Assignment 9: Underwriting Property and Liability Insurance Flashcards
COPE Model
A common tool underwriters use to evaluate exposures related to fire and other causes of loss. It stands for:
- Construction
- Occupancy
- Protection
- External Exposure
6 Insurance Services Office (ISO) Classes
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
Frame Construction
A class of construction that has load-bearing components made of wood or other combustible materials such as brick or stone veneer
Joisted Masonry Construction
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
Mill Construction
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
Noncombustible Construction
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
Masonry Noncombustible Construction
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
Modified Fire-Resistive Construction
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
Fire-Resistive Construction
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
Fuel Load (Fire Load)
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
Building Characteristics to Consider
- Construction Type (Class)
- Construction Materials (Interior, Insulation, Roof, etc.)
- Age
- Height
- Fire Divisions
- Building Operations
- Building Codes
High-Rise Building
The National Fire Protection Association (NFPA) defines this as a building that is at least 75 feet tall
Fire Division
A section of a structure so well protected that fire cannot spread from that section to another, or vice versa
Fire Wall
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
Parapet
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
Fender Walls
Extensions of the fire wall through the outer walls
Fire Stop
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
Fire Doors
Classified based on ability to resist fire; must be automatically self-closing and unobstructed
Building Codes
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)
Occupancy
The type or character of use of the property in question
Occupancy Categories
Habitational, Office, Institutional, Mercantile, Service, and Manufacturing
Evaluating Loss Potential of an Occupancy
- Ignition Sources
- Combustibility
- Susceptibility
Ignition Sources
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
Combustibility
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
Susceptibility
The extent to which fire and its effects, either direct or resultant, will damage personal property – either merchandise or materials – typical of the occupancy
Probable Maximum Loss (PML)
The largest loss that an insured is likely to sustain
Physical Hazards of an Occupancy:
- Common Hazards
- Special Hazards of the Class
- Special Hazards of the Risk
Common Hazards
Some examples include improper handling of waste and trash, heating equipment, electrical equipment, and smoking
Special Hazards of the Class
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
Special Hazards of the Risk
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
Protection
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
Public Fire Protection
Fire protection equipment and services made available through governmental authority to all properties within a defined area
Fire Protection Classifications
- Protected
- Partially Protected
- Unprotected
Fire Protection Classification: Protected
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
Fire Protection Classification: Partially Protected
Building is located more than 1,000 feet from a fire hydrant and is within five road miles of a responding fire department
Public Protection Classification (PPC)
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)
Private Fire Protection Systems - Types
- Prevention
- Detection
- Suppression
Private Fire Protection: Detection
Major detection systems include:
- Guard service with a clock system
- Private patrol service
- Smoke detectors
- Heat detectors
Local Fire Alarm System
A detection system, triggered by smoke or heat, that sounds a bell, siren, or another alert at the premises only
Central Station System
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
Remote Station System
Similar to a central station system, but directly signals the local police and fire stations
Proprietary Alarm System
Similar to a central station system, but directly signals a receiving station located on the protected premises
Private Fire Protection System: Suppression
Four categories:
1. Portable fire extinguishers
2. Standpipe and hose systems
3. Automatic sprinkler systems
4. Private fire brigades
Wet Pipe Sprinkler Systems
Automatic fire sprinkler systems with pipes that always contain water under pressure, which is released immediately when a sprinkler head opens
Dry Pipe Sprinkler Systems
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
Preaction Sprinkler System
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
Deluge Sprinkler System
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
Fire Brigade
A private or temporary organization of individuals equipped to fight fires; typically used in businesses that are located far from municipal fire services
Specialized Sprinkler Systems
Use gas extinguishing agents when water is inappropriate or ineffective
External Exposure
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
Single-Occupancy Loss Exposure
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
Multiple Occupancy Loss Exposure
This exists when persons other than the insured own or control portions of the fire division that contains the insured property
Factors that Determine Insurer’s Payment Obligation
- 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
Replacement Cost
The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation
Actual Cash Value
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
Coinsurance Clauses
A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property’s value
Insurance to Value
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
Measures to Determine Potential Loss Severity
- 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
Policy Amount
The amount of insurance the policy provides (limit of liability); easiest to calculate, only measure on which underwriters tend to agree, and least useful
Amount Subject
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
