Chapter 1. Property and Casualty Insurance Terms and Related Concepts

Question 1

What are the two types of risk?

Answer 1

Pure risk - can only lose; this is the only type of risk that is insurable

Speculative risk - stand the chance to gain

Question 2

What are the three types of hazard?

Answer 2

Physical
Moral - e.g. lying
Morale - mindset (e.g. indifference to loss)

Question 3

Peril

Answer 3

The causes of loss insured against in an insurance policy

Question 4

What is another word for indemnity?

Answer 4

Reimbursement - for loss ONLY

Insureds cannot recover more than their loss

Question 5

What is insurable interest and when must it exist for P&C policies?

Answer 5

The insured would incur a financial loss if the insured property is damaged or lost

It must exist at the time of the loss

Question 6

What are the two types of property losses?

Answer 6

Direct - covered by property insurance

Indirect - NOT covered by property insurance

Question 7

What are the six methods of loss valuation?

Answer 7

• Actual cash value
• Replacement cost
• Market value
• Agreed value
• Stated value
• Salvage value

Question 8

Compare named peril and open peril policies

Answer 8

Named peril covers only the perils explicitly listed in the policy

Open peril covers all perils unless they are explicitly excluded

Question 9

Acronym for handling risk

Answer 9

STARR
Sharing - among a group
Transfer - to an insurance company
Avoidance - avoid the risk
Reduction - e.g. salt the sidewalk
Retention - e.g. paying coinsurance to cover insurance benefits

Question 10

What are the five elements of insurable risk?

Answer 10

• Due to chance
• Definite and measurable
• Statistically predictable
• Not catastrophic
• Randomly selected/large loss exposure

Question 11

Property vs Casualty

Answer 11

Property - two-party contract between insurer and policyowner to insure one’s own assets

Casualty - third-party contract to insure damage to someone else’s assets

Question 12

Vacancy vs unoccupancy

Answer 12

Vacancy - insured structure is empty of people and property for 60 days

Unoccupancy - insured structure empty of people but not property

Question 13

What are the four elements of negligence?

Answer 13

LiSP A (elemenTH of negligenTH)

• Legal Duty: reasonably prudent
• Standard of Care: breached Legal Duty
• Proximate Cause: negligence led to chain of events that cause the damage
• Actual Loss and Damage

Question 14

What are the two types of negligence?

Answer 14

NegligenCCe

• Contributory (more strict): injured party must be completely free of fault otherwise the claim is void
• Comparative (more lenient): injured is covered to the degree they are not at fault

Question 15

What are the three types of liability?

Answer 15

ASVi

• Absolute: obviously hazardous activity led to the injury of another
• Strict: (e.g. product liability) liable regardless of fault or negligence
• Vicarious: transfer of liability to someone with greater ability to pay (e.g. child to parent or employee to employer)

Question 16

What is property coinsurance?

Answer 16

Insured agrees to carry insurance for most of replacement value (usually 80%)

Question 17

What is split limit liability?

Answer 17

Limits separately stated for different coverages (e.g. per person, per accident, property damage for auto liability)

Question 18

What sublimit in a liability policy puts a ceiling on the payment for all claims that arise from a single accident?

Answer 18

Per occurrence

Question 19

What are the two types of compensatory damages?

Answer 19

Special damages: these are tangible losses that can be easily calculated, like medical expenses, lost wages, and property damage

General damages: these are intangible losses that are harder to quantify, such as pain and suffering, emotional distress, and loss of enjoyment of life.

Question 20

In property insurance, what is actual cost?

Answer 20

Replacement cost at the time of loss minus depreciation

Question 21

In property insurance, what is the purpose of the coinsurance clause?

Answer 21

To encourage insureds to insure property close to its value

Question 22

What determines an insurer’s responsibility for payment, as stated in an insurance policy?

Answer 22

Limits of liability

Question 23

What provision states that if a policy allows for greater benefits than the financial loss incurred, the insured may be compensated only for the amount lost?

Answer 23

Indemnity

Question 24

What term defines an exact, direct and uninterrupted cause of loss?

Answer 24

Proximate cause

Question 25

What does loss of use coverage do?

Answer 25

It covers indirect losses incurred after after a direct loss caused by a covered peril has occurred

Question 26

An insured’s building has an actual cash value of $200,000, and he has insured the property for $120,000 with an 80% coinsurance clause. A $40,000 loss occurs. How much will the policy pay?l

Answer 26

$30,000 since it’s 75% of the loss and only 75% of of the amount of insurance he agreed to carry ($120,00 of the agreed $160,000) was covered

If the property was insured for $160,000 (80%), then the policy would have covered 100% of the partial loss

Question 27

An insured’s business is damaged because of a fire, and he is forced to close the business temporarily for repairs. As a result, the insured lost income. What type of loss is this?

Answer 27

Consequential

A type of indirect financial loss that a business may experience after an insured event. Liability consequential loss insurance protects businesses from these losses.

Question 28

Losses caused by continuous or repeated exposure to conditions resulting in injury to persons or damage to property that is neither intended nor expected is the definition of which of the following terms?

Answer 28

Occurence

Question 29

Which type of property valuation will the policy pay the full value as specified on the policy schedule, regardless of the insured property’s appreciation or depreciation?

Answer 29

Agreed value

Question 30

An insured owns several buildings, each at a different location and insured on a separate policy. What type of coverage does the insured have?

Answer 30

Specific