Chapter 5 - From Quote to Policy

Question 1

Describe the process of selecting coverage.

Answer 1

• once you have determined clients exposures and adequacy of clients existing cov, you will determine most appropriate cov for your client
• this process will include assisting in the completion of ins app, choosing a market and a ins product
• your knowledge of current market conditions will be invaluable in matching your clients needs to the most appropriate insurance product available
• once you have selected a policy, your insurer provides a quote or several for required cover
• client may need assistance interpreting various quotes
• when client accepts quote, you bind cover with u/w and provide client with confirmation with a binder while policy docs are being processed.

Question 2

How do you match clients needs to personal lines cover?

Answer 2

1) check insurers u/w guidelines
- will normally be clearly outlined in personal lines manual that insurer will provide brokerage

2) analyzing & comparing products of insurers
- each insurer has own version of personal lines package policy (broad/limited form)
- auto wordings are statutorily dictated by prov

3) selecting an ins policy based on your analysis of your clients needs and the polices your insurers supply

Question 3

How do you match clients needs to commercial lines cover?

Answer 3

1) applying knowledge of products available
- select appropriate policies based on discussion with client
- policies can vary considerably

2) applying your knowledge of what your insurers want
- class of business and products they offer

3) talking to your colleagues about which market would be the most appropriate for your client

Question 4

Explain binding authority.

Answer 4

• is a brokers capacity to confirm to applicants that they have cov against certain losses
• they can tell their clients that they are covered by an ins policy without first submitting the app for ins to the insurer
• broker is granted binding auth based on the broker agreement
• this agreement is negotiated between insurer and principals of brokerage
• binding authority is not equal
• it is normally limited to personal lines and smaller comm policies
• binding limits outlined in broker agreement do not represent the max amt an insurer will entertain, but atre used to limit brokers powers
• if you do not have BA leave decision to insurer
• submit clients u/w info to insurer for acceptance prior to confirming cov
• if no BA and broker confirms client has cov, they could be held liable for any loss insured suffers
• if risk exceeds BA, always contact insurer before binding

Question 5

What do the terms of binding authority include?

Answer 5

1) classes of risk and limits of ins that brokerage is permitted to bind

2) risks that brokerage cannot bind
- may be extremely hazardous or may require special u/w expertise

3) reporting requirements, including timeframe within which the insurer expects the broker to forward notice of binding
- a certain # of days after binding to submit it to the insurer

Question 6

Explain the importance of backdating cover.

Answer 6

• backdating is when the eff date of cov precedes the date of clients app
• can expose insurer to losses that have already occurred that were not within policy term
• insurers are usually resistant against backdating
• broker is to act as the eyes and ears of the insurer
• warning sign of potential fraud

Question 7

What are the warning signs of potential fraud?

Answer 7

1) client wants you to backdate policy
2) client asks you to bind cov on a new risk w/o adequate info or investigation
3) new applicant is in a hurry to get the cover bound

• these all may indicate problems, but they do not automatically indicate potential fraud
• how well you know your client and what you are binding are considerations

Question 8

What is a binder?

Answer 8

• can be oral or written
• for the period of time between binding a risk and issuing a policy, it is preferable to have written confirmation of cov bound
• this documentation can be used as a memorandum to insured and insurer outlining:
  i) what is covered
  ii) term of binding
  iii) perils insured
• or could be a more formal doc
• there are 2 forms of document used to record temporary cover:
  i) cover note - issued by broker
  ii) binder - issued by insurer
• a cover note effectively turns into a binder when insurer signs it and returns a copy to broker as confirmation that cov has been bound
• no legal requirement of written binder
• written binder is physical documentation that proves the intent of the parties to the transaction should a claim occur before the policy is issued
• useful if there is a delay in issuance of a policy
• is a source of evidence of policy terms & conditions
• binder should include full details outlining subject of ins and cov terms

Question 9

What is the binder format?

Answer 9

1) name of insured
2) mailing address of insured
3) loss payees/mortgagees and their mailing addresses
4) time and date that cov takes place
5) time and date that cov expires
6) location and type of risk that is being insured
7) exact cov details
- including limits of ins
- specific form #’s identifying policy cov forms
- any riders/endorsements
8) a clause that states that the cover is subject to all terms & conditions usual to insurers policy form and wording applicable to the class of insurance
- courts have determined that conditions not on binder are not binding on insured
9) details of ded’s, special warranties, any conditions or special wordings that restrict or broaden cov
10) clause stating “this policy contains a clause that may limit the amt payable” if applicable
- statute specifies size and type of print to be used
11) provisional premium charged for binder
- final policy premium may be different
12) name of insurer writing risk
13) time and date that binder cov expires
14) name, address, signature of issuing broker

Question 10

Explain binder expiry.

