Ch. 2 - Property Insurance Basics NOTE CARDS Flashcards
Reduction in value, particularly due to wear and tear.
Depreciation
The portion of premium paid in advance that now belongs to the insurer because it applies to the elapsed part of the policy.
Earned premium
Used as a measure of the rating units or the premium base of a risk (exposure units multiplied by the rate results in the premium)
Exposure units
The degree to which items are similar
Homogeneity
A legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyer’s expectations.
Implied warranty
The date at which the insurance policy goes into effect.
Inception
The failure to use the care that a reasonable, prudent person would under the same or similar circumstances.
Negligence
Depreciation in the value of a property due to becoming outdated.
Obsolescence
A written law passed by a legislative body.
Statute
The reduction, decrease, or disappearance of value of the person or property insured in a policy, by a peril insured against.
Loss
The insured must have an insurable interest in the person or property covered by an insurance policy.
Insurable Interest:
3 Elements of Insurable Risk:
- Financial: A monetary interest
- Blood: A relative
- Business: A business partner
The process of reviewing applications for insurance and the information on the application. (A risk selection process.)
Underwriting
A point system used by insurance underwriters to predict risk and possibility of claims, and determine charges for premiums.(AKA insurance risk score)
Credit Scores
What insurance are Credit Scores typically used in?
Homeowners and personal auto insurance
A formula used by insurance companies to compare premium income to losses, including claims paid and claim-related expenses.
Loss ratio
What is the Loss Ratio formula?
(Incurred losses + Loss adjusting expense) / Earned premium = Loss ratio
The amount charged for a particular amount of coverage.
Insurance Rate
How can insurance rates be developed?
Property values, revenues receipts, or payroll
The practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics.
Class Rating
Another name for class rating
Manual rating
What are the different types of insurance rates?
- Class rating
2. Individual rating
What is the most common approach to calculating insurance rates?
Class rating
Which insurance types typically use Class Rating?
- Life insurance
- Property insurance
- Casualty insurance
What are the advantages of Class Rating?
Permits the insurer to apply a single rate to a large number of insureds, resulting in a simplified process of determining premiums.
When the characteristics of the units to be insured vary so widely that it is deemed desirable to calculate rates on the basis that attempts to measure more precisely the unique loss-producing characteristics.
Individual Rating
5 Individual Rate-Making Approaches:
- Judgment Rating
- Schedule Rating
- Experience Rating
- Retrospective Rating
- Merit Rating
Rates for when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class.
Judgement Rating
Another name for judgment rating
A rated
Ocean Marine Insurance uses what rating system typically?
Judgment rating
Rates developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure.
Schedule Rating
Rates used on a class-rating system and adjusts the insured’s premium either up or down, depending on the extent to which his experience has deviated from the average experience of the class.
Experience Rating
A self-rating plan under which the actual losses during the policy period determine the final premium, subject to a minimum and maximum premium.
(Deposit is required at the inception of the policy. Premium is then adjusted at the end of the policy term based on the actual loss experience.)
Retrospective Rating
Rating used in personal auto insurance, where the insured’s premium is based not on the actual loss record, but on other factors that indicate the probability that loss will occur.
Merit Rating
A rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses or profit and are based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time.
Loss Costs
Factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profits.
Components
A specific cause of loss.
Peril
4 standard perils in property policies:
fire, wind, hail, explosions.
A term used in property insurance to describe the breadth of coverage provided under an insurance policy form that lists specific covered perils. (No coverage is provided for unlisted perils.)
Named Peril
A term used in property insurance to describe the breadth of coverage provided under an insurance policy form that insures against any risk of loss that is not specifically excluded.
(Replaces the term “all risks”.)
Open Peril
Direct physical damage to buildings and/or personal property.
Direct Loss
Damage where the insured peril was caused by the direct loss (such as water damage from a fire being put out).
Proximate Cause of Loss
Losses considered a result of direct loss, typically from the time it takes to repair or replace damaged property.
Indirect loss
Another name for indirect loss
Consequential loss
Most prevalent type for individual homeowners?
Additional living expense while the home is being repaired
Most prevalent type for commercial properties?
Loss of profits due to being closed down while business is repaired.
