Chapter 3 - Property & Casualty Insurance Basics Flashcards
Insurable Interest
Financial interest in property to be insured. Must exist at the time of loss
Requirements to prove insurable interest
- Legitimate financial interest in preserving the property to be insured 2. There must be no potential for gain 3. There must be potential for loss
Underwriting
The process of reviewing applications for insurance and the information on the application. Risk selection process
Underwriter’s function
Refers to the operations of an insurance company where underwriter is responsible for evaluating applications submitted to the insurer and determining whether a policy should be issued, and if so, the terms, conditions and rates for that policy
Loss ratio
Refers to a formula used by insurance companies to compare premium income to losses, including claims paid and claims-related expenses.
Formula:
(Incurred losses + loss adjusting expense) \ earned premium = loss ratio
Geographic Redlining
The practice of refusing to serve a particular area solely because of its location or because it is served by a volunteer fire department
Insurance credit score
A point system used by insurance underwriters to predict risk and possibility of claims, and determine charges for premiums
Insurance Rate
The amount charged for a particular amount of coverage. Charged per unit of exposure
Class rating (or manual rating)
Refers to the practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics
Individual rating
Used for unique risk. 5 rate making approaches: judgement, schedule, experience, retrospective, and merit
Judgement Rating
Used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class.
Schedule rating
Rates developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure.
Experience rating
The insured’s own past loss experience enters into the determination of the final premium.
Retrospective rating
Self-rating plan under which the actual losses during the policy period determine the final premium, subject to a minimum and maximum premium.
Merit rating
Most commonly used in personal auto. The insured’s premium is based not on the actual loss record, but on other factors that indicate the probability that loss will occur. Ex. Bad driving record
Loss costs
Rating developed by ISO provides insurer with that portion of a rate that does not include provisions and expenses (other than adjusting expense). Based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time
Components
Factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profits
Negligence
The failure to use the care that a reasonable, prudent person would have taken under the same or similar circumstances
Elements in establishing negligence
- Legal duty 2. Standard of Care 3. Unbroken chain of events 4. Actual loss or damage
Legal duty
Shown that the defendant had a legal duty to act or not to act
Standard of Care
Defendant must have used a standard of care that breached that legal duty. Acting as a reasonable person
Proximate cause
Act or event considered a natural or reasonably foreseeable cause of the damage or event that occurs and damages property or injures a plaintiff
Actual loss or damage
Actual injury or damage must have been suffered by the party seeking recovery
Assumption of Risk
Defenses against Negligence
The defense of an action for recovery for injuries attests that if a person recognizes and understands that there is danger involved in an activity and voluntarily chooses to encounter it.
pure Comparative negligence
Defenses against Negligence
Allows the plaintiff (the party who brings the lawsuit) to recover the damages, as long as he or she is not 100% negligent
Modified comparative negligence
Also known as “equal to or greater than” rule, the injured party may only recover damages if his or her fault is less than that of the defendant (the party being sued).
Contributory Negligence
The injured party must be completely free of fault in order to collect
Intervening cause
Doctrine bars or reduces
Statute of Limitations
Some states have set a time limit in which an injured party may bring legal action against another party for certain types of injuries
Property damage
The extent of the loss is usually simple to determine; it is measured by the actual monetary loss the injured party suffered, which is measured by the value of the property damages or destroyed and the loss of use of that asset
Bodily injury
May lead to claims by the injured party not only for medical expenses and lost wages but also for disfigurement, pain and suffering, mental anguish, that and loss of consortium
Special damages
Specific out of pocket expenses for medical, miscellaneous expenses, and loss of wages.
General damages
Compensate the injured person for pain and suffering, mental anguish, disfigurement, and other similar types of losses. Amount is set by whatever judge/jury feels is right
Punitive damage
Form of punishment for Xtreme outrageous behavior, gross negligence, or willful intent
Absolute liability
Is imposed on defendants engaged in hazardous activities, such as harboring wild animals, using explosive, etc. The injured party does not need to prove negligence
Strict liability
Commonly applied in product liability cases
Vicarious liability
To transfer the liability for one person to another person who would probably have a greater ability to pay. Ex scope of employment
Peril
A specific cause of loss
Named peril
Term used in property insurance to describe the breadth of coverage provided under an insurance policy form that lists the specific covered Perils. No coverage is provided for unlisted perils
Open peril
Term used in property insurance to describe the breadth of coverage provided under an insurance policy form that insures any risk of loss that is not specifically asked excluded. Aka all risks. Subject to exclusion
Direct loss
Property insurance covers only DL. direct, physical damage to buildings and/or personal property
Proximate cause of loss
Direct loss also includes other damage where the insured peril was the pc of l. Ex. Fire being put out and water damages wall
Indirect loss
Aka consequential losses. Losses considered a result of direct loss. Ex. Homeowners living expenses and profit a business may suffer
Blanket insurance
Single property insurance policy that provides coverage for multiple classes of property at one location, or for one or more classes of property at multiple locations
Specific insurance
Property insurance policy that covers a specific kind or Unit of property for a specific amount of insurance. Per property
Loss valuation
A factor in determining the premium charged and be amount of insurance required
Actual cash value
Method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence
Current replacement cost - depreciation = ACV
Replacement cost
Defined as the cost to replace damaged property with like kind and quality at today’s price, without any deduction for depreciation. Contrary to indemnity because following a loss it may provide the insured with a settlement in excess of the property’s actual cash value
Guaranteed replacement cost
The insurance company must fully replace or rebuild the insured property without considering depreciation even if the damage exceeds the policy’s limits
Functional replacement cost
The cost to replace damaged property with less expensive and more modern construction or equipment
Market place
Seldom-use method of valuing a loss based upon the amount a willing buyer would pay to a willing seller for the property prior to the loss. Takes value of land and location
Agreed value
Property policy with a provision agreed upon the insurer and insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is the written and suspense any coinsurance or other contribution clauses in the policy. Historical building with art. Depreciation or appreciation not accounted for
Stated amount
Amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the event of a covered loss.
Stated amount
Amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the event of a covered loss. Scheduled amount is the max amount the insurer will pay in the event of a loss.
Policy structure
- declarations
- definitions
- insuring agreement
- additional coverage
- conditions
- endorsements
- exclusions and policy limits
Declarations
The section of an insurance policy containing the basic underwriting information, such as the insured’s name, address, amount of coverage and premiums and a description of insured locations.