Answer 10

• should have a definite exp date
• exp date is based on timeframe permitted by the binding authority in broker contract
• some brokers use “until replace by policy docs” in place of exact exp date, but can be problematic as you could be exceeding time limit
• in the event policy isnt issued, the binder has no expiry and will continue covering risk until properly cancelled
• try and arrange expiration to fall on a business day opposed to weekend or holiday

Question 11

Describe delivering the binder to client.

Answer 11

• forward binder to client with:
  i) cover letter describing cov arranged on clients behalf
  ii) any covs recommended to client and declined by client
  iii) invoice for porvisional premium date
• send a copy to insurer with request to issue policy
• other copies are sent to additional insureds, and loss payees/mortagagees
• keep a copy got your records in insureds file
• record where copies have been sent including date it was sent, who sent it and to whom it was sent

Question 12

What are the binder handling procedures?

Answer 12

• abeyance your file while you wait for policy doc to arrive

- follow up with insurer one week before binder expires (may need to extend binder with insurers permission)

Question 13

What are reasons that delay policies?

Answer 13

1) u/w may want to more time to fully investigate risk to determine the correct rating
- in this instance, risk is covered, but u/w has not yet decided on premium

2) the insurer is waiting for more info from insured
- appraisals, supplementary questionnaires

• if insurer requires further documentation to issue policy, let insured know hat is needed, when it is needed and the consequences of not supplying it/providing it too slowly

Question 14

Explain the cancelling of a binder.

Answer 14

• the policy docs once issued, will show same eff date as binder and will replace binder
• to avoid duplication, cancel binder when replacing docs are received
• this requires that you issue an endorsement stating binder is cancelled
• some binders contain a statement that the binder is cancelled when it is replace by policy
• treat binder exactly like a policy
• under law, a binder has same status as policy
• if binder has to be cancelled (for any reason other than replacing a policy), follow same cancellation requirements mandated by law
• upon cancellation of a binder, all parties to policy including additional insureds and loss payees/mortgagees must be advised on cancellation

Question 15

What may cause a discrepancy between final premium and binder quote?

Answer 15

1) computer-generated policy premium may differ slightly from the one you calculated, or you made an error in calculation
2) payment plan charges can produce a difference in deposit premium and monthly withdrawals
3) insured may have requested an amendment to coverage, resulting in change of premium
4) insurer found that the risk was not as it was described in app, resulting in re-rating of risk

5) there has been a global rate change since original quote
- ex) gov insurer adjusted rates, postal code change

• issue a corrected invoice to show the change and collect additional premium
• forward revised invoice with an explanation of discrepancy

Question 16

What may cause coverage discrepancies?

Answer 16

1) insurers standard policy wording may have changed
- ex) terrorism cov may have been excluded due to current world events

2) insurer may have discovered that risk being covered is not as it was described in app

Question 17

How do you deal with coverage discrepancies?

Answer 17

• once you have confirmed reason with u/w, advise insured of differences between requested cov and actual cov
• explain insurer’s reason for change
• ask client if he/she is willing to accept policy as it is written
• offer client options if possible (other insurers)
• if client tells you he/she is unwilling to accept policy with limited cover, you may have option of approaching other markets
• may have to explain that cov is unavailable from your brokerage
• the broker and insurer have a duty to explain to the client any differences between requested cov and arranged cov
• if client offers no objection, then policy wordings are deemed accepted
• if no disclosure of differences between requested and actual cov is made, client can insist that losses be adjusted on basis of cov originally requested
• if this happens broker may be deemed responsible for loss payment

Question 18

What are the parts of a policy?

Answer 18

1) declaration
i) names of insured and insurer
ii) eff and exp dates
iii) names and addresses of any loss payees/mortgagees
iv) total premium
v) amt insured (can also appear on insuring agreement)

2) insuring agreements
- explains what is covered and for how much and can be quite detailed
i) cov applicable
ii) term of policy (if not shown on dec page)
iii) perils
- when read in conjunction with exclusions will describe cov that is provided
iv) exclusions
- restrict perils insured
v) circumstances under which insured will receive pmt of proceeds for claim

3) policy conditions
- subject to statutory or general conditions as required by law, as well as policy conditions
- policy conditions affect actions of insured or insurer under contract
- if condition is breached by insured, policy may be void or voidable or claim arising out of breach may be denied

4) Warranties
- are promises the insured makes as part of the contract that a specified state of affairs will continue to exist or the duration of the policy
- they are obligations which the insured must fulfill in order to keep policy in force
- failure to satisfy a warranty can result in insurer not paying claim
- whether a contract term is a condition or a warranty depends on the wording of the contract
- a true condition may be recognized by the fact that the clause says, in effect, if the insured does/does not do such and such, the insurer will not pay/policy will be voidable
- where as a warranty is a promise and if broken can result in loss not being paid
- advise insured of wording and identify any warranties/conditions that require action/duties of insured in order to maintain cov

5) Signature clause
- to comply with law of contract, the policy is signed
- a preprinted signature of chief exec of ins company is usually affixed to the declarations page
- broker/authorized employee of insurer countersigns it

Question 19

Void vs. voidable.

