Chapter 2 Property Flashcards
Accident –
A sudden, unforeseen, unintended, and unplanned event from which loss or damage results.
Occurrence –
An accident includes continuous or repeated exposure to the same general harmful conditions
Cancellation –
The termination of an insurance policy before its expiration date. Once cancelled, a policy provides no coverage. A policy may be cancelled by the insured or insurer.
Pro Rata Cancellation
A proportionate cancellation of insurance that refunds premium to the insured based on the precise number of days coverage was in effect. The earned premium is the premium charged and retained by the insurer for the number of days coverage was in place; the unearned premium is the premium refunded to the insured for the number of days coverage was not in place.
Short Rate Cancellation
A cancellation of insurance that incurs a financial penalty. Sometimes when the insured cancels the policy before its expiration date, a short-rate cancellation is issued. The insurer retains a portion of the unearned premium to cover costs.
Flat Cancellation
A cancellation of insurance that is retroactive to the effective date of the policy. No coverage is provided and the insurer must refund the policy premium paid by the insured.
Nonrenewal
The termination of a policy at the expiration of its term. The policy does not renew and no coverage is provided after the expiration date.
Proximate Cause
The primary cause of loss. If only one peril caused the loss, the proximate cause is the first event in the unbroken chain of events that resulted in loss. If more than two perils caused or contributed to the loss, the proximate cause is the peril having the most significant impact in generating the loss or damage.
Arbitration –
Process whereby a disputed claim is decided by a neutral third party. The disputing parties choose the impartial third party and agree in advance to accept the final decision of the arbitrator, who makes a decision after a hearing where both parties offer evidence.
Right of Salvage –
The right of the insurer to take possession of damaged property after paying for its loss. The salvage belongs to the insurer.
Salvage Value
The amount for which property can be sold at the end of its useful life. In property insurance, the salvage value is the scrap value of damaged property.
Binder
A legal agreement issued by an insurance company or a producer that provides temporary proof of insurance until the insurer is able to issue an insurance policy. Binders are issued for specific time periods (maximum of 60 days) and automatically end when the policy is issued. Binders contain the name of the insurer, the amount and type of insurance, and the perils insured against.
Inherent Vice
A quality within property that causes it to damage or destroy itself. Examples include rust, rot and the fading of paint. Inherent vice is not covered by a property policy.
Friendly Fire
A fire that was intentionally set and stays within its intended boundaries (e.g., a fireplace) and results in smoke damage to the inside of a fireplace. Property insurance does not cover damage from a friendly fire.
Hostile Fire
A fire that burns outside its intended boundaries, or becomes uncontrollable. Examples of a hostile fire include a wildfire or a fire that damages a home when a spark from a fire in the fireplace ignites a piece of furniture.
Endorsement
– A policy form that alters or adds to the provisions of a property and casualty insurance contract.
If the insured does not agree with the insurer’s decision regarding a claim, what process helps decide the outcome?
Arbitration
If the insured does not agree with the insurer’s decision regarding a claim, what process helps decide the outcome?
Arbitration
During arbitration a neutral third party decides the outcome of a claim.
Which of the following is attached to the policy to alter or add to the policy provisions?
Endorsement
Concurrent Causation
A principle holding that when two perils simultaneously cause a loss (i.e., they are both considered the proximate cause of loss), the insurer must pay the loss even if one of the perils is excluded by the policy.
Concurrency/Concurrent Policies
The existence of two or more policies covering the same exposures, having the same policy periods, and the same coverage triggers. For example, if an auto policy and an umbrella policy are written with the same policy dates, they are considered to be concurrent.
Non-Concurrency/Non-Concurrent Policies
The existence of two or more policies covering the same exposures that don’t have the same policy periods. Non-concurrency may create a coverage gap when underlying liability policies and an umbrella policy are non-concurrent because if an underlying liability policy exhausts its aggregate, it may violate the umbrella’s underlying limits requirement.
Deductible
he specified amount of each loss that the insured must bear. In property insurance (and with a per claim, or per occurrence, deductible), the insurer subtracts the deductible from the amount of loss when making payment. By accepting a larger deductible, the insured’s premium may be reduced. An insurer may require a larger deductible as an underwriting tool to limit small claims.
