Chapter 1: Insurance Terms and Concepts Flashcards
Insurance
Insurance is a type of:
Risk Transfer
What is the difference between Pure Risk and Speculative Risk
Pure risk involves the chance of LOSS OR NO LOSS, WHEREAS Speculative risk involves the chance of LOSS OR GAIN.
Note:Speculative risk is not insurable.
In a insurance policy the insurer promises to
The insurer promises to make claimants FINANCIALLY WHOLE when covered losses occur.
In PROPERTY INSURANCE, the insurer promises to pay covered losses that occur during the policy period on the condition that
The INSURED pays the premium when due AND
That the insured takes certain actions such as:
REPORTING The loss in a timely manner
PROTECTING the property from further damage
COOPERATING with the insurer
PROVING the loss with appropriate documentation
CONTRACTS
What is a contract
Is a legally binding agreement
CONTRACTS
What does a Contract need to be VALID
CONSIDERATION LEGAL PURPOSE Agreement Between the Parties Parties Who are Mentally Competent (CLAP)
CONTRACTS
Agreement between parties is
An offer by one party that is ACCEPTED by the other party is an AGREEMENT
A Conditional contract is
This means that ONE party’s obligation is conditioned on the performance of certain SPECIFIED DUTIES of the other party
A Contract of ADHESION is written by the (insurer)
If a dispute occurs over unclear VAGUE OR AMBIGUOUS words, what will be apply
The doctrine of reasonable expectations will apply
Note:the court will typically favor the insured.
What are NOT accidental losses
Losses caused INTENTIONALLY by an insured
Losses that are INEVITABLE OR EXPECTED
Examples: normal wear and tear, rust, corrosion, mechanical breakdown, losses caused by latent defects (defectos ocultos)
CONTROLLABLE LOSSES such interior damage from failing to shut windows and doors, frozen pipes
Adverse selection when does this occur
It occurs when people seek coverage only when they have the MOST RISK like rushing to buy flood insurance at the last minute.
Note:to prevent adverse selection the insurance company requires 30 days advance purchase
Representations are
STATEMENTS MADE that one reasonably believes to be true at that time.
Note: oral questions and those on written applications and claim forms, are legally considered to be REPRESENTATIONS.
Misrepresentation is
If an applicant or claimant falsifies an answer in response to any verbal or written question IF THE PERSON LIES during the application process, or at any time is considered to be MISREPRESENTION
REPRESENTATIONS AND MISREPRESENTATIONS
What is considered to be insurance fraud
Material representation and Material Concealment
Constitute INSURANCE FRAUD.
Note:in case of insurance fraud by a policyholder/claimant, the insurance coverage is VOID.
HAZARDS INCREASE THE CHANCE OF LOSS
What is a Hazard
Is a feature or characteristic about the subject of the insurance, existing BEFORE A LOSS OCCURS, that makes a loss MORE LIKELY
HAZARDS INCREASE THE CHANCE OF LOSS
What are Physical Hazards
Examples: large quantities of combustible materials, being located in a dangerous or crime-ridden area or being VACANT for a prolonged period
Crime-ridden =plagado de crimenes
Vacancy is an specially important physical hazard
A vacant building is when
The building is empty, without occupants, inhabitants, or contents.
Note: Many property policies automatically suspend coverage for the perils of VANDALISM
When the vacancy persists BEYOND 60 DAYS
HAZARDS INCREASE THE CHANCE OF LOSS
Moral and Moral Hazards are
Characteristic of PEOPLE that make a loss more likely.
Examples: acquiring the policy falsely, intentionally causing a loss, or PADDING A CLAIM.
Moral hazards occur when the property is not their own, lack of concern, they are careless.
Insurable interest is
When a party has economic interest in property.
We have Insurable interest when we have a
FINANCIAL STAKE in the property.
(Participacion financiera)
Insurable interes is created when we:
Own property
Or when we use, borrow, or have custody of non-owned property other than buildings.
Are a LIENHOLDER or the mortgagee (like a bank)
Are a BAILEE with possession of non-owened property to perform a SERVICE on it.
What is the Amount a party is able to recover under the ins. Policy for covered losses
Up to the LIMIT on the policy, and never more than its insurable interest in any covered loss.
Example:
Limit of $200,000.
Mortgage of $80,000
The bank’s recovery from Mr. Smith’s insurable policy will be LIMITED to $80,000.
Mr. Smith can recover $120,000.
Direct loss means
DAMAGE CAUSED BY A PERIL INSURED AGAINST.
Note: A direct loss includes physical damage, destruction or theft.
Windstorm or hail
Indirect loss is
Indirect loss is also known as LOSS OF USE or TIME ELEMENT LOSS or in COMMERCIAL ins.
Business interruption loss.
Additional coverages are
By definition, provided AUTOMATICALLY.
NOTE: IN Homeowners and Commercial property
A peril is
A peril is a CAUSE OF LOSS.
Note: property ins. Policies MUST state which PERILS are covered.
For each type of covered property, a policy will used two types of perils, what are they
NAMED-PERIL Approach or an
OPEN-PERIL Approach
To describe which perils are insured.
A policy using the NAMED-PERIL Approach Will
Will actually list, or name, the perils that the covered property is insured against
A policy using open-peril Approach will
Open-peril Approach (often referred to as ALL-RISK
Or SPECIAL FORM) Insures against all perils EXCEPT THOSE EXCLUDED.
EXCLUDED PERILS
There’s 2 groups of excluded perils which are
● GENERAL EXCLUSIONS these perils apply to most Open-Peril AND Named-Peril policies.
