Chapter 3 - Property & Casualty Flashcards
Underwriting
Hazard recognition and evaluation, risk selection, pricing and determination of policy terms and conditions.
Insurable Interest
The insured must have a financial interest (ownership either full or partial) in the subject of the insurance.
Insurable interest must exist at the time of the loss for the insurance to apply.
Loss Ratio
The percent of premiums used to pay claims.
Is determined by dividing the losses by earned premium.
Don’t pay out more than you take in.
Rates
What is charged.
Rates reflect the price of the insurance for each unit of exposure.
State insurance laws prohibit rates which are excessive to consumers, inadequate to insurers or unfairly discriminatory to consumers.
Types of Rates
Class
Rates that apply to all members of a wide group of consumers having similar exposures.
Since risks are similar, these rates can be developed using statistics.
Judgement
Rates that are particularly or exclusively based on judgement. They are developed when there are no distinguishable classes that are similar enough to establish rates based on statistics.
Surplus lines
Independent Fillings vs Deviate Fillings
Independent filings - Other companies prefer to make their own rate filings
Deviate filings - companies charging higher or lower rates than the recommended benchmark rates.
Hazard
Any condition that increases the chance of a loss or increases the frequency or severity of loss
Types of Hazards
Physical - something that can be seen, touched or felt that increases the probability or severity of a loss.
Moral - is a subjective characteristic of an insured person and is usually based on past actions that may tend to increase the probability or severity of a loss.
Morale - is a characteristic of an insured based on their present actions that display an indifferent or “I don’t care attitude”.
Physical Hazard
Something that can be seen, touched or felt that increases the probability or severity of loss.
Example is storing gasoline next to workstation.
Moral Hazard
Is a subjective characteristic of an insured person and is usually based on past actions that may tend to increase the probability or severity of a loss.
Example is someone who has arson convictions and is looking for property insurance.
Morale Hazard
Is a characteristic of an insured based on their present actions that display an indifferent or “I don’t care attitude”.
Example is someone who doesn’t take care of their property after getting a homeowner policy.
What is the property portion of an insurance policy?
Protects the insured for direct loses to the property they own.
Protects:
Real property - land, buildings, and other property attached to it
Personal property - contents of a dwelling or an auto
What does the casualty portion of insurance cover?
Protects the policyholder for injuries or damages the policyholder is legally liable for.
Tort
Any wrongful act committed by one party against another, other than a crime or breach of contract.
Is based on common lass and determines responsibility for injury or damage.
Determined negligence.
Negligence
Failure to exercise the standard care required by law to protect others from harm.
Failure to do what reasonable or prudent person would of done in the same situation.
Four Elements of Negligence
- Existence of a legal duty to act or a standard of care
- The failure to perform a legal duty
- Actual damages or injuries are sustained
- Proximate Cuase
Actual Damages
The amount of reduction in the value of the insured’s property caused by an insured peril.
The amount sought through an insured claim.
The amount paid on behalf of an insured under an insurance contract.
Proximate Cause
Where there is an unbroken connection between the peril and the loss without the intervention of a new and independent cause.
Ensuing Loss
Caused by a peril after, or as the result of an intentional peril.
A fire after an earthquake.
If their is an initial peril that is not covered, but results in a second peril that is covered, we cover the whole thing.
Assumption of Risk
A person may not recover for an injury received when he voluntarily exposes him/herself to a known and present danger.
Comparative Negligence
Based on a percentage of liability.
Permits a person to recover damages even thought he/she contributed to the accident. May recover damages as long as the negligence is 49% or less.
Texas is a comparative negligence state.
Contributory Negligence
A person cannot recover from other party of that person contributed in any way to the accident.
Intervening Causes
An independent cause of injury or damage that intervenes between the original wrongful act or omission and produces a result that would not have otherwise followed.
Statue of Limitations
2 yeas and 1 day for most policies.
Compensatory Damages
A combination of special and general damages and are designed to compensate an individual.
Special Damages
May be awarded for itemized losses such as medical bills, loss of earnings, and property damage.
General Damages
Awarded for damages that cannot be specifically itemized such as pain and suffering.
Punitive Damages
Awarded in cases of gross negligence and are intended to punish the wrongdoer for their reckless disregard for the safety of others.
Absolute (strict) liability
Certain activities impose liability without regard to fault or negligence.
Normally involve extra-hazardous situations where he person must use a certain standard of care that prevents the possibility of harm to others.
Dangerous animals, explosives, aircraft and intentionally setting fires.
Vicarious Liability
Liability imposed on one party as a result of the actions of another.
Parents responsible for actions of children
Employers responsible for actions of employees
Split Limits
Separate limits apply to bodily injury (BI) and property damage (PD)
Bodily injury is subject to per person maximums as well as per occurrence maximums.
The difference between accident and occurrence
An accident is a single event, normally sudden and unexpected in nature.
An occurrence is a single event that can occur over a period of time (workers compensation)
An occurrence can be an accident, an accident cannot be an occurrence.