Definitions
Words, terms, and phrases that are clearly described and used in an insurance policy for the purpose of clarifying the intent of the insurer and to avoid coverage disputes with respect to the extent of coverage provided by the policy. Most policies contain a definitions section in the policy and emphasize policy definitions by enclosing them within quotes or highlighting them with bold text.
Bailee
A person or any organization to which property has been entrusted, usually for repairs, servicing or storage. Because bailees are legally responsible for property in their care, property insurance policies specifically exclude coverage for property in the care of a bailee.
Bailor
A person or organization that entrusts property to a bailee.
Primary Insurance
Any type of coverage that responds to a loss before all other coverage responds.
Excess Insurance
Any form of insurance coverage that provides protection against certain perils or causes of loss ONLY after loss or damage exceeds a stated amount or the limits stated in specific policies or self-insurance. Excess insurance may be written over primary, excess, or umbrella insurance.
A person who takes possession of another person’s property in order to repair it is called?
Bailee
Unoccupancy
property that contains personal property but has no occupants.
Vacancy
provision in a property policy that eliminates or limits coverage for buildings that don’t contain sufficient personal property to support intended occupancy or use.
Burglary
The taking of property from inside the premises or a locked safe or vault by a person who commits forcible entry into, or exit from, the property of another while trespassing.
Robbery
The taking of property from the care and custody of a person who has been caused or threatened with bodily harm.
Theft
The broadest of the crime coverages, theft includes any act of stealing.
The loss of property when the cause of loss is not known. This is NOT theft, burglary, or robbery.
Mysterious Disappearance
Types of Property Losses
Direct Loss – A loss that causes direct damage to property without an intervening cause.
Indirect Loss or Consequential Loss – A loss that is not the direct result of a peril.
Each of the following is a direct loss, except
Loss of income
Loss of income is an indirect loss, as it is paid as a consequence of a direct loss such as a total fire loss to a home.
Two type of Perils that may be covered by property insurance policies is:
Named Peril – This type of property coverage only provides insurance for the causes of loss, or perils, listed. If a peril is not “named” in the policy, no coverage applies for loss or damage caused by that peril. Typical “named perils” are fire and theft.
Named perils may contain coverage for up to 16 named perils; coverage for additional perils may be added by endorsement. Open Peril (Special Form, All–Risk) – This type of property coverage provides insurance for all causes of loss that are not specifically excluded under the policy. Typical exclusions in an “open perils” policy are flood and earthquake.
Loss Valuation
A property policy pays for losses to property based on the valuation method contained in the policy or chosen by the insured in an endorsement added to the policy.
Replacement Value
The cost to replace property with property of like kind and quality, at current pricing, without a deduction for depreciation. Many property policies providing loss valuation at replacement value require covered property to be insured to a certain percentage of its replacement value, such as 80% or 90%.
Actual Cash Value (ACV
he cost to repair or replace property at its replacement value, minus depreciation.
Agreed Value –
The insurance company and insured agree to a specific value of a particular property before the policy is issued. If a total loss occurs, the insurer will pay the Agreed Value.
Stated Value
A valuation method that states the value of a particular property on the declarations page, but provides for the insurer to pay the lesser of the stated value or ACV of the property following a loss.
Valued Policy
A policy that states the value of property as the amount shown on the Declarations page and will pay that full face value in the event of a total loss, regardless of the actual cash value.
Functional Replacement Value –
The cost to replace property with other property that performs the same function with similar efficiency, although the replacement property is not identical to the property being replaced. This valuation method is typically used with older property (such as a Victorian home) for which the replacement value exceeds the insured’s ability or willingness to purchase coverage.
Market
The price a willing buyer would pay for property purchased from a willing seller
_____________ is the method of loss valuation that values damaged property at the cost to replace with property of like kind and quality, at current prices, and without deduction for depreciation.
Replacement value
What calculation is used to determine the actual cash value (ACV) of a loss?
Replacement cost – depreciation = ACV
Noncombustible
he buildings and its walls, floors, and structural framework are constructed of noncombustible materials.
Masonry Noncombustible
Buildings with exterior walls of masonry (not less than 4 inches thick) or made of fire-resistive construction with a rating of not less than one hour and noncombustible floors and roofs.
