Chapter 3 - The Evolution of Property Policies Part 2

Question 1

Explain premium calculation.

Answer 1

• rate pf premium/rate is expressed as a rate per $100
  Common rating criteria consists of:
  1) public fire protection
• substantial effect on premium
• large cities have more sophisticated firefighting apparatus: public mains supply water, hydrant accessibility, fire departments

2) private fire protection
- especially true with large manufacturing plants with automatic sprinklers, water mains, hydrants

3) Occupancy
4) Construction

5) Susceptibility to loss/damage
- combustibility and perishability

Question 2

Define deductible.

Answer 2

• is an amt by which the pmt received by an insured for a loss will be reduced
• it is the insureds portion of the loss

Question 3

How may a deductible be applied?

Answer 3

1) separate items
- if the total amt of insurance is subdivided into more than one item, the ded may apply separately to the amt recoverable under each item

2) occurrence basis
- the ded may apply to an occurrence
- ded may be subtracted from total amt of loss/damage arising from a single event insured under all items of the policy

3) loss above threshold
- may provide that no loss be paid below a specified amt, but that a loss greater than amt be paid in full

• a variation on this approach specifies a ded and a loss amt beyond which no ded applies

Question 4

Describe coinsurance.

Answer 4

• in a fire policy obliges insured to maintain a specified min amt of insurance in relation to the value of the prop insured or else share with the insurer any partial loss
• obliges insured to assume a share of the risk on a partial loss as well as a total loss
• if insured suffers total loss and has insufficient insurance, recovery will be limited by amt of insurance carried rather than coinsurance penalty
• penalizes insureds for underinsuring
• a % (usually 80) of the ACV of prop insured
• insureds can buy more, but not less if they are to receive full pmt for any partial loss
• rate is lower with clause than it would be without it
• insureds should consider effect of inflation on prop values
• higher coins % may be required with prop at several locations under one item on the policy
• if there are several policies in force at the time of a loss, coins. clause requiers that policies be concurrent with all the other policies (same terms & conditions)

Question 5

What is the waiver of coinsurance?

Answer 5

• prop policies include waiver of coinsurance for small losses
• where calculation of ACV to determine if a coins. penalty applies is not economical for insured or insurer
• common clause is 2% coinsurance waiver which nullifies coins. clause for losses exceeding 2% of amt of insurance or $5000
• if loss exceeds either amt, coins. clause applies

Question 6

Explain the stated amount coinsurance clause.

Answer 6

• alternative to standard coins. clause
• it too encourages a min amt of insurance, but is specified in dollar amounts rather than % of ACV
• insurer establishes minimum usually 100% of values reported by insured
• these values are reported through a statement of values prepared by accountants and are submitted at inception of policy and every anniversary/renewal
• the amt is adequate if it equals or exceeds dollar figure specified
• penalizes insured for underinsuring
• expires independently of policy, usually 3 months later
• thus insured has 3 months to confirm values for renewal term
• if they fail to confirm values within 3 months after expiry, the stated amount clause is replaced with standard coins. clause
• insulates insureds from fluctuations in prop values that might penalize them unexpectedly for partial loss
• gives insurers more confidence in adequacy of amt of ins than standard clause
• more likely to be used when insuring large, high-value complexes, insured under a single item

Question 7

Explain the average distribution clause.

Answer 7

• used for instances when operations such as a manufacturing/processing have goods moving from one building to another
• if total value remains fairly constant, insurer may agree to a policy covering all goods under a single item (blanket basis), with av avg dist. clause replacing coins clause
• does not penalize insured of when a loss occurs, the amt of ins equals or exceeds values at risk
• the amt of any underinsurance is spread proportionately over all locations insured
• proportion doesn’t apply to amt of loss, but to total amt of insurance
• if denies the insured full recovery if all prop in some of several buildings is destroyed, even if the loss is less than the total amt of ins

Question 8

What is a deferred payment clause and how does it work?

