Chapter 1 Flashcards
1
Q
- When dealing with risks, identify and explain four alternatives.
A
Avoidance of Risk – All chance of financial loss has been eliminated
Controlling of Risk – Taking measures to reduce frequency and severity of losses
Retention of Risk – Insured assumes responsibility for their own losses
Transfer of Risk – Transferring responsibility for losses to others (insurance)
2
Q
What is the most popular method of dealing with risks?
A
Insurance is the most popular method to deal with risks
3
Q
What are the five elements required to create legally enforceable contracts?
A
1.Agreement
2.Consideration
3. Legality of Object
4. Legal Capacity of the Parties
5. Genuine Intention
4
Q
Who may not have competence to form contracts?
A
Minors, mental incompetents, persons under the influence of alcohol or drugs and trade names do not have the competence to form contracts.
5
Q
Identify three additional elements required to form legally enforceable insurance contracts.
A
- Insurable Interest
- Utmost Good Faith
- Indemnity
6
Q
What duties do brokers owe to clients?
A
Brokers owe clients the duty to provide:
- a careful and prompt response to instructions
-expert advice
- competitive pricing of products
7
Q
What duties do brokers owe to insurance companies?
A
Brokers owe insurance companies the duty to provide:
- to collect premiums
- to pass on any relevant information obtained from clients
8
Q
When is indemnity measured?
A
Indemnity is measured immediately prior to loss.
9
Q
How is binding authority provided to brokers?
A
Through agency agreements with insurers
10
Q
What should occur after oral binders have been provided by brokers?
A
Oral binders should be followed up immediately in writing
11
Q
What risk do brokers face when they exceed their binding authorities?
A
When brokers exceed binding authority and losses occur, they may face an error and omissions loss
12
Q
How can brokers exceed their binding authorities?
A
Brokers may exceed their binding authority when they bind risks with values above the limits allowed in their agency agreements
13
Q
What are three elements found in Indemnity Agreements?
A
- Actual cash value or property at the time of loss
- Interest of insured in the property
- Limit of insurance on policy
14
Q
What considerations are used to determine depreciation?
A
- Condition of the object
- Resale value
- Normal life expectancy
15
Q
Why do governments play a role in the insurance industry?
A
- Ensure that insurers are financially competent
- the forms of insurance are drafted fairly
- business is conducted to the general benefit of the public
16
Q
What is PACICC?
A
PACICC (Property and Casualty Insurance Compensation Corporation) is an organization that will pay valid claims when federally licensed insurers become insolvent
17
Q
What limits are available from PACICC?
A
Limits are up to $250,000 per claim and refunds of unearned premiums up to 70% or $700 per policy
18
Q
What are 3 coverages that must be present in Fire policies?
A
- Fire
- Lightning
- Explosion of natural, coal, and manufactured gas
19
Q
What are two proximate losses, other than fire damage, arising from fires?
A
- Damage caused by water and other extinguishing agents
- Physical damage to buildings caused by firefighters
20
Q
Why are there exclusions?
A
- There are often more specialized forms of insurance available
- Some losses are uninsurable
21
Q
Is the following covered or not covered under the Fire Policy:
Resultant fire damage to home when fire arises from clothes dryer.
A
Covered
22
Q
Is the following covered or not covered under the Fire Policy:
Damage to clothes in clothes dryer.
A
Not covered
23
Q
Is the following covered or not covered under the Fire Policy:
Damage to television from lightning strike.
A
Not covered
24
Q
Is the following covered or not covered under the Fire Policy:
Fire damage to dwelling from television damaged by lightning strike.
A
Covered
25
Is the following covered or not covered under the Fire Policy:
Damage to blender from power surge.
Not Covered
26
Is the following covered or not covered under the Fire Policy:
Fire damage to kitchen resulting from blender damaged by power surge.
Covered
27
Is the following covered or not covered under the Fire Policy:
Fire resulting from nuclear attack.