Normal Loss Expectancy (NLE)
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
Maximum Single Loss Exposure
Statutes generally prohibit an insurance company from exposing more than 10% of its policyholders’ surplus to a single loss net of authorized reinsurance
Maximum Foreseeable Loss (MFL)
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
Business Income Coverage Forms
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
Extra Expense Coverage
Compensates the policyholder for the additional expenses incurred to minimize the interruption of operations
Businessowners Policies (BOPs)
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)
3 Steps to Estimate Business Income PML
- Determine the most serious direct loss that is likely to occur
- Calculate the longest period of restoration that this loss can reasonably be expected to cause
- Compute the largest loss of business income that the insured is likely to sustain during a period of this length
Factors Affecting Period of Interruption
- Rebuilding Time
- Seasonality
- Bottlenecks
- Computer Systems
- Long Production Processes
- Availability of Substitutes
- Business Continuity and Disaster Recovery Planning
Categories of Commercial Crime Loss Exposures
- Employee Dishonesty
- Crime Committed by Others
Crime Loss Exposures: Employee Dishonesty
Losses are significant and are estimated to cost businesses more than any other form of crime
Crime Loss Exposures: Crime Committed by Others
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
Policy Limits for Crime Insurance
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
Protective Safeguards Endorsement
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
Private Protection Systems
These serve two functions:
- Protect crime losses
- Reduce losses that do occur
The two main categories are detection devices and barriers to criminal access
Loss Exposures Covered Under ISO Commercial General Liability (CGL)
- Premises and Operations Liability
- Products and Completed Operations Liability
- Personal and Advertising Injury Liability
- Premises Medical Payments Liability
Premises Liability Loss Exposures
These arise from the insured’s ownership or possession of real property; often as these increase, operations loss exposures decrease
Operations Liability Loss Exposures
These arise from an insured’s business operations conducted away from its own premises and from uncompleted work (also known as operations in progress)
UWs Considerations for Premises and Operations Liability
- Extent of Public Exposure
- Physical Hazards (common hazards, special hazards of the class, special hazards of the risk)
- Contractors and Subcontractors (needing adequate insurance)
Vicarious Liability
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
Sources of Products Liability
- Breach of Warranty
- Negligence
- Strict Liability in Tort
Breach of Warranty
The failure to meet the terms of a promise or an agreement associated with a product
Implied Warranty
An obligation that the courts impose on a seller to warrant certain facts about a product
Implied Warranty of Merchantability
An implied warranty that a product is fit for the ordinary purpose for which it is used
Implied Warranty of Fitness for a Particular Purpose
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
Negligence
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
Strict Liability (Absolute Liability)
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
Completed Operations Loss Exposures
These include construction, service, repair, and maintenance activities
Personal and Advertising Injury Liability
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
Premises Medical Payments Liability
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)
Personal Auto Underwriting Considerations
- 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
Credit Scoring
Commercial Auto Underwriting Considerations
- Motor vehicle record, especially if it indicates any violations
- Accident history
- Experience with operating commercial motor vehicles
Class Rated
Trucks, Tractors, and Trailers Classification and Rating
Four factors considered are:
- Vehicle weight and type
- Vehicle use
- Radius of operation
- Special industry classifications
Risk Control Reports
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
Fleet Safety Program
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
Commercial Motor Vehicle Safety Act (CMVSA) of 1986)
It requires that drivers of specific large vehicles hold a commercial driver’s license (CDL)
Difference Between GL and WC Insurance
General Liability underwriting concerns itself with injuries to the general public while workers compensation underwriting focuses on injuries to the insured’s employees
Factors to Investigate for Workers Compensation Insurance
- Experience Modification Factor
- Temporary and Seasonal Employees
- Subcontractors
- Maritime Occupations
- Relative Premium Size
- Employee Concentration
Experience Modification Factor
A factor that tailors manual rates to an insured’s experience based on the insured’s payroll and loss record of certain prior years
Maritime Loss Exposures
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
United States Longshore and Harbor Workers’ Compensation Act (LHWCA)
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
Jones Act (U.S. Merchant Marine Act of 1920)
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
Occupational Disease
A disease resulting from causes the worker faces on the job and to which the general public is not exposed
Cumulative Trauma Disorders
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
Evaluating Off-Premises Hazards
Considerations are:
1. Duration of travel
2. Mode of transportation
3. Hazards at remote job sites
Umbrella Liability Insurance
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
Excess Liability Insurance
Insurance coverage for losses that exceed the limits of underlying insurance coverage or a retention amount
Does not broaden coverage, but umbrella insurance can
Drop-Down Coverage
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
Elements of Underlying Insurance
- 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
Self-Insured Retention
This amount is usually $10,000 for a commercial umbrella liability policy
