Chapter 1 Methods

Question 1

Law of Large Numbers

Answer 1

The law of large numbers is a fundamental concept in statistics & probability that describes how the average of a randomly selected sample of a population is likely to be close to the average of the whole population.

Question 2

Underwriting

Answer 2

The process in which the company decides whether to accept an application for a policy. Underwriters evaluate the risk/exposures of potential policy holders & decide how much coverage the policyholder should receive, how much they pay for it (premium,) or whether to accept the risk and insure them.

Question 3

Peril

Answer 3

A cause of property losses. Under an ins contract, used in the context of a peril insured against. I.e. fire/lightning, explosion, windstorm, hurricane, collapse of building, vandalism, accidental discharge, and theft.

Question 4

Hazard

Answer 4

A situation that poses a level of threat to life, health, property or environment. Most hazards are dormant/potential, with only a theoretical risk of harm; however once a hazard becomes “active,” it can create an emergency situation.

Question 5

Direct loss

Answer 5

Direct physical loss to property

Question 6

Indirect loss

Answer 6

Type of loss that doesn’t result from direct damage of a covered cause of loss or peril but is instead a consequence of the direct damage loss. I.e. a store burns down from a fire, that is direct loss, however the loss of income from the store not being able to operate is an indirect loss.

Question 7

Principle of Indemnity

Answer 7

An insurance principle stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.

Question 8

Property Insurance

Answer 8

Insurance coverage for real & personal property against loss or damage from perils insured against.

Question 9

Insuring agreement

Answer 9

This section of the insurance policy specifies what the insurance will provide coverage for in exchange for premium payments by their customer.

Question 10

Deductible

Answer 10

The amount the PH must pay in a loss prior to any payment from the IC, and is applied per occurrence. Texas has higher deductibles than most other states. If a percentage deductible, the percentage is always taken from Coverage A (structure) policy limit of liability that is stated on the declarations page.

Question 11

Cancellation

Answer 11

Termination of policy; either side can cancel, and all notices must be done in writing.

Question 12

Limit of Liability

Answer 12

The max amount that a policy will pay. The limits of liability are specified on the policy declarations page.

Question 13

Loss settlement

Answer 13

The process used to determine the amount of the loss.

A. Actual cash value - value of property, based on current cost to replace it, less applicable depreciation.

B. Replacement cost - the cost associated with replacing property at current market prices.

C. Agreed value - the amount that the insured and insurer agree upon during the time of policy inception

D. Market value - the amount that property is worth in a competitive market; this amount is accepted by buyer and seller.

Question 14

Casualty insurance

Answer 14

Protects a person from financial loss arising from bodily injury or property damage to others arising out of:
a. ownership of propety
b. operation of a motor vehicle
c. personal activities
d. business activities
e. burglary, robbery, and theft
f. worker’s compensation injuries
g. malpractice

Question 15

Liability

Answer 15

A person is legally liable for an accident if they are found responsible for bodily injury or property damage to another party. Usually based upon negligent acts of that person.

Question 16

Negligence

Answer 16

The failure to exercise the care that a reasonably prudent person (the average person,) would exercise in similar circumstances.

Question 17

Tort

Answer 17

A wrong involving a breach of a civil duty owed to someone else. This breach would determine if that person is negligent. The essential elements used to determine negligence are:

a. Duty owed
b. Duty breached
c. proximate cause
d. damages

Question 18

Punitive Damage

Answer 18

The amount awarded by the court, which is intended to reform or deter the defendant from engaging in similar conduct in the future.

Question 19

Comparative negligence

Answer 19

A partial legal defense that reduces the amount of damages that a person can recover based upon the amount that their own negligence contributed to the loss.

Question 20

Contributory Negligence

Answer 20

A law defense where a person’s own negligence contributed to the harm that they sustained.

Question 21

Assumption of Risk

Answer 21

A defense in which a person is barred from recovery against a negligent party if it can be proven that this person knew of the risks associated with the activity that they were participating in.

Question 22

Accident

Answer 22

An unforeseen, unintended event; something unexpected. The purpose of having insurance is to have protection in the case of an accident.

Question 23

Act of God

Answer 23

An event arising out of natural causes with no human intervention which could not have been prevented by reasonable care or foresight, such as a flood, a windstorm, a hurricane, hail, and lightning.

Question 24

Additional Living Expenses

Answer 24

Extra charges covered by HOI policies and above the PH’s customary living expenses due to damage by a covered peril that makes the home temporarily uninhabitable, the incurred cost of a hotel while the home is being repaired the policy will reimburse PH for all expenses that are over and above their normal expenses.