Not covered
28
When do policies come into effect and expire.
Policies come into effect and expire at 12:01 am standard time at the address of the insured
29
Describe “Removal” coverage.
- Provides protection when property is removed from the named location to protect it from loss or further loss.
- Coverage at the new, unnamed location is limited to amount of coverage not used at the loss at the named location and limited to 7 days or the unexpired term of the policy, whichever is least.
30
What rules must be followed when Insurers include clauses that may limit amount payable to clients?
Insurers must provide a warning label on the declaration page in red ink that states: "This policy contains a clause(s) that may limit the amount payable"
31
Explain subrogation.
Subrogation = the right of the insurer to pursue responsible parties for amounts paid to the insured
32
Explain who may make changes to policies.
Only persons authorized by the insurer may make changes to policies. Brokers do not have this authority.
33
Explain significance when clients receive policy documents, even when no premiums have been paid.
Once policy documents are in the possession of clients, coverage is in effect even when no premiums have been paid.
Promise to pay premiums is binding.
34
Define Misrepresentation
Misrepresentation = Misstatement or a fraudulent omission of a material fact
35
Define Property of Others
Property of Others = Not insured unless their interest is stated in the contract
36
Define Change in Interest
Change in Interest = New Insureds are protected when change of title is due to succession, operation of law or death
37
Define Material Change
Material Change = This is any change after policies have been issued that increases the chance of loss
38
Define Terminiation
Termination = Insurer must provide Insureds with 15 days' notice by registered letter
39
Define Requirements After a Loss
Requirements After a Loss = Notice is required to be provided forthwith and in writing
40
Define Fraud
Fraud = Deliberate attempt to deceive in order to secure a profit
41
Define Who May Give Notice
Who May Give Notice = Agent of insured may give notice or file proofs in certain situations
42
Define Salvage
Salvage = Insureds are required to protect their property from further damage
43
Define Entry Control Abandonment
Entry Control Abandonment = Insurer not entitled to rights of ownership or control
44
Define Appraisal
Appraisal = This condition outlines the procedure to be used when there are disagreements regarding the amount of loss
45
Define When Loss Payable
When Loss Payable = Losses must be paid within 60 days from the date proofs of losses were submitted
46
Define Replacement
Replacement = Notice is required to be provided within 30 days of the filing of the proof of loss
47
Define Action
Action = Claims must be commenced within one year of the date of loss
48
Define Notice
Notice = Insurer may contact insured by corresponding to the last known address of the insured
49
What are the differences between independent brokers and direct writers?
Independent brokers:
- Not employees of insurers
- Owners are responsible for payment of expenses associated with brokerages
- Owners own the business they produce
- Responsible for increased client services
Direct writers:
- Employ their producers
- Producers are paid a salary or combo of salary & commission
- DW own business produced
- DW assume administration function
50
Considering common law as it relates to minors, explain how minors purchase
insurance. Include your thoughts on enforceability of insurance purchased by
minors.
Minors may purchase insurance. However, when minors request relief within a reasonable period of time, brokers must provide relief. When minors fail to request this relief within a reasonable period of time, insurance contracts purchased by minors, will be enforceable.
51
Discuss Statutory Condition “Fraud.”
When clients deliberately attempt to deceive in order to secure a profit, the entire amount of claim may be denied
52
Discuss Statutory Condition “Material Change.”
When new facts arise during the policy term that increase the chance of loss, these facts must be reported to insurers. When losses arise from unreported material changes and insurers can show this link, policies may be voided with respects to the property involved
53
Discuss Statutory Condition “Misrepresentation.”
When completing application forms, clients must be truthful with their answers. When losses arise from any misstatement and insurers can show this link between the loss and misstatement, coverage will not be available, and contract may be voided
54
Discuss Statutory Condition “Replacement.”