Combined Single Limits
A single limit applies to both bodily injury and property damage arising from a single accident.
Usually found in commercial auto insurance and homeowners.
Aggregate Limit
The maximum amount that would be paid during a policy term for all damages arising out of one or more occurrences.
Only found in commercial lines of insurance.
Peril
Any event that causes a loss.
Loss and peril are interchangeable.
Fire, lightning, windstorm
Friendly fire
A fire that stays within its boundaries and is under control such as a fire in a fireplace.
Hostile fire
A fire that is out of any boundary and out of control such as a forest fire.
Extended Coverage Perils
REV C. H. SHAW
Riot Explosion Vehicle Civil Commotion Hail Smoke Hurricane Airplane Windstorm
Exclusions to Extended Coverage Perils
Windstorm - wind driven rain exclusion. There must be a hole in the building (roof or window) before rain damage is covered
Vehicle - cannot normally be driven by the insured person or family member unless otherwise stated
Named or Specific Perils
List the perils that the company will protect the property against.
Does not cover for a loss unless the peril that caused it is listed in policy.
The burden rest in the insured
Open or All Risk Perils
Covers the insured property against all causes of loss, unless the cause of loss is specifically excluded.
Virtually all polices exclude flood, war and nuclear hazard.
Losses are initially considered covered.
Insurers has burden of proof.
Direct Loss
Damage to property caused as a direct result of the peril.
All items destroyed in a house fire
Indirect or Consequent Loss
After the peril has resulted in direct damages.
Cost of hotel and eating out while a house is being repaired.
Basic Types of Construction
Frame - constructed of wood or other combustible materials including stucco
Masonry - constructed of brick, stone, Adobe, or concrete blocks
Fire Resistive - constructed entirely of fire resistant materials includes steel frames, concrete floors and fire resistant exterior walls
Specific vs Blanket Insurance
Specific Insurance is the most common. There is one object insured under one policy
Blanket insurance is when a single amount of insurance covers multiple properties. Is normally found in commercial properties.
When a loss occurs at more than one location covered on a blanket policy, the money is distributed by pro-rata distribution.
Actual Cash Value
Replacement cost - depreciation
Replacement Cost
Provides for coverage on the basis of full replacement costs without a deduction for depreciation.
The property must actually be replaced.
Functional Replacement Cost
Occurs when property cokes obsolete due to its design or because of technological advances.
Provides for closest equivalent available.
Agreed Value
Is when the amount of insurance scheduled on the covered property is agreed to be the value and will be paid in the event of a loss.
Deductibles
What you pay for each loss before insurance company pays.
The lower the deductible the higher the amount of risk and therefore a higher premium.
Claim Settlement Options
The insurance company has the option to pay whichever settlement option is least expensive; repair, replace or restore.
The insurance company also has right to take a case to court.
Salvage
The insurance company can take title to damaged property after payment for a total loss.
The insurance company must notify the insured if they will take possession of property after the payment of a total loss.
Abandonment
On partial losses or property that can be repaired, the insurance company will not accept the damaged property in return for the full insured value.
Will only pay to repair property.
Liberalization
If the TDI revises the policy to provide broader coverage, the insurer must provide these broader coverages at no additional charges.
Loss Payable Clauae
This form is sent to the lien or mortgage holder to verify that insurance is in force on a specific piece of property for specific coverages.
If the policy cancels, notification must be sent to the financial institution.
No Benefits to Bailee
When an insured’s property is damaged while in the custody of someone else (Bailee), this clause prevents the other party from benefitting from the insurance and preserves the insurers right to subrogate against the Bailee if they are responsible for causing the loss
More than one policy
If a policy is primary, it pays first.
If a policy is excess, it begins to pay when limits on the primary policy are exhausted.
If there is more than one primary or both are excess the loss can be paid by: contribution by limits or contribution by shares.
Contribution by limits
The policies will share the loss based on the ratio of each policy’s limit to the total available limits.
Also know as pro-rata liability.
Determine which policy limit is the least and divide that limit into the higher policy limits.
Divide the loss by the sum of the ratio.
Contribution by shares
Each policy pays equal amounts until the loss is paid or the limits are exhausted.
Divide the amount of loss by the number of polices.
Each policy pays equal amounts.
The payment cannot exceed the policy limit.
Coinsurance
Ensures the insurance is at least 80% of property value.
If the amount of the insurance is not at least 80% of the property value, the insured becomes a co-insurer of the property.
Did/Should X amount of loss = insurance payment
Amount Carried/(property value X 80%) X amount of loss = insurance payment.
Always check the house value X 80%
Vacant building
A building with no tenants or contents.
Most policies have a vacant clause that voids or limits coverage after 60 days of vacancy.
Unoccupied Building
A building with no tenants but contains contents.
No penalty for an unoccupied building.
Named Insured
A person or entity named in the policy declarations.
First Named Insured
The only person or entity named first on the declarations page.
Are the only ones who can:
Request cancellation
Make changes to policy
Receive notice of cancellation or non-renewal
Be held responsible for payment of premium
Additional Insureds
Other persons covered on the policy.