Question 25

Adverse Selection

Answer 25

The tendency of insured’s who present a higher probability of loss to purchase or renew insurance more often than those who present a lower probability.

Question 26

All Risk Insurance

Answer 26

This coverage provides insurance protection against loss or damage to property arising from any causes, except those that are specifically excluded in the exclusions section of the policy.

Question 27

Appraisal

Answer 27

A form of dispute resolution that occurs when there is a dispute between the insured and the IC regarding the amount of the claim. Both parties hire an appraiser to represent them. The two Appraisers will attempt to settle the dispute. If they can’t settle the dispute they will hire an umpire to settle it.

Question 28

Attractive Nuissance

Answer 28

The doctrine of attractive nuisance is premised on the belief that one who maintains a dangerous condition which is likely to attract children on their property is under a duty to post a warning or take affirmative action to protect children from the dangers of that attraction.

Question 29

Betterment

Answer 29

An improvement to property that puts it in a better condition than it was before the occupancy or loss.

Question 30

Breach of contract

Answer 30

Failure to comply with the terms or conditions of a policy that may result in restricted coverage or void the policy.

Question 31

Bodily Injury

Answer 31

Means bodily harm, sickness, or disease.

Question 32

Claimant

Answer 32

The party making a claim.

Question 33

Catastrophe

Answer 33

A severe disaster that involves a large population and normally generates a large amount of property damage and/or bodily injury.

Question 34

Coinsurance Clause

Answer 34

A provision requiring a specified amount of insurance based on the value of the insured property.

Question 35

Collision

Answer 35

This coverage pays for damage to your car without regard to who caused an accident. Applies when two vehicles hit each other or when a single vehicle hits an object, such as a tree.

Question 36

Commercial General Liability

Answer 36

Provides commercial general liability coverage, including premises and operations, products and completed operations, and other liability options.

Question 37

Comprehensive Coverage

Answer 37

This coverage pays for damage to or loss of your car from causes other than accidents, such as flood, hail, vandalism, fire, and theft.

Question 38

Concealment

Answer 38

The act of purposefully not reporting information that would affect the issuance or rate of an insurance contract. If the info cannot be known to the insurer and is known to be material by the insured, concealment of that info can give the insurer grounds to nullify the contract or not pay out on a claim related to that material info.

Question 39

Concurrent Causation

Answer 39

The insurance theory stating that if loss or damages occur as a result of more than one cause, one of which is covered (insured,) while the other is not, the damages are likely to still be compensated for by the insurer.

Question 40

Conditions

Answer 40

The part of the policy that details the rights and duties of the insured and insurer.

Question 41

Damages

Answer 41

The amount claimed by or awarded to an injured party as compensation for liability owing to bodily injury or property damage.

Question 42

Declarations Page

Answer 42

The part of the written policy that states all the policy’s specifics, including name of PH, type of property insured, premiums, and term limits of coverage.

Question 43

Depriciation

Answer 43

The act of lowering an item’s value due to use or wear and tear. Based on age, condition, and life expectancy.

Question 44

Endorsement

Answer 44

A specific addition to a policy that alters the coverage and therefore the price of that policy. Endorsements can either add or remove specific types of coverage.

Question 45

Exclusion

Answer 45

Provision in an insurance policy that indicates what is denied coverage, such as wear and tear, rust, rot, contamination, and mechanical breakdown.

Question 46

Expiration date

Answer 46

The date which a policy expires

Question 47

Exposure

Answer 47

The measure of the possibility of a loss

Question 48

Fraud

Answer 48

Any intentional lying or misrepresentation by PH or claim adjusters in order to inflate a claims payment or receive a claims payment that would otherwise not be paid

Question 49

Incurred Expense

Answer 49

The expenses that have already been sustained and that have not yet been paid (an additional living expense claim is a reimbursement of incurred expenses.)

Question 50

Insured

Answer 50

The party to an insurance arrangement that has an insurable interest in the property that is being insured. A loss payee or a lien holder can be considered an insured.

Question 51

Insurer

Answer 51

The insurance company.

Question 52

Loss history

Answer 52

The insured’s history of losses with other companies or the company that they are currently with. Insurance companies view loss history as an indication of an insured’s propensity for a claim in the future.

Question 53

Loss Payee

Answer 53

The party to whom money or insurance proceeds is to be paid in the event of a loss. A mortgage company and a lien holder are examples.

Question 54

Material Misrepresentation

Answer 54

A significant misstatement in an application form. If a company had access to the correct information at the time of the application, the company might not have agreed to accept the application.

