Chapter 3 Flashcards
Need for Crime Insurance
- Both personal and commercial insurance are targets for criminals.
- Little chance of recovery creates need for additional coverage.
History of Crime Insurance
- Has existed throughout the history of the insurance business.
- Continued to evolve to meet needs of consumers.
Perils Inside, as Well as Out
In additional to perils from the outside, a business owner faces perils from inside the business (employee dishonesty, computer fraud, document forgery).
- May be insured under “Comprehensive Dishonesty, Disappearance, and Destruction policy - AKA, “3-D policy)
Conditions Unique to Crime Insurance
- There can be stipulations as to how to distribute any stolen property after the claim is settled.
- The value of the property under the policy tends to be the actual cash value at the time of the loss, unless the property has been
Conditions Unique to Crime Insurance
- There can be stipulations as to how to distribute any stolen property after the claim is settled.
- The value of the property under the policy tends to be the actual cash value at the time of the loss, unless the property has been used as a pledge or collateral (ex. used as a loan) in which case it may be worth the amount agreed at the time the loan was made.
- If securities are stole, then they are valued at their actual cash value at the close of business on the last business day before the discovery of the loss.
Exclusions Unique to Crime Insurance
- Damage to glass or damage to lettering, ornamentation, tapes, or foils on the glass.
- Loss or damage to manuscripts, records, or accounts, except for their blank values.
- Loss or damage due to any criminal act committed by the insured, his or her partner, or an officer, employee, director, trustee or insured’s authorized representative, whether acting alone or in collusion with others.
Common Types of Crime Insurance
- Church theft
- Damage to building by burglary or robbery
- Inside/outside robbery
- Money and securities
- Office/store burglary and robbery
- Stock burglary
Church Theft
Applies to religious, education or social auxiliary botanizations under the insured director of control for loss of money, securities, and property by theft and for damages to the premises and property caused by the actual or attempted theft.
Damage to Building by Burglary or Robbery
Damage to the premises caused by actual or attempted theft.
Includes vandalism, malicious mischief if occurring at the same time.
Excludes loss arising from a fire.
Inside/Outside Robbery
Actual or attempted robbery of a custodian on premises, and includes damage to the premises and theft from a window display while the premises are open.
AKA smash and grab coverage.
Money and Securities
Includes loss of money and securities by their actual destruction, disappearance, or unlawful removal within the premises, as well as the damage to the premises and property.
Also applied to losses inside the premises, and outside the premises while the money and securities are being conveyed by a custodian.
Exclusions
- Loss due to an accounting error or omission.
- Loss of money contained in vending machines, unless the deposits are recorded by a continuous recording instrument.
- Loss due to unauthorized electronic transfer.
- Potential income loss from interest or dividends.
Office/Store Burglary and Robbery
- Replaces older storekeepers and office burglary and robbery policies.
- Insured selects one of three combinations of coverage:
A four part OR a seven part package for office burglary and robbery OR a seventh part package for store burglary and robbery. - Combinations are drawn from the following coverages:
- Inside Robbery
- Outside Robbery
- Safe Burglary/Burglary of Money and Securities
- Kidnapping
- Theft of money and securities in night depository or custodians home
- Burglary of stock in store
- Theft from office premises
- Damage to property and premises
Stock Burglary
Applies to loss or damage to stock and equipment caused by a burglary or robbery of a watchman or by vandalism or malicious mischief committed on the same occasion.
Includes coverage for show cases that do not open directly onto the interior of the premises.
No coverage for furs, leather goods, or articles containing either when removed from a showcase or window display.
Moral Hazards
- Cover a broad spectrum of human behaviour.
Examples: business owner who does not keep safe locked as it is too hard to re-open, business owner who forgets to set alarm each day when leaving, business owner that neglects to make the bank deposits each evening.
Physical Hazards
- Protection provided (alarms, locks)
- How easily covered property is to carry off with
- How easily property would be to sell
Burglary Exposure
Certain business, such as fur and jewellery, are more susceptible to burglary than others.
Susceptibility determines the kind of protection needed.
Cash on Hand
Risks holding large amounts of cash on premise are targets for hold up and robbery.
Regular deposits.
Alarms
Safes
Vaults
Loss Ratio Kept Low
Made relatively expensive for insurers by the added cost of inspecting risks. Therefor loss ratio must be low to keep profitable.
Employee Dishonesty Coverage
- Theft from employees.
- Has been a concern since the early twentieth century.
- Some employers started requesting guarantees from employers handling large sums. Employee had to prove that the employee would be reimbursed if the employee ever acted dishonestly. Guarantee bonds. Fidelity bonds.
- Commonly purchased as part of the 3D policy.
3D Policy
Combination of employee dishonesty insurance and coverages related to other exposures such as moneys and securities.
- Blanket policy covering all employees.
Two Forms of Coverage
- Under the 3D policy, insurers against intentional fraudulent or dishonest acts committed by the employees.
- Covers direct loss, as well as all goods mentioned in the policy (stock, confidential info, software).
Offered in two ways:
A: applies when the amount of insurance is applied per occurrence independently of the number of the employees involved.
B: applies when the amount of insurance is applied per employee involved in the embezzlement. Typically only given for certain limits.
Employee
- Broad.
- Can include a multitude of people - contract employees, directors and officers (if they are actively employed by the company).
- Includes 30 days after an employees departure.