A single property insurance policy that provides coverage for multiple classes of property at one location, or for one or more classes of property at multiple locations.
Blanket Insurance
A property insurance policy that covers a specific kind or unit of property for a specific amount of insurance.
Specific Insurance
6 Basic Types of Construction?
- Fire-resistive
- Modified Fire-resistive
- Masonry Noncombustible
- Noncombustible
- Joisted-masonry
- Frame
Which construction material rates best for property insurance?
Fire-resistive
Buildings constructed with masonry and/or other materials with a fire resistance rating between 1 hour and 2 hours.
Modified Fire-resistive
Buildings constructed with masonry or fire resistive walls and noncombustible or slow burning floors and roof.
Masonry Noncombustible
Buildings constructed of noncombustible materials (materials that will not ignite and burn when subjected to fire).
Noncombustible
Buildings constructed with masonry or fire-resistive walls and combustible floors and roof.
Joisted-masonry
Buildings constructed of combustible materials, or with noncombustible or slow-burning walls and combustible floors and roof.
Frame
Which construction material rates worst?
Frame
A factor in determining the premium charged and the amount of insurance required.
Loss Valuation
A method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence.
Actual Cash Value
Actual Cash Value Equation
Current Replacement Cost - Depreciation = ACV
The cost to replace damaged property with like kind and quality at today’s price, without any dedication for depreciation.
Replacement Cost
The cost to replace damaged property with less expensive and more modern construction or equipment.
Functional Replacement Cost
A seldom-used method of valuing a loss based upon the amount a willing buyer would pay to a willing seller for the property prior to the loss.
Market Value
A property policy with a provision agreed upon by the insurer and the insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is written and suspends any coinsurance or other contribution clauses in the policy.
Agreed Value
An amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the vent of a covered loss. The scheduled amount is the maximum amount the insured will pay in the event of a loss.
Stated Amount
Used when it is difficult to establish the value of insured property after a loss occurs, or when it is desirable to agree on a specific value in advance. Provides payment of full policy amount in event of total loss without regard to actual value or depreciation.
Valued Policy
What type of policy does Ocean Marine Insurance usually use?
Valued policy
The failure to use the care that a reasonable, prudent person would have taken under the same or similar circumstances.
Negligence
4 Elements of a Negligent Act
- Legal duty
- Standard of care
- Proximate cause
- Actual loss or damage
Typically, burden of proof is on the injured party to prove other party was negligent. Liability is shifted from proof of injured party to the defendant when the following four things are established: legal duty, standard of care, proximate cause, and actual loss or damage.
Elements of a Negligent Act
Acting as a reasonable person would act.
The defendant must have used a standard of care that breached that legal duty.
Standard of Care
Element of negligence that must be shown that the defendant had a legal duty to act or not act.
legal duty
An act or event considered a natural and reasonably foreseeable cause of damage or event that occurs and damages property or injures a plaintiff.
Proximate Cause
When the negligence must have been the cause without which the accident would not have happened.
Direct Liability
Actual injury or damage must have been suffered by the party seeking recovery.
Actual Loss or Damage
5 Defenses Against Negligence:
- Assumption of Risk
- Comparative Negligence
- Contributory Negligence
- Intervening Cause
- Statute of Limitations
The defense of an action for recovery for injuries that if a person recognizes and understands that there is danger involved in an activity and voluntarily chooses to encounter it, they may bar recovery for injury caused by negligence.
Assumption of Risk
The defense that the other party’s negligence or fault will not necessarily defeat the claim, but will be used to mitigate the damages payable to the other party.
The fault is shared between the two parties involved, and damages are reduced by the percentage of negligence of each party.
Comparative Negligence
Allows the plaintiff to recover the damages, as long as he or she is not 100% negligent.
Pure Comparative Negligence
The party who brings the lawsuit.
Plaintiff
The injured party may only recover damages if his or her fault is less than that of the defendant. (AKA equal to or greater than rule).
Modified Comparative Negligence
The party being sued.
Defendant
The defense that the injured party must be completed free of fault in order to collect. Any negligence on the part of the injured party that contributed to the injury, however slight, can defeat the claim.
Contributory Negligence