Chapter 2 - Property Basics

Question 1

ACCIDENT

Answer 1

A sudden, unforeseen, unintended and unplanned event from which loss or damage results

Question 2

ABANDONMENT OF PROPERTY

Answer 2

Specifies that the insurer is not obligated to accept any property abandoned by an insured

Question 3

ACTUAL CASH VALUE (ACV)

Answer 3

The cost to repair or replace property at its replacement value, minus depreciation

2.2

Question 4

ADDITIONAL COVERAGES

Answer 4

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.

2.4

Question 5

AGREED VALUE

Answer 5

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

Question 6

APPRAISAL

Answer 6

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

Question 7

ARBITRATION

Answer 7

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.

Question 8

ASSIGNMENT

Answer 8

Specifies that the insured may not transfer rights of ownership without the insurer’s prior written consent.

Example: a business owner cannot sell his business and then transfer ownership of the business’ general liability insurance policy to the new owner without the written consent of the insurance company

Question 9

BAILEE

Answer 9

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

Question 10

BAILOR

Answer 10

A person or organization that entrusts property to a bailee

Question 11

BANKRUPTCY CLAUSE

Answer 11

Specifies that bankruptcy or insolvency of the insured does not relieve the insurer of any of its duties or obligations under the policy

Question 12

BINDER

Answer 12

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

Question 13

BLANKET LIMIT

Answer 13

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

2.3

Question 14

BURGLARY

Answer 14

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

Question 15

CANCELLATION

Answer 15

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

Question 16

CHANGES

Answer 16

Any changes to the policy must be made in writing by the insurer

Question 17

COINSURANCE

Answer 17

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

2.5

Question 18

CONCURRENCY/CONCURRENT POLICIES

Answer 18

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

Question 19

CONCURRENT CAUSATION

Answer 19

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

Question 20

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

Answer 20

*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 – Specifies 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

2.4

Question 21

D.I.C.E - The structure of a standard property insurance policy

Answer 21

1. Declarations; such as Location of insured property & named insured
   - who, what, when, where, and how much
2. Insuring Agreement; such as Promise to pay & description of covered perils
   - company’s promise to pay and perils covered against
3. Conditions; such as Duties of the insured & liberalization clause
   - duties and obligations of the insured and insurer
4. Exclusions; such as Intentional loss and ordinance of law
   - perils not covered under the policy and what we don’t pay for

Question 22

DEATH

Answer 22

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

Question 23

DECLARATION PAGE

Answer 23

*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.

2.4

Question 24

DEDUCTIBLE

Answer 24

The 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

2.1

Question 25

DEFINITIONS

Answer 25

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

Question 26

DIRECT LOSS

Answer 26

Causes damage without an intervening cause

2.2

Question 27

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:

Answer 27

*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

Question 28

ENDORSEMENT

Answer 28

A policy form that alters or adds to the provisions of a property and casualty insurance contract

2.1

Question 29

EXCESS INSURANCE

Answer 29

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

Question 30

FIRE RESISTIVE

Answer 30

The entire building and roof are constructed of reinforced concrete and steel. Must have at least a 2-hour fire resistive rating.

Question 31

FLAT CANCELLATION

Answer 31

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

Question 32

FRAME

Answer 32

A building that has a roof, floor, and supports of combustible material, usually wood, and combustible interior walls

Question 33

FRIENDLY FIRE

Answer 33

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

2.1

Question 34

FUNCTIONAL REPLACEMENT VALUE

Answer 34

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

Question 35

HOSTILE FIRE

Answer 35

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.