When insurers decide to repair or replace damaged property instead of paying an indemnity in the form of money, they must advise the insured of this intention within 30 days of the submission of the proof or loss. Repair or replacement must then begin within 45 days of submission of proof of loss and continue with due diligence
55
Discuss policy condition “Notice to Authorities.”
When losses involve criminal acts, prompt notice must be provided to police or other authorities
56
Discuss policy condition “Pair & Set.”
When losses involve items that are part of a set or pair, the remaining item will still have value. This remaining value will be considered when losses are paid.
57
Discuss policy condition “Parts.”
When losses involve an item that is part of a larger item, payment will only be provided for the lost or damaged part.
58
- Policy Limit is $560,000
- Actual Cash Value of Property is $890,000
- Co-insurance percentage is 80%
- Amount of loss is $245,000
Indicate amount of settlement.
$192,697
$560,00 (did) / $712 000 (should) X $245,000 (loss) = amount of settlement
Should = ACV of property X co-insurance % (80%)
59
- Policy Limit is $635,000
- Actual Cash Value of Property is $1,200,000
- Co-insurance percentage is 80%
- Amount of loss is $1,200,000
Indicate amount of settlement.
= $635,000
Total loss, therefore, co-insurance is not applicable
60
Define ‘Direct Loss’
Direct Loss = When the object of insurance is actually attacked by an insured peril, the loss to the object is deemed a direct loss
61
Define ‘Insurable Interest’
Insurable Interest = people have insurable interest when they are able to show that they would suffer financially by a loss
62
Define ‘Peril’
Peril = the cause of the loss
63
Define Contract
Contract = an agreement between two or more persons which creates an obligation to do or not to do a particular thing
64
Define Pure Risk
Involves the possibility of financial loss only
65
Define Speculative Risk
Involves the possibility of either financial loss or gain
66
Define the contract element: Consideration
Consideration = an exchange of something of value between parties
When one party gives something of value to another, the consideration given by the other party generally takes one of the following forms:
- A return promise
- An act performed
- An agreement not to act
i.e., client brings premium, insurer brings coverage
67
Name the person(s) considered ‘incompetent’ by the courts and therefore cannot form an enforceable contract.
- Minors
- Mental Incompetents
- Persons under the influence of drugs or alcohol
- Trade Only Names
68
Identify the ‘consideration’ to the insurer in a contract of insurance by the insured.
The premium paid for the policy
69
Identify the ‘consideration’ given in a contract of insurance by the insurer.
The promise to covered insured losses
70
Define ‘fire’ as defined in all property policies that would normally include loss or damage caused by fire.
Fire involves the present of a visible flame or glow.
71
Define the two types of fire that can occur. Of these two types which type of fire can by insured by a fire insurance policy?
Friendly Fire - a fire that stays in its proper receptacle (i.e., logs in a fireplace)
Hostile Fire - fires that escape the receptacle or start outside where they belong. This type of fire can be insured by a fire insurance policy.
72
Identify two methods used by insurers to terminate an existing policy.
1. Notification of termination by registered letter to last known address (15 days notice required)
2. Personally delivering to clients written notice that their policy will be cancelled after 5 days
73
How is the amount of any refund due to the insured calculated?
When terminated by the insured: Clients will receive a pro-rated refund
When terminated by the client: Clients will receive a short rate refund
Under this method, the insurer can deduct certain administrative costs
74
When cancelling a policy is the insurer required to provide a reason?
No the insurer is not required to provide a reason
75
When a limiting clause is included in a policy of insurance, what specific notification must be provided to the insured?
The declaration pages must contain the following in red ink:
"This policy contains a clause that may limit the amount payable"
76
A co-insurance clause is an example of a limiting clause used by insurers. Identify the types of losses for which the co-insurance clause was designed to apply.
The co-insurance clause was designed to apply to partial losses only
77
State the formula used to determine the amount of co-insurance penalty if any, to be applied to an insurance loss
(did) / (should) X (amount of loss) = amount of settlement
Did = amount of insurance purchased
Should = Co Insurance percentage required multiplied by the value of the property being insured
78
What authority, if any, does the broker have to make actual changes to the contract?
