Chapter 7 - Property Insurance

Question 1

Different Housing Types

Answer 1

1) House
2) Apartment
3) Condominium

Question 2

Commercial Insurance - rated

Answer 2

Commercial insurance has always been individually rated, as there are no common elements found in all commercial building structures.

Question 3

Habitational Insurance

Answer 3

Most houses normally have bathrooms, kitchens, living rooms, and bedrooms of various sizes.

share so many common features, the insurance industry created one type of policy to cover everyone, with the ability to vary the rating and limits according to the risk (that is, the property). Homeowners who had more than the standard limits developed by rating tables could increase their limits by adding endorsements.

Question 4

apartment dwellers - insurance

Answer 4

This policy provided coverage for everything at that location, subject to certain limits and exclusions. However, the explosion of condominiums has added another layer to the type of policy available. Though condominiums range from high-rise to low-rise, to townhouse to single-family dwelling, the policy form has evolved to respond to this new type of building ownership and to meet the needs of the unit owners.

Companies used these common industry forms as a basis for their own policies. Today, most companies have their own uniquely different forms, which help to give them either a competitive advantage or the ability to restrict and/or control coverages. As a broker, it is important for you to have a thorough knowledge of the individual company products (policies) you are selling, and to make accurate comparisons to meet the actual needs and expectations of your clients.

Question 5

Evolution of Habitational policies

Answer 5

The development of the policy form succeeds (that is, follows) the creation of new building types, rather than preceding it. As the models for residential ownership and occupancy change and evolve, the policy forms providing coverage also need to change to meet those challenges. For example, we’re starting to see fractional ownership by non-related individuals of a single-family dwelling, which will challenge how we address the named insureds on a policy.

The structure of the habitational policy was derived from, and is controlled by elements of, the Insurance Act.

The Basic Fire Policy evolved into the Named Perils Form (also known as the Specified Perils Form), and then again into the Comprehensive Policy Form.

Question 6

COMPREHENSIVE POLICY FORMS

Answer 6

Every insurance company offers its own Comprehensive Policy Form.

While Comprehensive (or “All-risks”) Forms provide a lot of flexibility for different insureds, one challenge they create is that insureds assume that they are covered for everything. This is not the case, and brokers must be aware of the policy limitations and exclusions.

A comprehensive habitational insurance policy comprises the declarations page and the policy attached to it. The values on the declarations page are derived from the combination of information found in the Home Evaluation Calculator and/or the Contents Limit and the application. This combination is unique and will determine the limits and premium for every policy.

Question 7

Comprehensive Policy Form Elements

Answer 7

Conditions
Claims Payment
Definitions
Deductibles
Exclusions
Form 
Location
Standard Mortgage Clause

Question 8

Form

Answer 8

Rather than declaring the perils that must occur for a policy to respond, a Comprehensive Policy “insures against all risks of direct physical loss or damage subject to policy conditions and exclusions.” If a peril is not shown as excluded, coverage is provided for the loss. When a client asks if a claim is covered, check the list of exclusions first to see if the peril is excluded from coverage.

Question 9

Location

Answer 9

Property insurance policies contain a definition of the property they insure. For example, Homeowner Policy forms include automatic coverage for all the property within the lots lines. Under the Condominium Unit Owner and Tenant Policy forms, the dwelling or unit includes garages, outbuildings, and private approaches reserved for the policyholder’s use or occupancy only. The client must be made aware that any property beyond these limits must be declared and listed on the summary page for it to be covered.

Question 10

Definitions

Answer 10

Every policy starts with a definitions page to define who and what are covered by the policy. Definitions for certain terms are uniform — that is, they do not differ between the policy forms.

Question 11

Conditions

Answer 11

A condition requires the insured to do or not to do something. There are two types of conditions found in these policies:

1. Statutory Conditions: These are conditions which are established by law and are legally binding to all parties of the contract. They derive from the Insurance Act and are attached to all insurance policies insuring the peril of fire. Since fire is not an excluded peril in these policies, this condition must be included in the wording.
2. Policy conditions: These are specifically developed by insurers to deal with important coverage areas.

Question 12

Exclusions - Property

Answer 12

There are two types of exclusions: property excluded and perils excluded. These items are excluded due to the higher-than-normal risk they present, and they are more properly insured on other policy forms.

Property Excluded: 
•Evidence of debt or title.
•Securities.
•Automobiles.
•Watercraft.
•Aircraft.
•Money.
•Other motor vehicles.
•Books of account.
•Vacant property (after more than 30 days).