Joisted Masonry
Buildings with exterior walls of masonry or fire-resistive construction rated for not less than one hour and with combustible floors and roofs.
Frame
A building that has a roof, floor, and supports of combustible material, usually wood, and combustible interior walls.
fire Resistive
The entire building and roof are constructed of reinforced concrete and steel. Must have at least a 2-hour fire resistive rating.
Modified Fire Resistive
The materials used in the walls, floors, and roof of a structure must have a fire resistive rating of at least 1 hour, but less than 2 hours.
Specific Limit
Insures a single item of property for a single limit of insurance. For example, a fire policy insures one dwelling for $100,000.
Scheduled Limit
Insures one or more items of property on a single policy and the amount of insurance applying to each item is shown on a schedule. For example, one farm policy insures a home for $100,000 and a barn for $200,000.
Blanket Limit
Insures property located at more than one location OR more than one type of property at the same location OR both. For example, the $1 million blanket limit applies to two separate buildings at two separate locations, as well as the business personal property contained in each building.
Which of the following BEST describes a scheduled limit of insurance on a property policy?
Insures multiple items of property on a single policy
DICE is what?
- Declarations
- Insuring Agreement
- Conditions
- Exclusions
In addition to the four parts of a policy, additional coverages and endorsements will be explained.
Declarations
The Declarations Page describes basic information about the policy, including:
Who – Names the insurer and insured, including legal representatives in the event of the insured’s death.
What – A description of the property being insured and other parties having insurable interests, such as a mortgagee.
Where – The location of insured property and the named insured’s mailing address.
When – The effective and expiration dates of the policy.
How Much – The limits of liability insuring covered property and the annual premium for each type of coverage.
insuring Agreement
The insuring agreement states the insurance company’s promise to pay the insured. This promise is usually broad and the other sections of the policy restrict or limit the scope of coverage provided by the policy. Property insurance policies state in the insuring agreement what perils are covered.
Conditions
The conditions section states the obligations of the parties to the contract, as well as any other conditions of coverage. The insureds duties and obligations are spelled out in this section.
Policy Period
Specifies that coverage only applies to losses occurring when the policy is in force.
Concealment or Fraud
Specifies that coverage will not apply if an insured makes a material concealment, misrepresentation, or fraud in the application pertaining to the claim.
Liberalization Clause
pecifies that if the insurer broadens coverage with no increase in premium, that broadening of coverage will apply to existing policies without the need for an endorsement.
Cancellation
Specifies the terms under which the policy can be cancelled by the insurer and the named insured.
The duties and obligations of the insured are found under what part of the insurance policy?
Conditions
A Liberalization Clause serves which of the following purposes?
Broadened coverage applies automatically to all policies without a premium charge
Nonrenewal –
Addresses the requirements of the insurer if it elects not to renew a policy
Assignment
Specifies that the insured may not transfer rights of ownership without the insurer’s prior written consent.
Subrogation
States the insured must transfer to the insurance company its right of recovery against any party causing a loss after it accepts payment from the insurer for a loss. Subrogation allows the insurer to recover from the party that caused a loss any amounts paid to an insured. It also:
Prevents the insured from collecting twice for the same loss
Helps the insurer control expenses and premiums
Ultimately holds the responsible third party accountable for the loss
Restoration/Nonreduction of Limits
policy to its initial face value or not reduce limits of coverage after the insurer has paid a claim either to the insured business or a third party on behalf of the business.
Insurable Interest and Limit of Liability
The insurer will not be responsible for payment of loss in an amount greater than the financial interest of an insured.
Changes
Any changes to the policy must be made in writing by the insurer.