Brokers do not have any authority to make changes to policies. Brokers must request these changes on behalf of clients
79
Is it legal if changes to the terms of the contract are agreed to orally without any amendment to the contract in writing?
No, changes must be in writing
80
Indicate whether a policy insuring against the peril of fire would respond to pay the following losses.
Lightening damage to chimney on the insured’s dwelling.
Yes the policy would respond to cover lightening damage to chimney on the insured’s dwelling
81
Indicate whether a policy insuring against the peril of fire would respond to pay the following losses.
Explosion of gas fired hot water heater in basement due to build up of internal working pressure.
No, there would not be coverage for explosion of gas fired hot water heater in basement due to build up of internal working pressure as it does not provide coverage for concussion types of explosions
82
Define Risk
Risk = The chance of a financial loss to which the object of insurance may be exposed
83
Define Insurance
Insurance = the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed
84
Define the contract element: Agreement
Agreement = A meeting of the minds as to the subject matter and terms of the contract
There must be:
- An offer made
- An unequivocal and unconditional acceptance of the terms of the offer
85
Define the contract element: Legality of Object
Legality of Object = All contracts must not violate public policy
86
Define the contract element: Legal Capacity of the Parties
Legal Capacity of the Parties = All parties must be competent
Incompetent parties include:
- Minors
- Mental Incompetents
- Persons under the influence of drugs or alcohol
- Trade Name Only
87
Define the contract element: Genuine Intention
Genuine Intention = Shown that the parties actually intended to enter into the contract and was not affected by:
- Fraud
- Duress
- Concealment
- Mistake
88
Explain the unique elements to Insurance Contracts: Insurable Interest. Provide an example of those with insurable interest
Clients have an Insurable Interest in a contract when they are able to show that they would suffer financially by a loss
People with insurable interest include:
- Owners
- Mortgagees
- Bailees
- Defendants in lawsuits
89
Explain the unique elements to Insurance Contracts: Utmost Good Faith. Provide an example of how this is shown by insured, insurers, and brokers.
Law requires insurance contracts to maintain a higher standard of honesty. When this can be shown to be breached by one party, the other can challenge the enforceability of the contract
Insured - must be truthful when completing their application
Insurer - must draft fair wordings and settle claims properly
Brokers - must provide client and insurer with professional services
90
Explain the unique elements to Insurance Contracts: Indemnity.
Explain how Indemnity is measured
The proper application of indemnity ensures that people receive the actual amount of their loss, no more or less
Indemnity is measured by the value of the unsured property as it existed immediately prior to the loss
91
Define Indirect Loss
Indirect Loss = Losses which arise as a consequence of direct losses
92
What do Property Policies insure?
Property Policies insure direct damage only
93
How is ACV calculated?
Actual Cash Value = RC (replacement cost) - depreciation
94
What is a Replacement Cost Policy?
A policy that provides the repair or replacement of lost or damaged property with new property of like kind and quality, without deduction for depreciation
95
What are Valued Policies?
Policies in which both the insured and the insurer will agree at the time the policy is issued as to the cash value of the property. In the event of a loss the agreed mount with be paid.
96
Define Insurance Binder
Insurance Binder = Contracts of insurance in which a broker or insurer commit the insurer to provide a contract of insurance on the subject matter under discussion
97
Define Agency Agreement
Agency Agreement = what provides brokers with the authority to bind the insurer for certain classes of risks and limits
98
Define Void Contract
Void Contract = one which is unable in law to support the purpose for which it was intended (deemed to never have existed)
99
Define Voidable Contract
Voidable Contract = one which is void to (the) wrongdoer but not void as to (the) wronged party, unless they elect to so treat it as such
100
Describe Blanket Coverage
Blanket Coverage = Policies that allow insureds to select a single limit of insurance for all property falling within a specific class
101
Describe Scheduled Coverage
Scheduled Coverage = When property is itemized on a policy showing a limit of insurance for each
102
Identify the 3 criteria used to determine the amount of indemnity to be paid under most property insurance policies.