Answer 19

void - means policy is treated like it never existed

voiadable - means policy can be affirmed or rejected at the option of the aggrieved party

Question 20

Describe the effect of legislation of policy wordings.

Answer 20

• policy form is legislated to a greater or lesser extent by the prov gov
• states that all terms of an ins contract must be shown in full on policy
• ins policies are governed by legal principle of contra proferentem (which means against the offeror)
• since insurers prepare the policy, the are the offeror and are the ones who choose the language that will express their provisions
• any ambiguity in the wording and any resulting dispute over interpretation will be construed in the favour of the insured
• this places the burden of the insurer to make policies clear
• any failure to clarify terms/conditions on a policy means that the insurer cannot rely on the words in its policy to deny a claim

Question 21

Explain auto policy wordings.

Answer 21

• auto ins is highly legislated in form and content than other lines of ins
• policy wordings are subject to a standard form legislated by statute/regulation
• or legislation sets out general standards to which all contracts must conform
• policies are subject to stat cond in common law and gen cond in quebec
• these conditions deal with matters such as
  a) changes in risk
  b) prohibited use of auto
  c) obligations after a loss
  d) policy cancellation and others
• the policy is the same for each insured in the province
• wordings may differ from prov to prov, but within each prov are identical and non-negotiable
• ins can be customized by selling higher limits, varying deductibles, or adding cov to enhance required mandatory prov min

Question 22

Explain property policy wordings.

Answer 22

• wordings can differ from insurer to insurer
• but they must be consistent with the general rules set out by legislation
• prov statutes state the min cov that fire policies must include (fire, lightning, limited explosion) but do not specify exact wordings of policies
• a fire policy may also contain additional perils the insurer wishes to have
• prov legislation can also specify info that must be included in the policy wordings
• in common law provs, fire policies are subject to stat cond shown in various prov ins acts
• these conditions deal with matters such as:
  a) changes in risk
  b) rights & responsibilities of insured and insurer under policy
  c) obligations after a loss
  d) policy cancellations and others
• if there is any clause that limit amt insured may recover, the words “this policy contains a clause that may limit amt payable” must be stamped/printed on face of policy
• size and style of print are specified by legislation
• in quebec, policies are subject to gen cond, and they do not need to be printed on policy

Question 23

Explain casualty policy wordings.

Answer 23

• neither liab ins or crime ins is governed by stat cond
• wordings vary considerably from insurer to insurer
• because wordings are so different, be sure you provide client the most appropriate cov when comparing them

Question 24

Describe the use and purpose of deductibles.

Answer 24

• is the amt of a loss that the insured must pay
• creates an economic incentive for insured to protect prop from damage
• larger ded can be used to reduce premiums
• insureds may elect to take care of small losses themselves and reserve ins for major losses
• if there is a loss frequency history, insurers will often insist on higher deds to improve the loss ratio and to make the risk acceptable
• this reduces costs of claims, which can reduce premium costs
• tends to make insured more aware of need for loss control

HOW TO SELECT DEDUCTIBLE

• depends on how large a loss client is comfortable in self-insuring
• ded is applied on each and every loss incurred
• insurer may have a certain min ded
• broker may recommend amt based on general practice of insurer and on preferences of client
• advise client of possible options to increase/decrease the ded and request instructions

Question 25

What should you consider when dealing with deductibles for liability insurance?

Answer 25

1) does ded apply to each claim or to each occurrence?
- depends on u/w guidelines

2) how is ded applied?

3) an important part of the cover given by a liab policy is defence costs
- does ded apply to defence costs or just to settlement?

Question 26

How do you effectively deliver documents?

Answer 26

• before delivering doc to insured, check them for accuracy and completeness
• prepare an invoice to accompany docs
• prepare a cover letter]
• in some cases a cov summary sheet is sent with policy docs in addition to cover letter
• cov summary sheet outlines:
  a) the parties to ins contract
  b) eff and exp dates
  c) cov provided
  d) terms/conditions
  e) ded applicable

Question 27

What are the contents of a cover letter?

Answer 27

1) summary of cov placed (w/o cov summary sheet)
2) details of cov and any clauses, exclusions, limitations, warranties and deductibles
3) details of any cov client requested but you were unable to obtain, and a proposal to rectify problem
4) record of cov you recommend but client declined, and why they were declined
5) a reminder of clients responsibility to review policy doc for accuracy
6) reminder to keep doc in safe place
7) a note of what action to rake and who to contact in the event of a claim
8) an expression of gratitude for clients business and a reminder that you are available to answer any questions about cov.