Question 55

Non-renewal

Answer 55

A decision by an insurance company to not renew a policy.

Question 56

Notice of Loss

Answer 56

The noticed required by ICs immediately after an accident. Part of the standard provisions defining a PH’s responsibility after a loss.

Question 57

Occurrence

Answer 57

An event that results in an insured loss which results in bodily injury or damages.

Question 58

Overhead and Profit

Answer 58

The amount of money that is dedicated to a general contractor’s cost of doing business and earning a profit. The insurance industry standard is typically 10% overhead and 10% profit. Usually added on a loss that involves at least three trades and the repair process requires coordination by a general contractor.

Question 59

Personal Lines

Answer 59

Insurance protection for individuals and families, such as homeowner’s and auto insurance.

Question 60

Policy period

Answer 60

The period a policy is in force, from the effective date to the expiration date. For an insurance loss to be covered, the event has to occur within the policy period.

Question 61

Premiums

Answer 61

The amount of money paid by an insured to an insurance company to obtain or maintain an insurance policy.

Question 62

Reserves

Answer 62

A company’s best estimate of what it will pay for claims. The amount representing actual or potential liabilities kept by an insurer to cover debts to PHs.

Question 63

Salvage

Answer 63

The leftover value of a claim when an insurance company recovers and sells property to reduce its financial loss.

Question 64

Subrogation

Answer 64

The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is found to be legally liable for the loss. Subrogation is very important to ICs, adjusters, and their PHs.

In layman’s terms, Subrogation is making the responsible party of a claim pay for the damages that either they caused, or their product caused.

Question 65

Total loss

Answer 65

A situation in which property damage and cost of repair/salvage exceeds the value of the property

Question 66

Umbrella Insurance

Answer 66

Refers to a liability policy that protects the assets & future income of the name insured in addition to their primary policies

Question 67

Umpire

Answer 67

Person hired by the two appraisers during the appraisal process to make the final determination as to the value of or extent of damage to the property in question

Question 68

Underinsurance

Answer 68

Inadequate coverage by the holder of a policy. In the event of a claim, underinsurance may result in an economic loss to the PH, since the claim exceeds the max amount that can be paid out by the policy.

Question 69

Uninsured Motorist Coverage

Answer 69

An auto policy option which covers one for property damage and bodily injury caused by another motorist who does not carry insurance. This would cover damages of a hit and run.

Question 70

Vacancy

Answer 70

The condition of a property that is not occupied or containing furnishings.

Question 71

Vandalism

Answer 71

Willful intent to cause damage or destruction to a property.

Question 72

Elements of a legal contract:

Offer & Acceptance

Answer 72

Offer made by one party to the other party, typically from the the applicant applying for coverage. The insurer then accepts, rejects, or makes a counteroffer.

Question 73

Elements of a legal contract:

Competent Parties

Answer 73

For acontract to be legal & enforceable, it must involve these. Most entities involved in an insurance contract are deemed to be competent except minors, mentally incompetent individuals, and those under the influence of substances.

Question 74

Elements of a legal contract:

Legal Object

Answer 74

To be legal, a contract must be drawn for a legal purpose and not against public policy. An insurance contract that insures stolen property is not a legal contract.

Question 75

Elements of a legal contract:

Consideration

Answer 75

Each contract must be characterized by a mutual give and take by each party. A valuable consideration is necessary to bind coverage. With an insurance contract, the insured’s consideration is the premium paid, whereas the IC’s consideration is the promise to pay for a loss caused by a covered peril.

Question 76

Elements of a legal contract:
Special features of the insurance contract:

Unilateral contract

Answer 76

The insurance contrqact is unilateral in that it can be enforced by only one party. The company cannot force premium payment, but the insured can enforce the contract if all premiums are paid and a valid claim is presented.

Question 77

Elements of a legal contract:
Special features of the insurance contract:

Adhesion Contract

Answer 77

The contract is an adhesion contract and must be accepted by the insured as written by the company.
a. The courts interpret any ambiguities in favor of the insured, the one who did not write the contract.
b. the doctrine of reasonable expectations states that a policy must be interpreted in the way the average person would reasonable expect it to be interpreted.

Question 78

Elements of a legal contract:
Special features of the insurance contract:
Aleatory contract

Answer 78

As an aleatory contract, the policy is valid even though there are unequal exchanges (i.e. $100 premium for $100k coverage)

Question 79

Elements of a legal contract:
Special features of the insurance contract:

Valued contract

Answer 79

A valued contract states the amount to be paid in the event of a covered loss.