Once these amounts have each been calculated, which amount is deemed to represent the actual amount of the insured's loss?
1. Actual Cash Value
2. Insured's interest in the property
3. Limit of insurance provided on the policy
Whichever is the least of:
1. ACV
2. Insurable Interest
3. The Limit of insurance on the policy
103
State the formula used to determine the Actual Cash Value of a loss
ACV = Replacement Cost (RC) - Depreciation
104
Identify three factors considered by the insurance adjuster when determining the amount of depreciation to be charged
1. Condition of the object
2. Normal life expectancy
3. Resale value
105
Under common law, how long does an insured have to reject a policy after receiving written notice from the insurer?
Applicants are entitled to 2 weeks after receiving the policy from the insurer to reject it
106
What losses are excluded under Fire Policies?
1. Loss or damage due to direct application of heat
2. Lightning damage to electrical devices or appliances
3. Other electrical currents (power surges)
4. Contamination by radioactive material
107
Name three forms of misrepresentation that may occur during the application of insurance
1. False description of the property to the prejudice of the insurer
2. Misrepresentation of a material fact
3. Fraudulent omission of a material fact
108
Provide a brief explanation of the following legislative requirement: Policy Period
The policy takes effect at 12:01am standard time at the address of the names insured as stated on the policy
109
Provide a brief explanation of the following legislative requirement: Loss Payable or Payee
The policy must provide adequate space to identify all parties to whom insurance monies are payable in the event of a loss. The failure of the insurer to include a named payee in an insurance settlement could result in the insurer being liable to the payee
110
Outline the provisions relating to the following legislated policy requirements: Removal Coverage
1. Requires insurers to respond only when insured property is necessarily removed from the location specified to prevent further loss or damage
2. The amount of insurance available for any loss to the property while at the unnamed location will be reduced by the amount paid for the loss at the named location
3. The insurer is obliged to provide coverage at the unnamed location for at least 7 days or the unexpired term of the policy if less than 7 days
111
Outline the provisions relating to the following legislated policy requirements: Limitation of Liability Clauses
When a contract of insurance contains any clause which allows the insurer to pay an amount which is less than that purchased by the insured, it shall have printed in red ink on the coverage summary page "This policy contains a clause that may limit the amount payable" (i.e., Deductible Clause, Co-Insurance Clause)
112
Outline the provisions relating to the following legislated policy requirements: Subrogation Clause
When the insurer has paid a claim for a loss caused by a third party, the Insurance Act allows the insurer to place itself "in the insured's shoes" in respect of their right to recover the amount of the loss from the responsible party
113
Outline the provisions relating to the following legislated policy requirements: Waiver of Term or Condition
No terms or condition of a contract of insurance shall be considered to be waived by the insurer unless such waiver is provided in writing and signed by a person authorized for that purpose by the insurer
114
Outline the provisions relating to the following legislated policy requirements: Effect of Delivery of Policy
The Insurance Act stipulate that when the insurance policy has been delivered, but not paid for, it shall be as binding on the insurer as the premium has been paid
115
Provide two reasons why you might discourage your clients from selecting extremely low deductibles
1. Insurance policy is not intended as a maintenance contract for smaller losses which could easily be paid by insureds without financial hardship
2. Expensive to administer small claims. The insurer would be forced to increase premiums to pay for increased administration costs
116
What are 3 characteristics of the Independent Agency/Brokerage System?
1. Owners are not employees of insurers
2. Owners are responsible for payment of all expenses associated with the business
3. Owners own the business they produce
117
What are 3 characteristics of the Direct Writing System?
1. Producers are employees of the insurer
2. Remuneration of producers may be either of a salary or commission basis or combination
2. Insurer owns all business written and assumes administrative function