Question 13

Exclusions - perils

Answer 13

• Earthquakes.
• Floods.
• Smoke due to agricultural smudging or industrial operations.
• Wear and tear or gradual deterioration.
• Rust and corrosion.
• War.
• Nuclear incident.
• Increased cost of repair or construction due to by-law enforcement.
• Sewer backup.

Question 14

Deductibles

Answer 14

Almost without exception, a deductible clause is included on all property policies. A deductible represents the amount the insured is required to pay for each loss before receiving any payment from the insurer.

Question 15

Claims Payment

Answer 15

Until an insured submits a claim, the policy is only a promise to pay. The policy lays out the way claims are paid out to the insured to ensure they are properly indemnified for their loss.

Question 16

Claims Payment - ACV

Answer 16

Actual Cash Value Basis - Normally, claims are based on the actual cash value (ACV) of the property in question. ACV is defined as:

Replacement Cost minus Depreciation

The use of depreciation in determining value is based on the principle of indemnity. When an insured uses an item they own over a period of time, they will use up some of its ‘value,’ and that amount should be deducted from the settlement.

Question 17

Claims Payment - Replacement Cost Basis

Answer 17

When settling dwelling buildings and outbuildings on an RC basis, the conditions are that the repair or replacement must be on the same site, made with similar materials, and within a reasonable time.

The building occupancy must be the same as prior to the loss, and the building must have been insured to at least 80% of the RC prior to the loss.

These conditions reduce a moral hazard where a building has been allowed to deteriorate and become uninhabitable. If any of these conditions are not met, payment would be reduced to the ACV.

Question 18

Replacement Cost - Guaranteed Replacement

Answer 18

Dwelling buildings can also be covered on a guaranteed replacement cost basis (if specified in the declarations), in which case the insurer will pay the ACV or RC even if it is more than the amount of insurance shown, provided that:

1) The amount of insurance at inception or the most recent renewal date is not less than 100% of the RC as determined by a valuation guide acceptable to the insurer;
2) The amount of insurance has not been reduced below that amount;
3) Repair or replacement has been commenced within a reasonable time on the same location with a building of the same occupancy with materials of like kind and quality; and
4) The insured notifies the insurer within 30 days of any addition, extension, improvement, or betterment to the residence dwelling which increases its value by $5,000 or more.

For contents, the RC coverage must be purchased by endorsement and shown on the declarations page. The conditions are that the item lost must be replaced with like kind and quality and used for the same purpose. Because of their nature, some items (such as antiques or fine art) would not be covered as normal contents on an RC basis.

Question 19

Valued Basis

Answer 19

When insureds have property that cannot be replaced (such as original art, family jewelry, furs, antiques, and memorabilia), the insurer may agree to provide coverage on a valued basis. When there is a loss to insured property, the basis of settlement will be the value agreed to by the insured and insurer. Insurers will normally require valuation by a qualified appraiser and the item(s) will be added to the policy by a separate endorsement.

Question 20

Property in Pairs and Sets

Answer 20

Within claims payment, it is sometimes difficult to determine what constitutes a complete indemnity. This is particularly true when settling claims on property comprising a pair, a set, or several parts, and not all the property has been destroyed. For example, an insured might file a claim for a pair of matching candlesticks or a pair of diamond earrings, where only one unit of the pair is lost or stolen. In another example, an insured might file a claim for property in parts, such as three rooms of wall-to-wall carpet, where spilled paint has damaged the carpet beyond repair in only one room.

Pairs and sets: Pairs and sets: Loss or damage to one item of a pair or set does not constitute loss or damage to the entire pair or set. The item not lost continues to have value, and this amount will be deducted from the amount of the claim.

Parts: When there is loss to only one part of property which consists of several parts, the basis of settlement will be the value of the lost or damaged part, including the cost of installation. In our example, only the carpet in the one room where the damage occurred would be repaired or replaced — not the entire three rooms of carpet.

Question 21

Standard Mortgage Clause

Answer 21

To purchase a home, most Canadians rely on loans from various different financial sources. The party issuing the mortgage (the mortgagee) will insist that their interest be shown on the policy to protect their interest in the event of a loss. They will request a certified copy of the policy and copies of subsequent renewals.

This clause includes the following guarantees to the mortgagee:

Guarantee of payment when the insured breaches a policy condition. For example, if an insured committed arson or failed to disclose a material fact that could result in denial of a claim payment to an insured, the mortgagee would still be entitled to payment.

Guarantee that the insurer will not reduce coverage nor terminate the policy without due notice to the mortgagee. When reducing coverage, the mortgagee must consent to the change. When terminating the policy, the mortgagee is entitled to due notice.