Question 80

Elements of a legal contract:
Special features of the insurance contract:

Personal Contract

Answer 80

This type of contract insures the person who owns the property, not the property itself.

Question 81

Elements of a legal contract:
Special features of the insurance contract:

Conditional contract

Answer 81

The condition contract includes a number of conditions with which both the insured and the insurer must comply. An insurance policy is a conditional contract, in that the insured must notify the IC when a loss occurs, and the insurer must use the valuation methods specified in the policy to settle the loss.

Question 82

The 4 parts of an insurance contract:

Answer 82

Declarations - this section personalizes the policy for the insured and consists of identifying info about the insured and the risk(s) to be covered, including:
a. named insured
b. insurer
c. policy #
d. policy term
e. coverage limits
f. premium amount
g. object, property, or person insured

Question 83

The 4 parts of an insurance contract:

Insuring agreement

Answer 83

This section describes the coverage provided by the insurer, and may also specify the perils covered by the policy.

Question 84

The 4 parts of an insurance contract:

Conditions

Answer 84

Policy conditions are the obligations or duties of each party to the contract and failure to comply with these conditions can prevent or delay payment of a loss.

Question 85

The 4 parts of an insurance contract:

Exclusions

Answer 85

These modify the policy’s insuring agreement to eliminate uninsurable perils or other coverages not contemplated under the terms of the contract and also prevent duplication of coverage and tailor the coverage to meet an insured’s unique needs. Coverages excluded in most property contracts involve losses due to war, flood, and earth movement.

Question 86

The 4 parts of an insurance contract:

(additionally) Endorsement

Answer 86

Endorsements are attached to a policy to amend coverage, generally to add or exclude coverages The availability of endorsements permits the insured and the insurers to effect changes in coverage. The insured may want to endorse a policy to buy additional coverage or delete coverage, resulting in a premium reduction. Coverage for exclusions mentioned above may be effected or added to an insurance contract for an additional premium.

Question 87

Other contract Provisions and concepts

Policy definitions

Answer 87

This section clearly defines important terms referenced in the insuring agreement and other sections of the policy.

Question 88

Other contract Provisions and concepts

Third party provisions

Answer 88

The standard mortgage, or loss payable, clause specifies the rights and duties of the mortgagee or loss payee under the policy. I.e. the mortgagee may be expected to pay the premium if the insured fails to do so.

No benefit to bailee (a person or organization that has temporary possession of someone else’s property, such as a dry cleaner) is a condition that states that the bailee is not covered under the insured’s policy while the bailee has possession of the insured’s property.

Question 89

Other contract Provisions and concepts
Extensions

Answer 89

These are included in a policy too extend coverage beyond the policy limits of liability. Often temporary beyond the limits.

Question 90

Other contract Provisions and concepts

Utmost good faith

Answer 90

A characteristic of insurance, utmost good faith is demonstrated when an insurance company must rely on the honesty and cooperation of the insured and the insured must rely on the company to fulfill its obligations.

Question 91

Other contract Provisions and concepts

Reasonable expectations

Answer 91

Policies are ambiguous and difficult for the average person to understand. The reasonable expectations of an insured regarding the terms of a policy will be honored even if the policy states otherwise. This principle protects the insured from technical language, hidden provisions, and confusing language.

Question 92

Other contract Provisions and concepts

Representations

Answer 92

Oral or written statements made by an individual seeking to enter into a contract and are substantially true to the best of the knowledge of the party making them. Unless they are fraudulent or material, misrepresentations cannot void a contract.

Question 93

Other contract Provisions and concepts

Warranties

Answer 93

Statements made by the applicant regarding the nature of the risk to be insured. Answers to specific questions on an application are considered to be warranties. Unlike representations if warranted statements are found to be false, they cause the policy to be voided by the insurer.

The basic difference between a warrant and representation is that the warranty is a part of the contract itself and must be strictly complied with; a representation is usually an incidental statement preceding the formation of a contract and not actually a part of it.

Because a warranty is guaranteed to be true, it establishes some restrictions concerning the liability of the insurer if the warranted act fails to take place. i.e. alarm was warranted to be involved, then it is determined following a loss that it was not, the insurer may suspend or refuse coverage because the warranty was breached.

Question 94

Other contract Provisions and concepts

Concealment

Answer 94

Neither party may conceal facts that would have affected the formation of the contract.

Question 95

Other contract Provisions and concepts

Fraud

Answer 95

The intentional misrepresentation of a material fact that may void a contract.

