Ch 3 | Common Policy Concepts Flashcards
How does one have an insurable interest in property?
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
What are bailee liability policies?
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.
Does the Mortgageholders condition apply to all property covered under a property policy, and how is it applied?
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.
What is a security interest in a property?
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
loss payable clause
Provides the right to have payment of any loss made jointly to the loss payee and insured.
lenders loss payable clause
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.
contract of sale clause
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.
building owner loss payable clause
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.
Trustee
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.
Insurable interest
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.
What is the mortgageholders condition?
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.
replacement cost
cost to replace lost or damaged property with new property of like kind and quality, or its functional equivalent, at current prices
Can you think of an example of when a functional valuation approach is appropriate?
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.
actual cash value
replacement cost minus depreciation
Straight-line depreciation method
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.
Accelerated depreciation
Depreciation that occurs more rapidly when an item is first purchased and then more slowly in subsequent years.
Decelerated depreciation
Depreciation that occurs slightly for a given time period and then increases rapidly.
Obsolescence
The loss of value caused by changes in technology or fashion.
When is market valuation useful?
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
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?
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.
broad evidence rule
developed through case law
requires claims reps to consider all relevant factors when determing ACV
pair or set valuation method
special clause to cover property that comes in a pair or set, where much of value is lost if 1 item is damaged
How might a business property policy and business income insurance provide duplicate coverage on a retailer’s inventory?
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.
Selling price valuation method
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.
How might a business property policy and business income insurance provide duplicate coverage on a retailer’s inventory?
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.
original cost valuation method
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.
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?
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.
Agreed value method
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.
Annual transit policy
Policy that covers all shipments made or received by the insured throughout a one-year policy period.
Trip transit policy
Policy that covers a particular shipment of goods specified in the policy.
how can one suspend a coinsurance provision under BPP?
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
Coinsurance
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.
Split deductible
A deductible provision that applies one deductible for most causes of loss but a different, higher deductible for other specified causes of loss.
Percentage deductible
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.
Special limits of liability
Internal dollar limits on certain specified classes of property that apply regardless of the overall policy limit.
When is book value usually used for valuing property?
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.
Out-of-sight merchandise
Merchandise that has been damaged beyond recognition.
Claims representatives should take these steps after reviewing the facts of a claim:
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
Damages
Money claimed by, or a monetary award to, a party who has suffered loss or injury for which another party is legally responsible.
Compensatory damages
A payment awarded by a court to reimburse a victim for actual harm.
Special damages
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.
General damages
A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific, measurable expenses.
Remittitur
This occurs when a judge uses his or her discretion to reduce an excessive jury verdict award.
Additur
Occurs when a judge uses his or her discretion to increase a jury verdict award that is deemed insufficient.
Collateral source rule
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.
Mitigation of damages
A duty owed by an injured party to a claim to take reasonable measures to minimize or avoid additional injury or loss.