● SPECIAL FORM EXCLUSIONS.
These exclusions appear only in OPEN-PERIL policies.
Note:Special form exclusions DEAL with losses that are CONTROLLABLE, EXPECTED, INEVITABLE, Or otherwise NON-ACCIDENTAL.
Examples: Freezing of pipes when power is turned off .
DEDUCTUBLES
A deductible can be defined as DEDUCTION FROM LOSS. Examples are:
Example: policy limit of $ 15,000
Deductable of $ 1,000
In the event of $17,500 covered loss, How much the insured receive (assume 100% insurable interest)?
ANSWER: Covered loss minus deductible equals
$16,500, but the policy LIMIT is $15,000.
Thus, the insured will receive $15,000.
[The reader will note that $2,500 was DEDUCTED from the insured’s $17,500 loss.
Note:the insured became co-insured
Deductibles are normally stated on the policy as a DOLLAR AMOUNT, but sometimes a deductible is stated as
PERCENTAGE-OF-LIMIT.
Note: Percentage-of-limit deductibles MAY appear in Homeowners and Commercial property policies for EVENTS like earthquakes in the southwest, hail in the midwest, and hurricanes on the coasts.
Conditions can be described as
RULES governing the covered losses, and the
RIGHTS maintained by the insured, insurer, mortgagees, and possibly others.
Examples of property conditions are
Insured’s Duties in the Event of loss
> PROTECT the damage property from further loss
REPORT the loss to the insurer
COOPERATE with the insurer during the entire adjustment process
PROVE the loss (sometimes by submitting a formal proof of loss).
Replacement cost (RC), Actual cash value (ACV) Definitions:
REPLACEMENT COST basis: cost to replace the damaged property WITH NEW property of LIKE KIND and QUALITY.
ACTUAL CASH VALUE basis: replacement cost MINUS the amount of depreciation at the time of loss. RC-DEP=ACV
Abandonment is:
By the Insured
No insured may ABANDON covered property in the event of a covered loss.
RIGHT OF APPRASIAL
When there is a dispute over the AMOUNT of a covered loss the Right of Appraisal is invoked by either party, each parties hire appraisers, called an
UMPIRE
When any two of these three people agree on the total cost of the loss, the dispute is settled at that Amount.
Right of ASSIGNMENT
A named insured may transfer or assign the policy to another party
ONLY with Written consent of the insurer.
RIGHT OF SUBROGATION
The rights of an insured to financially recover from a party (como si alguien choca mi carro y no tiene aseguranza)
An insurer cannot subrogate against its insured, however.
An insured may cancel at any time for any reason with out prior notice.
Additional Interest is
An additional interest is ANY PARTY other than the named insured who may have insurable interest in certain property at the time of loss with rights to file a claim.
BAILMENT is transfer of possession and Bailment involves:
Bailments involved NON-OWEND PROPERTY.
Examples: taking a car to a service garage.
A Bailee has INSURABLE INTEREST during the bailment period.
BLANKET VS SPECIFIC LIMITS
When a limit of insurance applies to a specific building or one item of property, such as a wedding ring, that limit is a SPECIFIC LIMIT.
When a limit applies to a group of items such as personal property or ALL buildings at a location #3
That is a BLANKET LIMIT.
A specific or blanket LIMIT is to be the
Is the Maximum that is payable for any covered loss. Recall that an insured’s payment on a covered loss will also be NO MORE than the amount of loss.
When a policy is Concurrent
When more than one policy covers a loss, and the policies cover the same property WITH SIMILAR TERM AND CONDITIONS, the policies are CONCURRENT.
Two policies are nonconcurrent when:
They cover the same property but with DIFFERENT TERMS AND PROVISIONS. Which may complicate loss settlement.
DECLARATORY JUDGMENT ACTION
what is the purpose of declaratory action
A declaratory judgment is a judgment of a COURT which determines the RIGHTS of parties WITHOUT ORDERING ANYTHING BE DONE OR AWARDING DAMAGES.
In the case of FRAUD at any time by the applicant or insured, the policy will be VOIDED and
In this instance, any premium paid to date of the policy will be returned. THE EFFECT IS THAT COVERAGE NEVER EXISTED.
CANCELATION is
A policy may also be CANCELED by the insured or the insurer. CANCELATION IS MID-TERM TERMINATION.
Note: Any unearned premium will be returned at a short-rate basis meaning 90%
NON-RENEWAL IS
Non-renewal is the END-OF-TERM TERMINATION.
WAIVER IS
Voluntary giving up a known right.
CONDITIONS SECTION
Duties of the insured in the event of loss are:
Give immediate written notice of any loss
Protect the property from further damage
Cooperate with claim adjusters
COMPLETE A SIGNED AND SWORN proof of loss within 60 DAYS of the loss.
PRO-RATA LIABILITY is
The policy will pay only its PROPORTION of covered loss when there is OTHER INSURANCE in force.
FRAUD
By the insured
By the insured at any time VOIDS the entire policy.
LOSS PAYMENT-
Losses are to be paid within
60 DAYS after the proof of loss is received and agreed to by the insurer.
ABANDONMENT of a property:
Abandonment of any property to the insurer is not allowed.
RIGHT OF APPRASIAL is
A standard property condition that offers a method to resolve a dispute over the loss amount without having to resort to a legal proceeding.
RIGHT OF SUBROGATION is
SUBROGATION =
(TRANSFER OF RIGHT OF RECOVERY)
UNDER Subrogation/transfer of right of recovery CLAUSE, the insurer is substituted the legal right that the insured has to recover losses from a responsible THIRD PARTY.