Question 96

Other contract Provisions and concepts

Waiver and estoppel

Answer 96

A waiver is the intentional relinquishment of a known right by the IC or agent upon which the insured relies.

An estoppel is the intentional or unintentional impression by the IC that a certain fact exists when it does not. If the insured relies on that fact and is damaged as a result, the company is estopped from denying the complain. If the agent says it is covered, the company cannot deny the claim.

Question 97

Other contract Provisions and concepts

Binder

Answer 97

A binder is a temporary contract pending the issue of the policy, generally spanning 30-60 days and is subject to the terms of the contract to be written later.

• Can be cancelled with 2 days notice to insured
• Automatically cease once the policy is written or declined
• Binding authority is granted to an agent through the agency contract with an insurer. i.e. if an agent verbally agrees to a condition a prospect wants, an oral binder has been created subject to the requirements for effect a legal contract.

Question 98

Other contract Provisions and concepts

Proposal

Answer 98

A proposal is an outline or quotation of coverage and premium before any coverage is issued or in force.

Question 99

Insurance Company Structure:

Actuarial

Answer 99

By use of math and statistical techniques, the actuarial department is responsible for rate-making and determines the rates charged by the insurer.

• Loss costs are one component of the process of making rates. The amount an IC needs to collect to cover expected losses is based on its combined financial, operational, and loss record.
• To develop a final rate, the actuary will add other policy expenses and profits to the loss costs. The expenses are the administrative cost of doing business, such as commissions, salaries, and overhead. The profit is the ROI after all expenses and loss costs.

Question 100

Insurance Company Structure:

Sales/ Marketing

Answer 100

Development and sale of products, premium collection, producer licensing, training, market research, and advertising are responsibilities of this department.

Question 101

Insurance Company Structure

Answer 101

• Agency division is responsible for recruiting, training and development of agents/producers
• Marketing distribution systems - 4 basic distribution systems used to market insurance

1. Captive - the insurer contracts with independent agencies to represent and sell for only that company, which owns and controls all accounts, policy records, and renewals.
2. Direct writer - the direct writing agent is an employee of the company, and may be paid a salary, commission, or a combo of both. The company owns and controls all accounts, policy records, and renewals.
3. Direct response - this system does not use agents, but rather solicits through direct mail or telemarketing. Company owns and controls all accounts, policy records, and renewals.
4. Independent agent - an independent contractor who contracts with several different companies to represent and sell insurance for those companies. The agent owns and controls the accounts, policy records, and renewals.

Question 102

Insurance Company Structure:

Underwriting

Answer 102

The selection, classification and acceptance or rejection of a proposed insured according to the insurer’s underwriting standards. Consists of 4 basic steps:

1. gathering necessary UW info
2. Making the UW decision
3. Implementing the decision
4. Monitoring the decision

Question 103

Insurance Company Structure:

Loss ratio

Answer 103

Insurance companies evaluate the relationship of loss expenses to income using a loss ratio formula:

Loss ration = (incurred losses + loss adjustment expenses) / earned premiums

The loss ratio is one component of determining profitability

Question 104

Insurance Company Structure:

Claims

Answer 104

This department makes good on the promises the company has made by investigating and paying claims for damage and injury covered by the insurance contract. Guarding against fraudulent claims is another responsibility of the claims department.

Question 105

Insurance Company Structure:

Investment

Answer 105

This department invests the premiums collected by the company.

Question 106

Insurance Company Structure:

Accounting

Answer 106

In addition to being responsible for the financial operation of the company, the accounting department also deals with state regulation and reserves, premium collections, and agent/producer commissions.

Question 107

Insurance Company Structure:

Legal

Answer 107

The legal department assures compliance with state laws and handles claims disputes.

Question 108

Methods to resolve insurance disputes

Alternative Dispute Resolution (ADR)

Answer 108

ADR refers to any means of settling disputes outside of court and typically includes negotiation, conciliation, mediation, and arbitration. Most people do not want to becoming involved in litigation, which can create lengthy delays and be very costly.

The most common methods of resolving these disputes are Negotiation, Mediation, the Appraisal Process, and Arbitration.

Question 109

Methods to resolve insurance disputes

Negotiation

Answer 109

• Can take a variety of forms from a trained negotiator acting on behalf of a particular organization or position in a formal setting, to an informal negotiation between friends. Negotiation theorists usually distinguish between two types of negotiation.

Distributive Negotiation: also called positional or hard-bargaining negotiation, and tends to approach negotiation in the modality of haggling in a market. Both sides adopt an extreme position, knowing it won’t be accepted, then employs a combination of bluffing and brinksmanship in order to concede as little as possible before reaching a deal.

