured property (replacement cost vs. actual cash value)
  • Relationship of the amount of insurance to the value of insured property
54
Q

Replacement Cost

A

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation

55
Q

Actual Cash Value

A

A method in valuing property that is calculated as the cost to replace or repair property minus depreciation, the fair market value, or a valuation determined by the broad evidence rule

56
Q

Coinsurance Clauses

A

A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property’s value

57
Q

Insurance to Value

A

Insurance to value means that the insured has enough coverage to receive an adequate recovery on damages

Insurers can benefit from this because they will have:
- Higher limits of property insurance (higher premiums)
- An adequately insured book of business
- Competitive status

58
Q

Measures to Determine Potential Loss Severity

A
  • Policy Amount
  • Amount Subject
  • Normal Loss Expectancy (NLE)
  • Probable Maximum Loss (PML)
  • Maximum Foreseeable Loss (MFL)

Each measure is the sum of separate values for each type of coverage the policy provides

59
Q

Policy Amount

A

The amount of insurance the policy provides (limit of liability); easiest to calculate, only measure on which underwriters tend to agree, and least useful

60
Q

Amount Subject

A

Measures the exposure to a single loss and varies by cause of loss; often underwriters use the expression “within four walls” to explain this concept

61
Q

Normal Loss Expectancy (NLE)

A

The loss expected under normal operating conditions with all fire protection services working. Elements used for consideration include:
- Construction
- Protection
- Business interruption contingency plans
- Fire divisions
- Susceptibility of contents to damage and combustibility
- Operational hazards

62
Q

Maximum Single Loss Exposure

A

Statutes generally prohibit an insurance company from exposing more than 10% of its policyholders’ surplus to a single loss net of authorized reinsurance

63
Q

Maximum Foreseeable Loss (MFL)

A

An estimate of the financial cost of the loss that would occur if all protection measures (automatic and manual) were to fail and no effective fire department response occurred

64
Q

Business Income Coverage Forms

A

Provide compensation for reductions in income or profits resulting from a necessary interruption of the policyholder’s business operations arising from direct physical damage to property by a covered cause of loss

65
Q

Extra Expense Coverage

A

Compensates the policyholder for the additional expenses incurred to minimize the interruption of operations

66
Q

Businessowners Policies (BOPs)

A

Usually include business income coverage on an actual loss sustained basis, often with fewer conditions or restrictions than separate business income or extra expense policy forms

Usually has a time limit (may/may not be sufficient)

67
Q

3 Steps to Estimate Business Income PML

A
  1. Determine the most serious direct loss that is likely to occur
  2. Calculate the longest period of restoration that this loss can reasonably be expected to cause
  3. Compute the largest loss of business income that the insured is likely to sustain during a period of this length
68
Q

Factors Affecting Period of Interruption

A
  • Rebuilding Time
  • Seasonality
  • Bottlenecks
  • Computer Systems
  • Long Production Processes
  • Availability of Substitutes
  • Business Continuity and Disaster Recovery Planning
69
Q

Categories of Commercial Crime Loss Exposures

A
  1. Employee Dishonesty
  2. Crime Committed by Others
70
Q

Crime Loss Exposures: Employee Dishonesty

A

Losses are significant and are estimated to cost businesses more than any other form of crime

71
Q

Crime Loss Exposures: Crime Committed by Others

A

Six factors are considered by underwriters:
- Susceptibility and marketability
- Property location
- Nature of the occupancy
- Moral and morale hazards
- Public protection
- Coverage and price modifications

72
Q

Policy Limits for Crime Insurance

A

Too much insurance can create moral hazard so most underwriters do not want to provide crime insurance to full value even if it is requested; for low policy limits, the probable maximum loss equals the amount subject

73
Q

Protective Safeguards Endorsement

A

Warrants that certain safeguards are in place; if the insured fails to protect the property as promised, the insurer is not contractually obligated to pay any resulting losses

Warranty requires the insured to make good faith effort to maintain specified level of protection

74
Q

Private Protection Systems

A

These serve two functions:
- Protect crime losses
- Reduce losses that do occur

The two main categories are detection devices and barriers to criminal access

75
Q

Loss Exposures Covered Under ISO Commercial General Liability (CGL)

A
  • Premises and Operations Liability
  • Products and Completed Operations Liability
  • Personal and Advertising Injury Liability
  • Premises Medical Payments Liability
76
Q

Premises Liability Loss Exposures

A

These arise from the insured’s ownership or possession of real property; often as these increase, operations loss exposures decrease

77
Q

Operations Liability Loss Exposures

A

These arise from an insured’s business operations conducted away from its own premises and from uncompleted work (also known as operations in progress)

78
Q

UWs Considerations for Premises and Operations Liability

A
  • Extent of Public Exposure
  • Physical Hazards (common hazards, special hazards of the class, special hazards of the risk)
  • Contractors and Subcontractors (needing adequate insurance)
79
Q

Vicarious Liability

A

A legal responsibility that occurs when one party is held liable for the actions of a subordinate or an associate because of the relationship between the two parties

80
Q

Sources of Products Liability

A
  • Breach of Warranty
  • Negligence
  • Strict Liability in Tort
81
Q

Breach of Warranty

A

The failure to meet the terms of a promise or an agreement associated with a product

82
Q

Implied Warranty

A

An obligation that the courts impose on a seller to warrant certain facts about a product