Answer 8

• insured is indemnified for only a portion of the total loss to a building at the time of a loss
• remainder of loss pmt is deferred until insured repairs/rebuilds building
• addresses moral hazard arising from possibility of total constructive loss to an insured building
• discourages insured from contriving to burn down own building for ins proceeds

REBUILDING CLAUSE

• most common example
• applies to farm buildings that are vacant or not longer used
• if a building suffers damage equal to 2/3s or more of its value, 50% of amt of loss is paid at the time of loss
• if within 9 months, the insured repairs/replaces building and spends an amt at least equal to amt payable on policy, insurer will pay insured balance of loss settlement with interest
• insured’s premium is reduced

Question 9

Explain additional interests.

Answer 9

• where security for a loan is real property, the loan arrangement is a mortgage
• when it is personal prop it is a chattel mortgage
• a mortgage conveys an interest in prop as security for debt and will be prejudiced by its destruction, so they have an insurable interest
• mortgagee or other lender could protect their interests with an ins policy for unpaid amt of loan, but it is rarely done
• it is simpler to issue a single policy with borrower and lenders interests on it
• the use of prop as security for a loan does not reduce borrower’s interest
• lender must be repaid even if prop is damaged/destroyed
• therefore, borrowers have even more incentive than lenders to insure their interests

Question 10

Explain loss payees.

Answer 10

• mortgagees or others included in policies are called loss payees or payees
• any cheque issued by insurer to settle claim will be drawn jointly in named of insured and loss payee
• the parties themselves will determine the disposition of proceeds to reduce/discharge loan
• only named insured may instruct insurer to add loss payee to policy
• loan agreement may require borrower to make lender as loss payable on a policy
• insurer may respond to request from loss payee, but requires written consent from insured
• insurer is unlikely to deny the addition of a loss payee
• prov legislation protects interest of loss payees to some extent:
  1) insurer may not alter or cancel policy to the detriment of a payee without prior written notice to payee
• if insurer fails to give required notice, the insurers obligations remain eff until policy expiry
• an insured’s request for cancellation is usually accompanied by a release of interest signed by loss payee
• the insureds inability to recover under the policy would prevent the payees recovery too**

Question 11

When can a loss payee be denied indemnity?

Answer 11

1) Policy may be void due to a mis rep of a material fact about risk made by insured
2) a fraudulent statement about a loss may result in insured’s claim being denied
3) non-payment of premium may result in insurer’s cancelling policy

Question 12

What is a mortgage clause?

Answer 12

• offers greater protection fro a mortgagee in exchange for some benefits that accrue to the insurer
• its included or attached to policies covering buildings that a mortgagee has insurable interest in
• main benefit for mortgagee is that the policy covers mortgagees even when named insured is unable to recover because a condition of policy was breached
• creates a separate contract between mortgagee and insurer
• therefore, a breach by any other party is set aside
• amends stat cond 8, permitting mortgagee to give notice of loss or proof of loss
• broadens stat cond 3, to include mortgagees acquiring title to insured prop, are automatically entitled to be insured under policy until cancl/expiration

Question 13

What are the obligations of a mortgagee?

Answer 13

1) must notify insurer asap on learning of any vacancy/non-occupancy extending beyond 30 consec days
2) any transfer of interest
3) any insurance in hazard
4) must also pay, on reasonable demand, for any increased hazard from time such increased hazard existed until the policy is cancelled/expired

Question 14

Explain how subrogation works under the mortgage clause.

Answer 14

• insurer, upon indemnifying mortgagee, becomes subrogated to the rights of the mortgagee against insured
• if insureds claim is denied, the insurer may still have to pay out to mortgagee
• in this case, the mortgagee becomes the insured
• the named insures is no longer part of the settlement and becomes like any other 3rd party against whom action may be taken to recover amt of loss

Question 15

What happens when other insurance is involved with the mortgagee?

Answer 15

• mortgagee clause requires that amt payable to mortgagee under other valid ins on prop be considered in determining pmt to mortgagee
• this provisions cannot bind other insurers, but it may limit the mortgagee’s recovery under that policy to which mortgagee clause is attached

Question 16

Explain the terms associated with termination of the policy and the mortgagee clause.

Answer 16

• allows insurer to cancel policy according to appropriate stat cond
• provided that insurer neither cancels/alters policy to the prejudice of the mortgagee without notice
• requires same notice to mortgagees as the stat cond require to insureds