Distributive bargainers conceive of negotiation as a process of distributing a fixed amount of value (fixed pie.)

Integrative negotiation - also sometimes called interest-based or principled negotiation, is a set of techniques that attempts to improve the quality and likelihood of a negotiated agreement by providing an alternative to traditional distributive negotiation techniques. Unlike distributive negotiation, integrative negotiation often attempts to create value in the course of negotiation (expand the pie.)

Question 110

Methods to resolve insurance disputes

Styles/Responses to negotiation

Answer 110

1. Accommodating: Solving the other party’s problems and preserving personal relationships. Sensitive to the emotional states, body language, and verbal signals of other parties. Can feel taken advantage of with other party is not accommodating.
2. Avoiding: Do not like to negotiate and don’t do it unless necessary. Tend to defer & dodge the confrontational aspects, but may seem tactful and diplomatic.
3. Collaborating: Enjoy negotiations that involve solving problems in creative ways. Good at using the negotiations to understand the concerns and interests of the other parties. Can sometimes create problems by transforming simple situations into more complex ones.
4. Competing: Enjoy negotiations because they present the opportunity to win. Have strong instincts for all aspects of negotiation and are strategic. Often neglect the importance of relationships.
5. Compromising: Eager to close the deal by doing what is fair and equal for all parties involved. Useful when there is limited time to complete the deal, but often unnecessarily rush the process and make concessions too quickly.

Question 111

Methods to resolve insurance disputes

Negotiation Barriers

Answer 111

a. Die hard bargainers
b. Lack of trust
c. Informational vacuums & negotiator’s dilemma
d. Structural impediments
e. Spoilers
f. Cultural and gender differences
g. Communication problems

Question 112

Methods to resolve insurance disputes

Mediation

Answer 112

A process in which a neutral third-party (mediator) is utilized to help resolve a dispute between the IC and the PH. Has no authority to make the final decision, but helps facilitate an agreement between both parties. Can meet with each individually or as a group.

Docs included in mediation - policies, estimates, reports, photos, invoices, bills, or other documentation to support their case. Contractors, adjusters, specialists, and any other type of outside consultant can be asked to attend.

Mediators are selected usually based on this criteria:

• Qualifications
• Experience
• Training
• Professional background
• Personal attributes
• Cost

Question 113

Methods to resolve insurance disputes

The Appraisal Process

Answer 113

A method to resolve claims where there is a dispute between PH and the IC regarding the amount of the claim. Either can request the Appraisal process.

Appraisal clause is usually in the policy section I - Conditions - which states that if parties fail to agree on the actual cash value, amount of loss, cost of repair/replacement, can either make a written demand for appraisal. Then both parties select an independent appraiser and notify of the identity within 20 days of receipt of the demand. Both appraisers will choose an umpire. If they can’t agree on an umpire in 15 days, you may request the choice be made by a judge of a district court of a judicial district where the loss occurred.
The appraisers will then set the amount of loss, stating separately the actual cash value and loss to each item. Upon request, they can also set the full replacement cost of the dwelling, and any other building upon which loss is claimed. The full repair or replacement cost of the building without deduction for depreciation. If they fail to agree, they submit their differences to the umpire. Any two of the three of them will settle on a decision and it will be binding. (Agreement is known as The Award)

Two appraisers + umpire = Appraisal Panel - main purpose is to set or determine amount of loss, which is the dollar amount needed to return the damaged property back to its original condition by either repair or replacement.

Note - there cannot be any retaliation for using the appraisal process. It is unethical and illegal for IC to raise deductibles or premiums or cancel your policy for invoking this process.

Appraisers must be disinterested 3rd parties, and must be someone trained/qualified to make damage assessments. They often are adjusters, contractors, consultants, attorneys, engineers, inspectors.

Question 114

Methods to resolve insurance disputes

Appraisal Process cont’d

Answer 114

Advantages:
- Cost, much lower than court.
- time; court can take months or years. the amount of time saved impacts cost.

Objective:
- Determine the amount of loss/value of claim
- Does not address coverage issues, deductible amounts, policy provisions, or prior payment amounts. It would not be invoked in the event that a loss was not covered.

Question 115

Methods to resolve insurance disputes

Arbitration

Answer 115

A well-established and widely used means to end disputes.

Takes place out of court. An impartial third party is selected, and both sides agree in advance to comply with the arbitrator’s award, then partake in a hearing at which both sides can present evidence and testimony. The arbitrator’s decision is usually final, and courts rarely reexamine it.

