Ch 3 | Common Policy Concepts

Question 1

How does one have an insurable interest in property?

Answer 1

an individual must stand to suffer a monetary loss if that property were damaged, destroyed, lost, or stolen

Parties that have an insurable interest in property are responsible for ensuring that they are named or qualify for coverage under proper insurance policies

Question 2

What are bailee liability policies?

Answer 2

written for bailees and other custodians of property to protect them against legal liability for damage to the property in their care, custody, or control. The property owner is not an insured under the policy, and the insurer will not make any payment to the owner on behalf of the insured unless the bailee is liable for the loss.

Question 3

Does the Mortgageholders condition apply to all property covered under a property policy, and how is it applied?

Answer 3

The Mortgageholders condition applies only to covered losses to buildings or structures—not personal property. The insurer agrees to pay mortgageholders to the extent of their financial interests in the real property and “in their order of precedence, as interests may appear.” This means if a property has a first mortgage and a second mortgage, the insurer will pay the holder of the first mortgage first and the holder of the second mortgage next.

Question 4

What is a security interest in a property?

Answer 4

when lenders require borrowers to pledge property as collateral for their loans
these lenders typically rely on the borrower’s insurance in the event of damage to the property

Question 5

loss payable clause

Answer 5

Provides the right to have payment of any loss made jointly to the loss payee and insured.

Question 6

lenders loss payable clause

Answer 6

Provides that a loss payee whose interest in the insured property is established by written agreements, such as bills of lading or financing statements, receives protection similar to that provided by the Mortgageholders condition.

Question 7

contract of sale clause

Answer 7

Provides that a purchaser or seller has the right to have payment of any loss made jointly to the loss payee and the named insured as their interests may appear.

Question 8

building owner loss payable clause

Answer 8

Provides that the owner of a building in which the insured is a tenant can be covered as a loss payee. The insurer further agrees to adjust losses to the described building with the building owner. Any loss payment made to the owner will satisfy the insured’s claims against the insurer for the owner’s property. The insurer also agrees to adjust losses to tenants’ improvements directly with the insured unless the lease provides otherwise.

Question 9

Trustee

Answer 9

Someone who has the legal title to a property but is responsible for ensuring that it be used, handled, and transferred solely for the benefit of the beneficiary.

Question 10

Insurable interest

Answer 10

An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred.

Question 11

What is the mortgageholders condition?

Answer 11

the insurer will pay covered claims to the mortgageholder even though the insurer has denied the insured’s claim because of the insured’s acts (such as arson) or because the insured has failed to comply with policy conditions. To obtain coverage in those situations, the mortgageholder must meet these requirements:

The mortgageholder must pay any premiums due to the insurer.

The mortgageholder must submit a proof of loss within 60 days of the insurer’s request.

The insurer must be notified of any change in ownership or occupancy or any substantial change in risk known to the mortgageholder.

Question 12

replacement cost

Answer 12

cost to replace lost or damaged property with new property of like kind and quality, or its functional equivalent, at current prices

Question 13

Can you think of an example of when a functional valuation approach is appropriate?

Answer 13

A functional valuation approach may be appropriate for a Victorian-style house with plaster walls and ceilings. If the walls and ceilings need to be repaired or replaced, the current replacement material would be drywall.

Question 14

actual cash value

Answer 14

replacement cost minus depreciation

Question 15

Straight-line depreciation method

Answer 15

An accounting method of calculating depreciation by taking an equal amount of an asset’s cost as an expense for each year of the asset’s expected useful life.

Question 16

Accelerated depreciation

Answer 16

Depreciation that occurs more rapidly when an item is first purchased and then more slowly in subsequent years.

Question 17

Decelerated depreciation

Answer 17

Depreciation that occurs slightly for a given time period and then increases rapidly.

Question 18

Obsolescence

Answer 18

The loss of value caused by changes in technology or fashion.

Question 19

When is market valuation useful?

Answer 19

object has no real replacement cost (no other object of like kinf and quality exists, such as for antiques, collectibles)
older buildings with obselete construction materials

Question 20

Gilbert’s Art Gallery was located in a finely restored Victorian home owned by the gallery and insured for ACV. An electrical fire destroyed the building. What would be the best method of determining the building’s ACV?

Answer 20

Because it would be difficult or impossible to determine the replacement cost of a Victorian home, market value would be the best method for determining the building’s ACV. This way, the claims rep does not have to try to estimate replacement cost, and the final amount would include any depreciation.

Question 21

broad evidence rule

Answer 21

developed through case law
requires claims reps to consider all relevant factors when determing ACV

Question 22

pair or set valuation method

Answer 22

special clause to cover property that comes in a pair or set, where much of value is lost if 1 item is damaged

Question 23

How might a business property policy and business income insurance provide duplicate coverage on a retailer’s inventory?