Duties in the Event of Loss
Specifies the obligations of the insured in the event of a loss. With respect to any loss, these obligations include:
Giving prompt written notice to the insurer, including a complete description of how, when, and where the loss or damage occurred
Notifying the police if a theft occurred
Cooperating with the insurer in the investigation and settlement of the loss
Protecting property from further damage
Preparing an inventory of the damaged property
Allowing the insurer to inspect any damaged property and examine books and records
Submitting proof of loss to the insurer, including:
The time and cause of loss
Any other insurance that may cover the loss
Any appropriate receipts, evidence, or affidavits to support the loss
Duties in the Event of Loss
Specifies the obligations of the insured in the event of a loss. With respect to any loss, these obligations include:
Giving prompt written notice to the insurer, including a complete description of how, when, and where the loss or damage occurred
Notifying the police if a theft occurred
Cooperating with the insurer in the investigation and settlement of the loss
Protecting property from further damage
Preparing an inventory of the damaged property
Allowing the insurer to inspect any damaged property and examine books and records
Submitting proof of loss to the insurer, including:
The time and cause of loss
Any other insurance that may cover the loss
Any appropriate receipts, evidence, or affidavits to support the loss
Loss Settlement
Specifies which loss valuation method will apply to the property insured under the policy.
Appraisal
Addresses disputes about the amount of a loss. If the insurance company and insured cannot agree on the amount of a loss, either party may request an appraisal. Each party selects its own appraiser and the appraisers select an umpire. Agreement by any two parties settles the loss. Each party pays the cost of its own appraiser and shares the costs of the umpire and the appraisal. Appraisal is a dispute resolution method and is not used to determine whether the policy provides coverage for a loss.
Mortgage Clause –
Specifies how the policy protects the mortgagee’s financial interest. (A mortgagee has insurable interest in real property.) Payment is made to mortgagees only up to its insurable interest in covered property and in order of precedence. The mortgagee must comply with requirements if the insured’s claim is denied and the mortgagee wishes to collect under the policy:
It must pay any premium due under the policy on demand if the insured fails to do so
It must notify the insurer of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware
It must submit a proof of loss to the insurer if the insured fails to do so
Under cancellation requirements, the insurer must provide the mortgage holder (mortgagee) with advance written notice (typically 10 days) before cancelling or nonrenewing coverage, giving the mortgagee the opportunity to pay the premiums.
Abandonment of Property
Specifies that the insurer is not obligated to accept any property abandoned by an insured.
Loss Payment
Specifies how the insurer will make payment for loss and any applicable time frames that must be honored when submitting proof of loss and other claim documents.
Legal Action Against Us
Specifies that no one may bring suit against the insurer until all terms and conditions of the policy have been complied with.
Other Insurance –
Specifies the process to be followed when more than one policy covers the same loss. Each policy pays no more than its share of the loss.
Recovered Property
Specifies the procedure to be followed when lost or stolen property is recovered after the insurer has made payment under the policy. Each party shall notify the other of any recovery and, under most property policies, the insured has the right of keeping the claim payment or returning the claim payment and retaining right to the property after adjustments have been made for any damage.
No Benefit to Bailee
Specifies that no coverage applies if loss payment benefits a bailee.
Bankruptcy Clause
pecifies that bankruptcy or insolvency of the insured does not relieve the insurer of any of its duties or obligations under the policy.
Death
Specifies that in the event of the named insured’s death, the insurer will extend coverage to the legal representative of the deceased with respect to the premises and property covered under the policy at the time of the named insured’s death.
Loss Payable Clause –
Specifies how the policy protects the interests of a loss payee. A loss payee has insurable interest in personal property.
Match the Condition of coverage with its description
Duties in the Event of a Loss
The obligations of the insured that must be met following a loss before the insurer will settle the loss
Policy Period
The period of time for which coverage applies
Limit of Liability
The maximum amount the insurer will pay for a covered loss
Appraisal
Dispute resolution method used when the insured and insurer cannot agree on the amount of the loss
Assignment
The insured may not transfer rights of ownership without the insurer’s prior written consent
Excluded common perils include
Ordinance or Law
Earth movement
War
Water Perils that are NOT covered by the policy are listed in the exclusions section. Other perils may be excluded in provisions stated elsewhere in the policy (i.e., water damage, flood, sewer backup, etc.)
Utility failure that originates off-premises
Neglect of the insured to protect covered property from further loss
Intentional loss
Nuclear hazard, war, and military action
Governmental action
Fungus, wet rot, dry rot, and bacteria (e.g., mold)
Each of the following is a typical property insurance policy exclusion, except:
Fire
Fire is a basic peril covered under property policies. Ordinance or law, flood, and neglect are common exclusions.