It is a simplified version of a trial involving limited discovery and simplified rules of evidence.

Can be voluntary or required.

Efficiency is the greatest advantage of this method. It is easier, cheaper and faster than litigation. Parties also have greater flexibility and involvement.

Arbitrators can be lawyers but don’t have to be. Arbitration is considered binding, and courts in most jurisdictions will enforce awards.

Hearings usually last between a few days to a week, and the panel only meets for a few hours each day. The panel then deliberates and issues a written decision, or arbitral award.

The process:

1. Pre-arbitration process - grievance steps in an attempt to settle prior to submitting it to arbitration.
2. Set parameters for discovery. - less than litigation but enough that both sides have the opportunity to obtain the info necessary to present their case.
3. Select an arbitrator - Qualified neutral arbitrators may be found through providers such as the American Arbitration Association (AAA)
4. Arbitration hearing - sides present evidence; witness testimony & documentation. Opportunities for cross-examination, rebuttal testimony, opening and closing arguments, written briefs and party representatives (who may or may not be attorneys)
5. Arbitration Decision - provides a remedy & explains reasons for the conclusions drawn, and can be appealed on narrow grounds only - legal error is usually the basis for appeal.

Fair and unbiased system.

Courts generally defer to the arbitration decision.

Question 116

Overview of Insurance policies

Auto Insurance

Answer 116

Liability - accidental bodily injury and property damages to others. Includes medical expenses, pain and suffering and lost wages. Property damage includes property and vehicles. Also pays defense and court costs. State laws determine how much liability coverage you must purchase, and you can always get more than your state requires.

Collision - pays for damages to your vehicle caused by collision with another vehicle or object

Comprehensive - covers loss or damage to the insured vehicle that doesn’t occur in an auto accident. Covers loss by fire, wind, hail, flood, vandalism, or theft.

PIP (Personal Injury Protection) - required in some states. Pays medical expenses for the insured driver, regardless of fault, for treatment due to an auto accident.

Medical coverage - Pays medical expenses regardless of fault when the expenses are caused by an auto accident.

Uninsured motorist - pays your car’s damages when an auto accident is caused by a driver who doesn’t have liability insurance

Underinsured motorist - pays your car’s damages when an auto accident is caused by someone who has insufficient liability insurance.

Rental reimbursement - pays for a rental car if your car is damaged due to an auto accident. Often has a daily allowance.

Question 117

Overview of Insurance policies

Homeowner’s Insurance

Answer 117

Protection for residential dwellings that are listed declarations page. The following is covered under HOI:

The dwelling/building - may include other structures on the premises

Personal property - trees, shrubs, plants, lawn

Question 118

Overview of Insurance policies

Watercraft Insurance

Answer 118

In most cases, the policy will cover you, your spouse, and any other household member that have permission to ride the watercraft. The policy will pay bodily injury or other property damages caused by the watercraft. Available coverages include medical payments, physical damage, uninsured boater, and personal effects.

Medical payments - extra coverage that will cover medical treatment that results from an accident involving the water craft

Physical damage - will cover the cost of repair to the watercraft if you are in a collision with another craft or other object. In most cases, you’ll be covered in cases of theft, vandalism, or fire.

Uninsured boater - pays for medical treatment that results from an accident with another boater who does not have insurance.

Personal effects - optional coverage that will cover some of the common contents kept within a watercraft, which may include cameras, binoculars, clothing, or assorted accessories.

Question 119

Overview of Insurance policies

Umbrella Policies

Answer 119

Refers to insuring more than one property as opposed to insuring only one. Possible to get a lower premium for insuring both your house and your car rather than having separate policies for each.

Typically pure liability coverage over and above the coverage afforded by the regular policy, and sold in million dollar increments. Umbrella because it covers all liability claims from all policies underneath it, such as auto & HOI policies.

Provides broad insurance beyond traditional HOI/Auto:
- Additional liability beyond limits of HOI, auto & boat

Provides coverage for claims which may be excluded by other policies, including:
- false arrest
- Libel/slander
- Invasion of privacy
- Liability coverage for rental units you own

Question 120

Overview of Insurance policies

Insurance Bonds

Answer 120

Surety bonds are used in the construction industry; in order to obtain a contract to build, the GC (and sub-contractors as well) must provide the owner a bond for its performance of the terms of the contract. Conversely, owners & contractors may also provide payment bonds to ensure that subcontractors & suppliers are paid for work done. Under the miller act, payment and performance bonds are required for general contractors on all US Federal govt construction projects where the contract price exceeds $100k.