Answer 23

If a retailer holds inventory it did not manufacture and has both business income insurance and a property policy covering its entire inventory for selling price, both policies could cover damaged inventory using selling price valuation—the exclusion of finished goods under business income insurance applies only to goods manufactured by the insured. If duplicate coverage does exist, the insurer will pay no more than the actual amount of the loss, in accordance with policy provisions regarding two or more coverages.

Question 24

Selling price valuation method

Answer 24

stock = merchandise held in storage or for sale
BPP states value of stock insured has sold but not delivered is selling price less discounts and expenses you otherwise would have had

unlike replacement cost and ACV, selling price incorporates the normal business markup above cost, discounts, and expenses.

Question 25

How might a business property policy and business income insurance provide duplicate coverage on a retailer’s inventory?

Answer 25

If a retailer holds inventory it did not manufacture and has both business income insurance and a property policy covering its entire inventory for selling price, both policies could cover damaged inventory using selling price valuation—the exclusion of finished goods under business income insurance applies only to goods manufactured by the insured. If duplicate coverage does exist, the insurer will pay no more than the actual amount of the loss, in accordance with policy provisions regarding two or more coverages.

Question 26

original cost valuation method

Answer 26

usually original cost is not relevant
only relevant to tenants improvements and betterments
The BPP offers this coverage under Your Business Personal Property, but it handles valuation of a tenant’s improvements and betterments in different ways, depending on the circumstances:

If the tenant promptly repairs or replaces the improvements, the tenant’s insurer will pay the ACV of the damaged property unless the tenant purchased Replacement Cost optional coverage.
If the tenant does not promptly repair or replace the improvements, the tenant’s insurer is obligated to pay only a pro rata portion of the original cost; the ACV or replacement cost is not relevant to loss settlement.
If a third party pays to repair or replace the damaged property, the tenant will not receive a claim payment from its insurer.

Question 27

Alexis is opening a studio to display and sell fine art, including paintings and sculptures. What type of settlement method might be most appropriate for artwork held in her studio?

Answer 27

Because it can be difficult to determine replacement cost for property such as fine arts, the agreed value settlement method may be most appropriate for the artwork in Alexis’s studio.

Question 28

Agreed value method

Answer 28

A method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss.

Question 29

Annual transit policy

Answer 29

Policy that covers all shipments made or received by the insured throughout a one-year policy period.

Question 30

Trip transit policy

Answer 30

Policy that covers a particular shipment of goods specified in the policy.

Question 31

how can one suspend a coinsurance provision under BPP?

Answer 31

purchase the agreed value optional coverage
insurer and insured agree in advance on insurable value, so carrying insurance for at least that amount is considered adequate for coinsurance purposes

Question 32

Coinsurance

Answer 32

An insurance-to-value provision in many property insurance policies providing that if the property is underinsured, the amount that an insurer will pay for a covered loss is reduced.

Question 33

Split deductible

Answer 33

A deductible provision that applies one deductible for most causes of loss but a different, higher deductible for other specified causes of loss.

Question 34

Percentage deductible

Answer 34

A deductible expressed as a percentage of some other amount, such as the amount of insurance, the covered property’s value, or the amount of the loss.

Question 35

Special limits of liability

Answer 35

Internal dollar limits on certain specified classes of property that apply regardless of the overall policy limit.

Question 36

When is book value usually used for valuing property?

Answer 36

when property has been severely damaged (piece of machinery rendered useless)
another common application is when a business’s inventory has been so badly damaged that it’s no longer recognizable and therefore difficult to quantify. By determining the inventory’s book value using information from the insured’s records, the claims rep can establish the business’s insurable interest in the destroyed inventory.

Question 37

Out-of-sight merchandise

Answer 37

Merchandise that has been damaged beyond recognition.

Question 38

Claims representatives should take these steps after reviewing the facts of a claim:

Answer 38

Review and apply the relevant law
Determine the legal obligations and defenses that apply to the facts
Determine what choices, if any, the claimant might have in applying the law
Determine what category liability falls into—clear, probable, questionable, or doubtful
Review the facts and determine whether other potentially liable parties have been overlooked

Question 39

Damages

Answer 39

Money claimed by, or a monetary award to, a party who has suffered loss or injury for which another party is legally responsible.

Question 40

Compensatory damages

Answer 40

A payment awarded by a court to reimburse a victim for actual harm.

Question 41

Special damages

Answer 41

A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person’s loss, such as medical expenses or lost wages.

Question 42

General damages

Answer 42

A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific, measurable expenses.

Question 43

Remittitur

Answer 43

This occurs when a judge uses his or her discretion to reduce an excessive jury verdict award.

Question 44

Additur

Answer 44

Occurs when a judge uses his or her discretion to increase a jury verdict award that is deemed insufficient.

Question 45

Collateral source rule

Answer 45

A legal doctrine that provides that the damages owed to a victim should not be reduced because the victim is entitled to recover money from other sources, such as an insurance policy.

Question 46

Mitigation of damages

Answer 46

A duty owed by an injured party to a claim to take reasonable measures to minimize or avoid additional injury or loss.