83
Q

Implied Warranty of Merchantability

A

An implied warranty that a product is fit for the ordinary purpose for which it is used

84
Q

Implied Warranty of Fitness for a Particular Purpose

A

An implied warranty that a product is fit for a particular purpose; applies if the seller knows about the buyer’s purpose for the product

85
Q

Negligence

A

The failure to exercise the degree of care that a reasonable person in a similar situation would exercise to avoid harming others

Failure to give adequate warning is the most common ground for negligence in products liability suits

86
Q

Strict Liability (Absolute Liability)

A

Liability imposed by a court or by a statute in the absence of fault when harm results from activities or conditions that are extremely dangerous, unnatural, ultrahazardous, extraordinary, abnormal, or inappropriate

87
Q

Completed Operations Loss Exposures

A

These include construction, service, repair, and maintenance activities

88
Q

Personal and Advertising Injury Liability

A

This is automatically included as Coverage B in the ISO CGL coverage form, unless it is specifically excluded by attaching an endorsement to the policy; underwriters do not usually evaluate this loss exposure closely unless there is reason to

89
Q

Premises Medical Payments Liability

A

This is automatically included as Coverage C in the ISO CGL coverage form

Medical payments coverage does not require the insured to be legally liable to pay for them so the limits are much lower than those for bodily injury / property damage (typically $5k-$10k per person)

90
Q

Personal Auto Underwriting Considerations

A
  • Age of operator
  • Age and type of auto
  • Auto use
  • Driving record
  • Territory
  • Gender and marital status
  • Occupation
  • Personal characteristics
  • Physical condition of driver
  • Safety equipment
91
Q

Credit Scoring

A
92
Q

Commercial Auto Underwriting Considerations

A
  • Motor vehicle record, especially if it indicates any violations
  • Accident history
  • Experience with operating commercial motor vehicles
93
Q

Class Rated

A
94
Q

Trucks, Tractors, and Trailers Classification and Rating

A

Four factors considered are:
- Vehicle weight and type
- Vehicle use
- Radius of operation
- Special industry classifications

95
Q

Risk Control Reports

A

A first-hand evaluation of an account by the insurer’s risk control representative; generally used only for accounts that meet a specific premium size or other specific criteria

They confirm and supplement information on the application

96
Q

Fleet Safety Program

A

Consists of the written policy and procedures that an account uses in the management of its drivers and vehicles; it generally indicates that the account management understands the value of risk management and is working to prevent and control losses

97
Q

Commercial Motor Vehicle Safety Act (CMVSA) of 1986)

A

It requires that drivers of specific large vehicles hold a commercial driver’s license (CDL)

98
Q

Difference Between GL and WC Insurance

A

General Liability underwriting concerns itself with injuries to the general public while workers compensation underwriting focuses on injuries to the insured’s employees

99
Q

Factors to Investigate for Workers Compensation Insurance

A
  • Experience Modification Factor
  • Temporary and Seasonal Employees
  • Subcontractors
  • Maritime Occupations
  • Relative Premium Size
  • Employee Concentration
100
Q

Experience Modification Factor

A

A factor that tailors manual rates to an insured’s experience based on the insured’s payroll and loss record of certain prior years

101
Q

Maritime Loss Exposures

A

Loss exposures related to occupations involving work on vessels while at sea or in close proximity to bodies of water, such as on docks, on piers, or in terminals

102
Q

United States Longshore and Harbor Workers’ Compensation Act (LHWCA)

A

A federal statute that eliminates the right of most maritime workers (other than crew members of vessels) to sue their employees and, in return, requires such employers to provide injured or ill workers with benefits like those provided by state workers compensation statutes

103
Q

Jones Act (U.S. Merchant Marine Act of 1920)

A

A federal statute that permits injured members of a vessel’s crew (or survivors of a deceased crew member) to sue their employer for damages due to the employer’s negligence

104
Q

Occupational Disease

A

A disease resulting from causes the worker faces on the job and to which the general public is not exposed

105
Q

Cumulative Trauma Disorders

A

Sometimes referred to as repetitive strain injuries (RSI), these arise from a series of minor stresses over a period of time; these can be relatively minor and accumulate until they require medical treatment and can result in a disability

106
Q

Evaluating Off-Premises Hazards

A

Considerations are:
1. Duration of travel
2. Mode of transportation
3. Hazards at remote job sites

107
Q

Umbrella Liability Insurance

A

Liability insurance that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to a self-insured retention

Most are designed to:
- Provide excess liability limits above all specified underlying policies
- Provide coverage when the aggregate limits of the underlying policies have been exhausted
- Provide coverage for gaps in the underlying policies

108
Q

Excess Liability Insurance

A

Insurance coverage for losses that exceed the limits of underlying insurance coverage or a retention amount

Does not broaden coverage, but umbrella insurance can

109
Q

Drop-Down Coverage

A

Coverage provided by many umbrella liability policies for
1. Claims not covered at all by the underlying policies
2. Claims that are not covered by an underlying policy only because the underlying policy’s aggregate limits have been depleted

110
Q

Elements of Underlying Insurance

A
  • Type of insurance
  • Name of insurer
  • Applicable limits and deductibles
  • Premium for bodily injury liability coverages
  • Premium for property damage liability coverages
  • Details of extensions of coverage beyond standard policy provisions
111
Q

Self-Insured Retention

A

This amount is usually $10,000 for a commercial umbrella liability policy

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