Question 36

INDIRECT

Answer 36

loss occurs as the consequence of a direct loss

2.2

Question 37

INHERENT VICE

Answer 37

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

Question 38

INSURABLE INTEREST AND LIMIT OF LIABILITY

Answer 38

The insurer will not be responsible for payment of loss in an amount greater than the financial interest of an insured

Question 39

INSURING AGREEMENT

Answer 39

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

2.4

Question 40

JOISTED MASONRY

Answer 40

Buildings with exterior walls of masonry or fire-resistive construction rated for not less than one hour and with combustible floors and roofs

Question 41

LEGAL ACTION AGAINST US

Answer 41

Specifies that no one may bring suit against the insurer until all terms and conditions of the policy have been complied with

Question 42

LIBERALIZATION CLAUSE

Answer 42

Broadened coverage applies automatically to all policies without a premium charge

If the insurer broadens coverage with no increase in premium, the coverage applies to existing policies automatically

Question 43

LOSS PAYABLE CLAUSE

Answer 43

Specifies how the policy protects the interests of a loss payee. A loss payee has insurable interest in personal property

Question 44

LOSS PAYMENT

Answer 44

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

Question 45

LOSS SETTLEMENT

Answer 45

Specifies which loss valuation method will apply to the property insured under the policy

Question 46

LOSS VALUATION

Answer 46

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

Question 47

MARKET

Answer 47

The price a willing buyer would pay for property purchased from a willing seller

Question 48

MASONRY NONCOMBUSTIBLE

Answer 48

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

Question 49

MODIFIED FIRE RESISTIVE

Answer 49

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

Question 50

MORTGAGE CLAUSE

Answer 50

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

Question 51

MYSTERIOUS DISAPPPEARANCE

Answer 51

The loss of property when the cause of loss is not known. This is NOT theft, burglary, or robbery

Question 52

NAMED PERILS

Answer 52

policy specifically lists the covered perils (causes of loss)

2.2

Question 53

NO BENEFIT TO BAILEE

Answer 53

Specifies that no coverage applies if loss payment benefits a bailee

Question 54

NON-CONCURRENCY/NON-CONCURRENT POLICIES

Answer 54

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

Question 55

NONCOMBUSTIBLE

Answer 55

The buildings and its walls, floors, and structural framework are constructed of noncombustible materials

Question 56

NONRENEWAL

Answer 56

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

Addresses the requirements of the insurer if it elects not to renew a policy

Question 57

OCCURRENCE

Answer 57

An accident includes continuous or repeated exposure to the same general harmful conditions

2.1

Question 58

OPEN PERILS

Answer 58

policy covers all perils except those specifically excluded

2.2

Question 59

OTHER INSURANCE

Answer 59

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

Question 60

PRIMARY INSURANCE

Answer 60

Any type of coverage that responds to a loss before all other coverage responds

Question 61

PRO RATA CANCELLATION

Answer 61

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

2.1

Question 62

PROXIMATE CAUSE

Answer 62

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

2.1

Question 63

RECOVERED PROPERTY

Answer 63

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

Question 64

REPLACEMENT VALUE

Answer 64

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%

2.2

Question 65

RESTORATION/NONREDUCTION OF LIMITS

Answer 65

Specifies the sum and circumstances under which an insurer charges the insured, usually a business firm, to restore a 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

Question 66

RIGHT OF SALVAGE

Answer 66

The right of the insurer to take possession of damaged property after paying for its loss. The salvage belongs to the insurer.

Question 67

ROBBERY

Answer 67

The taking of property from the care and custody of a person who has been caused or threatened with bodily harm

Question 68

SALVAGE VALUE

Answer 68

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

Question 69

SCHEDULED LIMIT

Answer 69

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

2.3

Question 70

SHORT RATE CANCELLATION

Answer 70

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

Question 71

SPECIFIC LIMIT

Answer 71

Insures a single item of property for a single limit of insurance. For example, a fire policy insures one dwelling for $100,000

2.3

Question 72

STATED VALUE

Answer 72

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

Question 73

SUBROGATION

Answer 73

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

2.4

Question 74

THEFT

Answer 74

The broadest of the crime coverages, theft includes any act of stealing

Question 75

TYPES OF INSUREDS

Answer 75

* 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

Question 76

UNOCCUPANCY

Answer 76

A property that contains personal property but has no occupants

Question 77

VACANCY

Answer 77

A 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

Question 78

VALUED POLICY

Answer 78

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

2.2