Ch 2 Flashcards
Cost of a replacing lost or damaged property with new property of like kind and quality, or it’s functional equivalent at current prices.
Replacement cost.
Depreciation that happens more quickly after purchase and levels out eventually.
Accelerated depreciation (cars)
Depreciation that is slight for a given time and then rapidly increased. Ex: food medicine batteries.
Decelerated depreciation.
A $1,000 TV is expected to last 8 years calculate the ACV at 5 years. (Straight line)
Depreciates 12.5% per year x 5 years = 62.5% depreciation. $1000-$625= $375
Explain the term betterment.
And jets amount of depreciation is identical to how much better or more valuable a new object is compared to the old object.
What are the 2 approaches to ACV?
Market value
Broad evidence rule
When is market value approach inappropriate?
When a commodity is controlled by a small number of sellers or buyers. The market becomes artificial. Example diamonds.
When is market value particularly useful?
When an object has no real replacement cost. No LKQ exists. Art or old building with obscure construction of methods.
Reasons land value might drop after a loss.
Exempt structure being destroyed and replacement has to meet code.
Reasons land value could increase after a loss.
Damaged structure isn’t making good use of land (old warehouse in area with luxury shops)
How is market value loss calculated?
Market value of loss to building = market value of entire property before- after
Give an example of when an insurer could benefit from ACV instead of market value.
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.
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.
Broad evidence rule.
When is a situation where an insurer would use the original cost valuation?
During settlement of tenant’s improvements or betterment a. Original value pro rated for time left on lease
When is increased limits of liability coverage A B C or D important?
Catastrophes when rc is high due to demand for builders and materials.
What does it mean to say a deductible is absorbed?
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.
Indicators of possible fraudulent double insurance.
One policy has property grossly uninsured
Insured incorrectly stated who the agent or adjuster.
If no “other insurance” condition indicated that coverage is excess or pro rata, what should the adjuster do ?
Treat existing coverage as primary
If there is an excess policy can the insured recover the deductible withheld by the primary insurer?
Can recover the difference in deductibles.
When do The Guiding Principles operate?
Only when more than one policy covers a loss and the policies’ other insurance conditions do not resolve how coverage applies.
What do The Guiding Principles do?
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.
What are the two situations The Guiding Principles have guidelines for?
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)
What is the first step in formal resolution of overlapping coverage disagreements?
arbitration
What happens if an adjuster tells an insured to dispose of a damaged carpet and then wants to inspect it?
They have waived right to inspect it by telling the insured to dispose of it. They are estopped from denying the claim.
Why is it good to get the proof of loss up front?
It commits the insured under oath to a specific set of facts
What are the actions an insurer can take after getting proof of loss?
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
Typical reasons for rejecting proof of loss
1) Not enough documentation to support claim
2) incomplete
3) not filed within required time
This provides a means to resolve disputes regarding value without one party having to sue another. Does not involve coverage disputes.
Appraisal
Why does the appraisal provision use the word demand?
It means that if either party makes a demand, the other has no choice but to submit to the appraisal.
Need to learn how deductibles are pro rated
Review pgs 23-27
What happens if an insurer chooses an incompetent appraiser?
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
When is an appraisal considered decided upon?
When 2 of the parties agree
Are appraisal determinations binding?
Yes
How are appraisers and umpire paid?
Appraisers paid by the party that hired them. Umpire cost is split.
Telling an insured the settlement subtracts out the value they already got from property is a way of explaining?
ACV
What would be the best way to value an old Victorian building with ACV valuation?
Market value because replacement cost would be difficult or impossible to determine
When would an insurer invoke the right to replace or repair property?
When settlement is expensive or if they think insured is trying to profit.
To receive additional limits of liability if the insured has the endorsement, what do they have to do?
Have coverage A limit equaling 100% of replacement cost.
Special limits: cash $100, collectibles: $500
All perils deductible:$250
Loss $100 cash, $500 TV, collectibles $3,000
Calculate loss
Cash: $100
Collectibles: :$500 (deductible absorbed in overage)
TV: $500
= $1,100
Equal shares method of sharing loss:
Policy A primary: $50k
Policy B excess: $100k
Loss: $75k
$37,500 since splitting is under each policy limit.
Most common approach to settling agreements over overlapping coverage.
Compromise.
How does prorating a deductible work?
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.
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?
30 days
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?
$5k