Select the section of the policy where each of the following items would be found
Declarations
Named Insured
Location of insured property
Insuring Agreement
Promise to pay the insured
Description of covered perils
Conditions
Duties of the insured
Liberalization clause
Exclusions
Ordinance or law
Intentional loss
Additional Coverages
additional coverages are automatically included in property policies without an additional premium. The type of additional coverages depends upon the type of policy. Additional coverages are paid in addition to those stated in the insuring agreement and include debris removal, collapse, and fire department service charges.
Common Policy Provisions of Type of Insured
Named Insured – The person or organization designated on the Declarations page of the policy. If property is being insured, the named insured should be the owner of the property. If vehicles are being insured, the named insured should be the party or entity to which the vehicle is titled and registered. The named insured receives the broadest coverage of all persons or organizations protected by a policy.
Insured – A person or organization protected by an insurance contract.
First Named Insured – This insured has rights and responsibilities not applying to other insureds. The First Named insured represents all insured, particularly on commercial lines policies. The First Named Insured receives notifications from the insurer, can cancel the policy, and is responsible for paying the premium.
Additional Insured – A person or organization not ordinarily protected by a policy but which, through the addition of an endorsement to the policy, is granted status as an insured. Under a property policy, an additional insured is often a co-owner of real property. Under a liability policy, an additional insured is often a party to an indemnification or hold harmless agreement.
Which of the following has the broadest coverage under the insurance policy?
Named Insured
Coinsurance
A provision contained in most policies insuring commercial property, and is used to encourage the insured to purchase and maintain insurance to value, and to establish the basis of payment in the event the insured fails to maintain a specified percentage of that value. The higher the coinsurance percentage the insured agrees to purchase, the lower the rate that the insured pays for the insurance. Coinsurance applies only in the event of a partial loss, as total losses typically are paid in accordance with the Valued Policy Law.
Which of the following is not true of coinsurance?
It applies in the event of total loss, it’s only for partial loss
Which of the following is not found on the Declarations Page?
Exclusions
Which of the following clauses protects the interests of the loss payee?
Loss payable clause
Which of the following best defines short-rate cancellation?
The insured will receive less than the full amount of the unearned premium
Which clause broadens coverage of an existing policy with no increase in premium?
Liberalization
A property purchased 10 years ago for $100,000 has a replacement value today of $200,000. It has depreciated 3% each year. What is today’s actual cash value?
$140,000
Current replacement cost of $200,000 minus 30% depreciation = $140,000.
When firefighters extinguish a house fire with water, the water damage is considered a(n):
Direct loss, water damage
Which of the following best describes a direct loss?
Water damage resulting from a burst pipe
A direct loss is a physical loss proximately caused by a covered peril.
The Additional Coverages part of a property insurance policy provides:
Coverage that supplements the basic coverages in the insuring agreement which is automatically included without an additional premium
Additional coverages are automatically included in property policies without an additional premium. The type of additional coverages depends upon the type of policy. Additional coverages are paid in addition to those stated in the insuring agreement and include debris removal, collapse, and fire department service charges.
Which of the following is stated in the Insuring Agreement?
The perils insured against
The Insuring Agreement states the insurance company’s promise to pay the insured, including the exact perils insured against by the policy.
The part of an insurance contract that varies with each individual policy, but is still a mandatory part of the policy, is the:
Declarations
The concealment and fraud condition in a property insurance policy states:
The policy will be voided if there is material concealment, misrepresentation, or fraud on the insured’s part
Which statement about property insurance terminology is correct?
A spark that jumps from a fireplace and ignites a nearby rug would be deemed a hostile fire
All of the following are methods of writing property insurance limits, except:
Concurrent coverage
Specific, scheduled, and blanket are all methods of writing property insurance limits. Concurrent coverage applies to separate policies covering the same risk, such as a primary policy and an umbrella policy. It does not indicate a type of insurance limit.
The Insuring Agreement of a policy describes:
Perils that are covered
The Insuring Agreement includes the perils insured against. The duties of the insured and the transfer of recovery rights (subrogation) would be included in the policy’s Conditions. Excluded perils would be listed in the Exclusions section.
Short-rate cancellation occurs when:
The insured cancels the policy mid-term
When the insured cancels a policy before the expiration date, a short-rate cancellation is issued, and the insurer retains a portion of the unearned premium to cover costs.