- Insured is excluded as it would be a criminal act.
Trigger for Loss
- The discovery of loss during the policy period.
- Creates two problems:
1. Some losses may occur over a period of time that continues after the policy has expired.
2. Some losses may occur during the policy period but be discovered after the policy has been cancelled or renewed by another carrier.
To deal with this, policy includes a discovery period that extends coverage under the policy to losses discovered within a specified period of time after the policy has expired. Policy A - one year, Policy B - two years.
Loss Under Prior Bond
- Insured may also have been insured by different insurers over two or more successive policy periods.
- Guided then by the Loss Under Prior Bond or Policy Provision.
- Allows for the recovery of the loss under the certain policy under certain conditions:
1. The insured had continuous coverage prior to the current policy.
2. The coverage and exclusions under the current policy be used to determine if the loss is covered.
3. The amount paid by the insurer for this portion of the loss does not exceed the limits of the prior policy.
4. Triggering this does not increase policy limits.
Business Interruption Insurance
- Protects business earnings.
- Business is partially or completely shut down so that lost or damage property caused by a direct loss can be repaired or replaced.
- Can protect prospective earnings.
- Indemnifies the insured business against losses arising from its inability to continue normal operations or functions.
- Includes boiler and machinery losses.
- Is generally provided by attaching an endorsement to a direct damage policy.
- Perils in direct damage policy become perils insured against for business interruption.
- Rating is based on a percentage of rate for the physical damage insurance.
Two Aspects of Indirect Loss
All BI addresses two aspects of an indirect loss:
- The reduction in earnings directly resulting from the interruption of business due to a covered peril
- The necessary expense incurred to reduce the business interruption loss.
Interruption by Civil Authority
- Virtually all business interruption forms include a coverage extension for interruption by civil authority.
- Loss of business suffered by the insured when access to its premises is prohibited by order of civil authority. Prohibition must be the direct result of damage to a neighbouring premises by an insured peril.
Income Restoration Business Interruption
Profits and Gross Earnings
Additional Expense Business Interruption
Extra Expense
British and American Approaches
American:
- Indemnified once the product and place to sell has been restored - the rest is up to the insured.
- Gross earnings: income restoration from the date of loss until repairs or replacement has been completed.
- IBC version: Business Income form. Available in named perils or broad form.
British:
- Recognizes that interruption of business continues once the business has re-opened.
- Profits: income restoration that provides coverage from the date of loss until the business income achieves the level it would have achieved had no loss occurred.
- IBC Version: Extended business income form. Available in named perils or broad form.
Newer Forms
- Not designed as endorsements.
- Are policies unto themselves, incorporating the physical damage perils and exclusions that may give rise to BI claims.
- Accompanied by own declaration pages.
Gross Earnings
- American form.
- Indemnity period: max of 12 months. income restoration from the date of loss until repairs or replacement has been completed.
- Coinsurance: 50% or 80%, depending on option insured chooses regarding the treatment of ordinary payroll.
- Stock: loss of earnings caused by damage to finished stock is excluded.
- By-laws: no coverage for delays caused by the application of bylaws.
Profits
- British Form
- Indemnity period: max of 12 months. Income restoration that provides coverage from the date of loss until the business income achieves the level it would have achieved had no loss occurred.
- Coinsurance: No coinsurance clause, which in effect, makes it 100% coinsurance.
- Stock: no exclusion.
- By-laws: includes any delays caused by the application of bylaws.
Indemnity Periods Decide Coverage Needed
Gross Earnings: Golf Course pro shop
Profits: Restaurant
Premium Adjustment Clauses
Encourages an insured to buy more than its estimate of the minimum amount of insurance required.
Usually included in forms.
Stated Amount Clause
The insurer and the insured agree before the inception of coverage on an appropriate amount of insurance.
- The insurer will pay the full amount of the loss up to the amount of insurance.
- Benefit is that it ensure’s no co-insurance penalty.
- Disadvantage - insured may delete the premium adjustment cause. Insured may have to pay more than necessary if they have a bad year. If a better year than expected, insured might not have enough coverage for a serious loss.
Contingent Business Interruption
A supplier or important client suffers a business interruption, the insured may be interrupted by the interruption of the supplier or clients business.
Depends on how heavily the insured relies on the other businesses, may have it’s own business interruption as a result.
Extra Expense Insurance
- Continuing operations after a loss even if the increase in cost to do so exceeds the amount by which the loss would thereby reduce.
- Ends when damage cause by a loss has been repaired and the risk is able to resume operations.
- No coinsurance requirement.
- Can be standalone, or complimentary to other BI coverage.
- Ex. Account being able to operate in different location as long as the extra rent and costs for installation of telephones and computers for the new location can be paid.
Boiler and Machinery
- All risk policy excludes:
1. Explosion, bursting or rupture of boiler and pressure vessels.
2. Mechanical breakdown
3. Electrical arcing
Boiler and machinery policy compliments property policy and fills in certain gaps of coverage.
Frequency is more of a problem than severity. Makes deductibles and waiting periods important.
Covers loss form an accident to an object and any resultant property damage.
Most policies are comprehensive, without specifying certain pieces or groups of equipment.
Broadened coverage - now includes electrical equipment, computers.
Loss prevention inspections are important.
Business Interruption and Boiler and Machinery
Business interruption insurance can be added by endorsement to a EBI policy.
EBI policy covers direct loss only.