A surety bond is a contract among at least three parties:
- The Principal - the primary party who will be performing the contractual obligation;
- The Obligee - the party who is the recipient of the obligation; and
- The Surety - who ensures that the principal’s obligations will be performed.

Through this agreement, the surety agreeds to uphold – for the benefit of the Obligee– the contractual promises made by the principal if the principal fails to uphold its promises to the Obligee. The contract is formed so as to induce the Obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement.

Contract bonds guarantee a specific contract. Examples include performance, bid, supply, maintenance, and subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc.

Question 121

Overview of Insurance policies

Builder’s Risk Insurance

Answer 121

Buildings are subject to many different risks while under construction. They may catch fire, be damaged by high winds, or fall victim to other force majeure. Builder’s Risk insurance is a property insurance that indemnifies against losses due to fire, vandalism, lightning, wind, and similar forces. It usually does not cover quake, flood, acts of war, or intentional acts of the owner.

Is typically needed during construction period only.

All types of buildings are eligible for this coverage – including dwellings and farm property, which are not eligible for other commercial property insurance forms.

In addition to buildings under construction, it also applies to cover the value of renovations to buildings.

Question 122

Overview of Insurance policies

Commercial Auto Insurance

Answer 122

Contains two coverages; liability & physical damage. Others which are basic to business auto exposers, and added by endorsement, are personal injury protection, medical payments, and unsured motorists.

Liability coverage: for selected covered autos, protects those who are insureds from legal liability for bodily injury or property damage to others, caused by auto accidents. Further, the insurer agrees to defend insureds against all liability claims for which coverage is afforded.

Personal Injury Projection: provides medical, disability, and death benefits for persons injured in or by the insured’s vehicles, without regard to fault. Individual name insureds and their family members are also covered for injuries in or by the vehicles of others.

Medical payment coverage: Voluntary coverage which applies in a similar manner to PIP; supplementing those medical benefits & covering for certain residual injury situations not included in PIP.

Physical damage coverage: covers accidental damage to those designated as covered autos, without regard to fault.

Uninsured motorists: supplements PIP & medical to cover for additional amounts to which the injured person would be legally entitled to recover from another motorist who is uninsured for liability, or insured but with limits inadequate to cover the damages suffered.

Commercial Property: Protects the business against the loss or loss of use of company property, which can include lost income or business interruption, buildings, computers, money, and valuable papers.

Question 123

Overview of Insurance policies

Contractor’s Insurance

Answer 123

Covers the insured for bodily injury and property damage liability arising from operations performed for the insured by a designated contractor at a designated location, including acts or omissions of the insured in connection with general supervision. Coverage no longer applies after the work has been completed, except for service, maintenance and repairs, or after that portion of the work, out of which the injury or damage arises, has been put to its intended use.

Designed to satisfy requirements that insurance protection be provided to one for whom operations will be performed, by the one who will perform the operations.

The most frequent usage is for an owner on whose behalf operations will be performed by a contractor. It is also appropriate for a subcontractor to satisfy the requirements of a contractor.

Question 124

Overview of Insurance policies

Inland Marine Insurance

Answer 124

Indemnifies loss to moving or movable property and is an outgrowth of ocean marine insurance. Historically, it held the transporter responsible for property loss before, during, and after the completion of the voyage. In the 1800s the non-ocean portion of the journey grew as cargoes were transferred to non-ocean vessels, such as barges, and then the term “inland marine” was derived from.

Became known as floaters, since the property to which the coverage was originally extended was essentially floating. The coverage has grown to include property that just involves an element of transportation.

The property that is insured under inland marine coverage is typically one of the following:
- Actually in transit;
- Held by a bailee;
- At a fixed location that is an instrument of transportation;
- A movable type of goods that is often at different locations.

Question 125

Overview of Insurance policies

Errors & Omissions Insurance

Answer 125

A professional liability insurance that protects companies & individuals against claims made by clients for inadequate work or negligent actions. E&O often covers both court costs and any settlements up to the amount specified on the insurance contract.

Question 126

Overview of Insurance policies

Workers’ Compensation Insurance

Answer 126

Covers the liability of the employer for work-related injuries to employees, in accordance with the requirements of law. WC is one the most fundamental and important insurance coverages of business & industry.

WC is a state mandated insurance system & most employers are required by law to provide coverage for their employees. Although it is a private insurance system, it is closely regulated by the state, with a high degree of uniformity in coverage, rates, and procedures.