Chapter 3 - Property & Casualty Insurance Basics

Question 1

Insurable Interest

Answer 1

Financial interest in property to be insured. Must exist at the time of loss

Question 2

Requirements to prove insurable interest

Answer 2

1. 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

Question 3

Underwriting

Answer 3

The process of reviewing applications for insurance and the information on the application. Risk selection process

Question 4

Underwriter’s function

Answer 4

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

Question 5

Loss ratio

Answer 5

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

Question 6

Geographic Redlining

Answer 6

The practice of refusing to serve a particular area solely because of its location or because it is served by a volunteer fire department

Question 7

Insurance credit score

Answer 7

A point system used by insurance underwriters to predict risk and possibility of claims, and determine charges for premiums

Question 8

Insurance Rate

Answer 8

The amount charged for a particular amount of coverage. Charged per unit of exposure

Question 9

Class rating (or manual rating)

Answer 9

Refers to the practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics

Question 10

Individual rating

Answer 10

Used for unique risk. 5 rate making approaches: judgement, schedule, experience, retrospective, and merit

Question 11

Judgement Rating

Answer 11

Used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class.

Question 12

Schedule rating

Answer 12

Rates developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure.

Question 13

Experience rating

Answer 13

The insured’s own past loss experience enters into the determination of the final premium.

Question 14

Retrospective rating

Answer 14

Self-rating plan under which the actual losses during the policy period determine the final premium, subject to a minimum and maximum premium.

Question 15

Merit rating

Answer 15

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

Question 16

Loss costs

Answer 16

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

Question 17

Components

Answer 17

Factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profits

Question 18

Negligence

Answer 18

The failure to use the care that a reasonable, prudent person would have taken under the same or similar circumstances

Question 19

Elements in establishing negligence

Answer 19

1. Legal duty 2. Standard of Care 3. Unbroken chain of events 4. Actual loss or damage

Question 20

Legal duty

Answer 20

Shown that the defendant had a legal duty to act or not to act

Question 21

Standard of Care

Answer 21

Defendant must have used a standard of care that breached that legal duty. Acting as a reasonable person

Question 22

Proximate cause

Answer 22

Act or event considered a natural or reasonably foreseeable cause of the damage or event that occurs and damages property or injures a plaintiff

Question 23

Actual loss or damage

Answer 23

Actual injury or damage must have been suffered by the party seeking recovery

Question 24

Assumption of Risk

Answer 24

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.

Question 25

pure Comparative negligence

Answer 25

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

Question 26

Modified comparative negligence

Answer 26

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).

Question 27

Contributory Negligence

Answer 27

The injured party must be completely free of fault in order to collect

Question 28

Intervening cause

Answer 28

Doctrine bars or reduces

Question 29

Statute of Limitations

Answer 29

Some states have set a time limit in which an injured party may bring legal action against another party for certain types of injuries

Question 30

Property damage

Answer 30

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

Question 31

Bodily injury

Answer 31

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

Question 32

Special damages

Answer 32

Specific out of pocket expenses for medical, miscellaneous expenses, and loss of wages.

Question 33

General damages

Answer 33

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

Question 34

Punitive damage

Answer 34

Form of punishment for Xtreme outrageous behavior, gross negligence, or willful intent

Question 35

Absolute liability

Answer 35

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

Question 36

Strict liability

Answer 36

Commonly applied in product liability cases

Question 37

Vicarious liability

Answer 37

To transfer the liability for one person to another person who would probably have a greater ability to pay. Ex scope of employment

Question 38

Peril

Answer 38

A specific cause of loss

Question 39

Named peril

Answer 39

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

Question 40

Open peril

Answer 40

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

Question 41

Direct loss

Answer 41

Property insurance covers only DL. direct, physical damage to buildings and/or personal property

Question 42

Proximate cause of loss

Answer 42

Direct loss also includes other damage where the insured peril was the pc of l. Ex. Fire being put out and water damages wall

Question 43

Indirect loss

Answer 43

Aka consequential losses. Losses considered a result of direct loss. Ex. Homeowners living expenses and profit a business may suffer

Question 44

Blanket insurance

Answer 44

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

Question 45

Specific insurance

Answer 45

Property insurance policy that covers a specific kind or Unit of property for a specific amount of insurance. Per property

Question 46

Loss valuation

Answer 46

A factor in determining the premium charged and be amount of insurance required

Question 47

Actual cash value

Answer 47

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

Question 48

Replacement cost

Answer 48

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

Question 49

Guaranteed replacement cost

Answer 49

The insurance company must fully replace or rebuild the insured property without considering depreciation even if the damage exceeds the policy’s limits

Question 50

Functional replacement cost

Answer 50

The cost to replace damaged property with less expensive and more modern construction or equipment

Question 51

Market place

Answer 51

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

Question 52

Agreed value

Answer 52

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

Question 53

Stated amount

Answer 53

Amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the event of a covered loss.

Question 54

Stated amount

Answer 54

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.

Question 55

Policy structure

Answer 55

• declarations
• definitions
• insuring agreement
• additional coverage
• conditions
• endorsements
• exclusions and policy limits

Question 56

Declarations

Answer 56

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.