Ch 2

Question 1

Cost of a replacing lost or damaged property with new property of like kind and quality, or it’s functional equivalent at current prices.

Answer 1

Replacement cost.

Question 2

Depreciation that happens more quickly after purchase and levels out eventually.

Answer 2

Accelerated depreciation (cars)

Question 3

Depreciation that is slight for a given time and then rapidly increased. Ex: food medicine batteries.

Answer 3

Decelerated depreciation.

Question 4

A $1,000 TV is expected to last 8 years calculate the ACV at 5 years. (Straight line)

Answer 4

Depreciates 12.5% per year x 5 years = 62.5% depreciation. $1000-$625= $375

Question 5

Explain the term betterment.

Answer 5

And jets amount of depreciation is identical to how much better or more valuable a new object is compared to the old object.

Question 6

What are the 2 approaches to ACV?

Answer 6

Market value

Broad evidence rule

Question 7

When is market value approach inappropriate?

Answer 7

When a commodity is controlled by a small number of sellers or buyers. The market becomes artificial. Example diamonds.

Question 8

When is market value particularly useful?

Answer 8

When an object has no real replacement cost. No LKQ exists. Art or old building with obscure construction of methods.

Question 9

Reasons land value might drop after a loss.

Answer 9

Exempt structure being destroyed and replacement has to meet code.

Question 10

Reasons land value could increase after a loss.

Answer 10

Damaged structure isn’t making good use of land (old warehouse in area with luxury shops)

Question 11

How is market value loss calculated?

Answer 11

Market value of loss to building = market value of entire property before- after

Question 12

Give an example of when an insurer could benefit from ACV instead of market value.

Answer 12

A suit purchased a year ago is destroyed. Market for used clothing is small and market value could be $50 whereas it could be worth $300 if rc - depreciation.

Question 13

A court ruling requiring all relevant factors to be considered in ACV. RC, obsolescence, circumstances of use, income that could b derived from property, all other factors.

Answer 13

Broad evidence rule.

Question 14

When is a situation where an insurer would use the original cost valuation?

Answer 14

During settlement of tenant’s improvements or betterment a. Original value pro rated for time left on lease

Question 15

When is increased limits of liability coverage A B C or D important?

Answer 15

Catastrophes when rc is high due to demand for builders and materials.

Question 16

What does it mean to say a deductible is absorbed?

Answer 16

If the loss exceeds the limit by more than the deductible the insured should collect the whole limit. Ex. $350 cash loss and $200 TV. Special limit cash $200 and all perils deductible $100 since insured shares in loss with $200 cash deductible the $100 deductible is absorbed.

Question 17

Indicators of possible fraudulent double insurance.

Answer 17

One policy has property grossly uninsured

Insured incorrectly stated who the agent or adjuster.

Question 18

If no “other insurance” condition indicated that coverage is excess or pro rata, what should the adjuster do ?

Answer 18

Treat existing coverage as primary

Question 19

If there is an excess policy can the insured recover the deductible withheld by the primary insurer?

Answer 19

Can recover the difference in deductibles.

Question 20

When do The Guiding Principles operate?

Answer 20

Only when more than one policy covers a loss and the policies’ other insurance conditions do not resolve how coverage applies.

Question 21

What do The Guiding Principles do?

Answer 21

resolve which policy is primary or what the pro rata distribution should be when there are no Other Insurance conditions in the policies or when the applicable conditions are contradictory.

Question 22

What are the two situations The Guiding Principles have guidelines for?

Answer 22

1) When the policies cover the same property and the same interest (ex. 2 homeowners policies for the same insured and same property.
2) Policies cover the same property and different interests (HO-3 and Dry Cleaner’s policy covering clothing)

Question 23

What is the first step in formal resolution of overlapping coverage disagreements?

Answer 23

arbitration

Question 24

What happens if an adjuster tells an insured to dispose of a damaged carpet and then wants to inspect it?

Answer 24

They have waived right to inspect it by telling the insured to dispose of it. They are estopped from denying the claim.

Question 25

Why is it good to get the proof of loss up front?

Answer 25

It commits the insured under oath to a specific set of facts

Question 26

What are the actions an insurer can take after getting proof of loss?

Answer 26

1) accept as submitted
2) Reject and give the insured a chance to refile
3) Reject and allow an insured to make the next move without further direction

Question 27

Typical reasons for rejecting proof of loss

Answer 27

1) Not enough documentation to support claim
2) incomplete
3) not filed within required time

Question 28

This provides a means to resolve disputes regarding value without one party having to sue another. Does not involve coverage disputes.

Answer 28

Appraisal

Question 29

Why does the appraisal provision use the word demand?

Answer 29

It means that if either party makes a demand, the other has no choice but to submit to the appraisal.

Question 30

Need to learn how deductibles are pro rated

Answer 30

Review pgs 23-27

Question 31

What happens if an insurer chooses an incompetent appraiser?

Answer 31

If one party objects to the competency and the other party does not find a new appraiser the award could be contested through the court

Question 32

When is an appraisal considered decided upon?

Answer 32

When 2 of the parties agree

Question 33

Are appraisal determinations binding?

Answer 33

Yes

Question 34

How are appraisers and umpire paid?

Answer 34

Appraisers paid by the party that hired them. Umpire cost is split.

Question 35

Telling an insured the settlement subtracts out the value they already got from property is a way of explaining?

Answer 35

ACV

Question 36

What would be the best way to value an old Victorian building with ACV valuation?

Answer 36

Market value because replacement cost would be difficult or impossible to determine

Question 37

When would an insurer invoke the right to replace or repair property?

Answer 37

When settlement is expensive or if they think insured is trying to profit.

Question 38

To receive additional limits of liability if the insured has the endorsement, what do they have to do?

Answer 38

Have coverage A limit equaling 100% of replacement cost.

Question 39

Special limits: cash $100, collectibles: $500
All perils deductible:$250

Loss $100 cash, $500 TV, collectibles $3,000

Calculate loss

Answer 39

Cash: $100
Collectibles: :$500 (deductible absorbed in overage)
TV: $500
= $1,100

Question 40

Equal shares method of sharing loss:
Policy A primary: $50k
Policy B excess: $100k
Loss: $75k

Answer 40

$37,500 since splitting is under each policy limit.

Question 41

Most common approach to settling agreements over overlapping coverage.

Answer 41

Compromise.

Question 42

How does prorating a deductible work?

Answer 42

Prorate the loss by percentage of total coverage.

Prorate share of common deductible, which is the smallest deductible of the two policies. The insured is still responsible for $100 and the other companies share in the deductibles.

Question 43

How many days does an insurer have to make a payment after receiving satisfactory proof of loss before notifying the insured of its intent to either pay or deny a claim?

Answer 43

30 days

Question 44

What is the per occurrence limit if an employee in a company vehicle is transporting $20,000 drawings to a customers house and someone accosts the employee and takes the drawings?

Answer 44

$5k