They are not specifically named and may be added by endorsement.
Assignment
Because insurance is a personal contract, the policy may not be given to another person without the insurer’s written consent.
The policy is not transferable.
Each policy has these seven parts
Declarations - the page most policyholders see first and are most familiar with. Exclusions - limits coverage Conditions - rules Insuring Agreement - promise to pay Definitions - prevents ambiguity Endorsement - customize Supplemental - additional coverages
What is included on the declarations part of a insurance policy?
Insured's name and address Insurer's name and address Policy period Premium Amounts of insurance Lists of coverages
What is on the exclusions part of an insurance policy?
This section of the policy is necessary to narrow the scope of coverage to that which is intended by the policy.
Limits coverage
What is on the conditions part of an insurance policy?
This section establishes certain rules concerning cancellation, dispute resolution, other insurance and other rights of both parties.
What is on the insuring agreement per of an insurance policy?
This section of the policy Includes the “promise to pay” for covered claims and describes coverages.
What is on the definitions part of an insurance policy?
This section of the policy describes key terms so the average policyholder will have a clearer understanding when reading the policy.
This prevents ambiguity in the policy.
What is on the endorsement part of an insurance policy?
This section of the policy allows the policyholder and the insured to customize the policy by attaching forms that will become a part of the policy itself.
Adding or deleting insureds, perils, property, etc.
What is on the supplemental part of an insurance policy?
This section of the policy (also called additional coverages) adds coverage for special features covered by the policy.
Defense cost for liability claims.
All supplemental payments pay in addition to policy limits.
What parts of an insurance policy are pre-printed and the insured has no choice in their contents?
Exclusions Conditions Insuring Agreement Definitions Supplemental
Cancellation and Non-Renewal
If an insurance company cancels a policy mid-term or non-renews a policy it must give the customer an opportunity to obtain another policy.
Personal Polices Cancellation and Non-Renewal Timeframes
New business (policy in effect for 60 days or less) - 10 days
Non-payment of premium -10 days
Non-renewal - 30 days
Commercial polices cancellation and non-renewal timeframes.
New business (policy in effect for less than 60 days) - 10 days
Non-payment of premium - 10 days
Non-renewal - 60 days
How must a insured cancel a policy?
In writing
Reasons for Midterm cancellation
Property insurance: non payment of premium, fraudulent claim, an increase in hazard.
Auto insurance: non payment of premium, fraudulent claim, suspension or revocation of driver’s license or registration, unless an exclusion for the driver is added to the policy.
Restrictions to non-renewal
An insurance company is prohibited from non-renewing a policy for the following reasons:
Company no longer writes auto insurance for certain groups of drivers
Company no longer writes insurance in a particular geographic area
A single loss accident
Binder
A binder is temporary written evidence that coverage is in effect and is issued at the time of the sale.
Binders should never be backdated or used for short-term coverage.
What is the policy period?
All polices begin and end at 12:01 AM standard time on the date specified in the declarations portion of the policy.
What is the policy territory?
Most policies limit coverage to the United States and territories, Canada and Puerto Rico.
The loss must occur within the policy territory to be covered.
No coverage is provided in Mexico.
What are the insured’s duties after a loss?
Proof of loss must be submitted within 91 days
If the loss is a theft, the insured must notify the police
Inform the insurer of the details of the loss, all interests in the property, and the existence of any other insurance
Complete a signed and sworn statement to the insurer
Protect property from further damage after a loss (mitigate damages)
Duty to Defend
Insurance company has the duty to defend the insured.
The policyholder must forward any demand, notice, summons, or legal papers received conceding the claim or suit to the insurance company.
Subrogation
Insurance company’s right to go after the truly negligent party after the payment is made.
Standard Mortgage Clause
The bank always gets their money
In a situation where a loss might not be payable to an insured due to an intentional act (ie arson), the loss may still be payable to the mortgage to the extent of their interest in the property.
Mortgagee
The bank
Mortgagor
The person taking out the loan
Arbitration & Appraisal
An optional procedure for settling disputes between the insurer and the insured.
The insurer and insured both select their own arbitrator and then these two select a third, usually called an umpire.
The agreement made by an 2 of the 3 is binding on the insured and the insurance company.
Arbitration = casualty or liability Appraisal = property or an amount.
What does arbitration deal with?
Casualty
Liability
What does appraisal deal with?
Property
Amounts.
Liquidated Demand
All polices insuring real property contains this clause hat pays full policy limits, regardless of ACV, in the event of a total loss by fire to the insured’s real property.
Does not apply to the contents.
Terrorism Risk Insurance Act of 2002
Makes terrorism covered on all policies
An act of terror:
Must be violent or dangerous to human life, property or infrastructure.
Must include an action that results damage within the U.S. Or U.S. Property.
Must include an action committed by someone acting on behalf of a foreign person or foreign interest to coerce U.S. citizens or U.S. policy.
Must include an action that produces over $5 million in insurance losses
