Chapter 5 - Property Insurance Policies - Common Characteristics

Question 1

Define Personal Property insurance.

Answer 1

Non business use (Tenant, homeowners, mobile home, condo, secondary, seasonal) property

Question 2

Define Commercial Property insurance.

Answer 2

Property having business use

Question 3

State the main difference between “named perils” policies and the broader “all risks” policies provided by most insurers.

Answer 3

1. “Named peril” policies name the perils that are insured within the policy. When a loss is caused by a peril not named in the policy, there is no coverage.
2. “All risks” policies insure against all risks of direct physical loss or damage subject to policy conditions and exclusions. In other words, all causes of loss are insured unless specifically excluded by the policy.

Question 4

Identify the types of property insured by policies of Personal Property insurance.
(Homeowners Forms)

Answer 4

• Dwelling building
• Detached private structures
• Personal Property

Question 5

Identify the types of property insured by policies of Commercial Property insurance.

Answer 5

• Building
• Stock
• Equipment

Question 6

Property policies insure “direct” damage only. Explain and provide examples of
a) Direct damage.
b) Indirect damage.

Answer 6

a. Direct Damage is when the object of insurance is damaged or destroyed by any insured peril. Ex. Damage to roof caused by firefighter’s axe, smoke & heat damage to adjacent storage shed.
b. Indirect Damage is when the other losses arise as a result of direct losses. Ex. Loss of food in a freezer when the electrical motor is damaged by a lightning strike, loss of profit to the business after a tornado destroys the building.

Question 7

Insurance policies may contain conditions and warranties. Identify two types of “conditions” and briefly describe each.

Answer 7

Condition - requires an insured to do or not do something.
Types of condition include:

Statutory Conditions (All property policies insure peril of fire, accident and sickness insurance, automobile insurance).

Policy Conditions are developed by insurers to deal with important coverage areas (a sprinkler condition would require the insured to notify of any defects)

Question 8

Define “Warranty”.

Which of “conditions” or “warranties” can result in a denial of coverage, regardless of whether the the breach was directly linked to the cause.

Answer 8

A warranty is a promise by insureds that certain facts are truly as they are represented to be and that they will remain so.

A No Spray Painting Warranty would void all coverage even if the cause of loss was not directly related to spray painting

Question 9

Exclusions are common to all property insurance policies. Provide two reasons why insurance policies contain exclusions.

Answer 9

1. Some items represent a greater than normal potential for loss are more properly insured by other policy forms.
2. The potential for catastrophic losses is of concern to all insurers. Ex. War is a loss that could jeopardize the solvency of insurers, therefore coverage is not included.

Question 10

Two types of exclusions contained in property insurance policies and examples.

Answer 10

Property Excluded:
Evidences of debt or title, Securities, Automobiles, Watercraft, Aircraft, Money, Other motor vehicles, books of account, vacant property (more than 30 days)

Perils Excluded:
Earthquake, Flood, Smoke due to agricultural smudging or industrial operations, Wear and tear or gradual deterioration, Rust; corrosion; War; Nuclear incident; Increased costs of repair or construction due to enforcement of any by-law, Sewer back-up

Question 11

Define “deductible.”

Answer 11

Represents the amount the insured is required to pay for each loss before receiving payment from insurer

Question 12

Explain the way claims are paid. Explain the way claims are settled when there is loss to:
a) One item of a pair or set
b) One part of property which consists of several parts.

Answer 12

a) Pair and set - Item not lost will continue to have value and will be deducted from amount claimed
b) Parts - Limited to cost of replacement part plus the cost to install the replacement part

Question 13

“Indemnity Agreement” outlines the criteria considered by the adjuster in determining the amount payable under the policy.
State the three criteria considered by the adjuster in determining the amount of the loss.

Answer 13

1. The actual cash value (ACV) of the property at the time of loss or damage
2. The interest of the insured in the property
3. The amount or limit of insurance specified on the “Declarations Page” in respect of the property lost or damaged.

Question 14

“Indemnity Agreement” outlines the criteria considered by the adjuster in determining amount payable under the policy.
When the value for each of these criteria has been determined, the adjuster will make an offer to the insured. What is the basis of the offer made to the insured.

Answer 14

The offer of settlement will be based on the least of those amounts.

Question 15

“Indemnity Agreement” outlines the criteria considered by the adjuster in determining the amount payable under the policty.
Identify four factors used to determine the amount of depreciation when insured property is lost or damaged.

Answer 15

1. Condition of the item(s)
2. Obsolescence
3. Resale Value
4. Normal life expectancy

Question 16

When “replacement cost” coverage is being claimed for building losses, the insureds must comply with certain policy provisions.
a) Identify three provisions relating to replacement cost coverage.
b) What is the basis of settlement when all of these provisions are not met?

Answer 16

a)
1. Replacement shall be effected by the insured with due diligence & dispatch.
2. Replacement shall be on the same site or an adjacent site.
3. Settlement on a replacement cost basis shall be made only when replacement has actually been effected.
b) If they fail to comply, settlement will be made on an ACV basis

Question 17

Define replacement cost.

Answer 17

New property or materials of like kind and quality as existed prior to loss. Insured is not charged any depreciation on the lost or damaged property

Question 18

Identify two important provisions to be followed by the insurer when making settlement on a replacement cost basis.

Answer 18

1. Replacement Cost
2. Depreciation (nil)

Question 19

Explain the basis of settlement under a “valued” policy.

Answer 19

Insurer shall not make any deduction for depreciation and for valued policies (jewellery, furs, antiques) the basis of settlement will be the value agreed by the insured and insurer

Question 20

Property polices normally contain a “Standard Mortgage Clause”. Who can be a mortgagee?

Answer 20

A mortgagee is anyone having an insurable interest in the property insured. It can include a bank, trust company, credit union, individual or group of people.

Question 21

Property policies normally contain a “Standard Mortgage Clause,”
a) Who can be a “mortgagee?”
b) Identify two guarantees provided to mortgagees by the Standard Mortgage Clause.

Answer 21

a) Anyone having an insurable interest in the property (bank, trust company, credit union, individual or group of people)
b) Guarantee of payment when insured breaches any policy condition (Neglect - when insured fails to make no effort to save property, Omission - insured fail to disclose a material fact, in either cases, the mortgagee is entitled to payment).

Guarantee #2 is that insurer will not reduce coverage or terminate the policy without notice to the mortgagee (the same notice that the insured would receive)

Question 22

What do deductibles accomplish?

Answer 22

The application of a deductible to all losses helps to keep insurance affordable.
*Insurers will usually provide insureds with deductible options. The higher the deductible, the lower the premium paid.