Chapter 8 - Common Policy Concepts

Question 1

Legal Bases for Insurable Interest

Answer 1

• Ownership interest in property
• Contractual obligations
• Exposure to legal liability
• Factual expectancy
• Representation of another party

Question 2

Factual Expectancy

Answer 2

A situation in which a party experiences an economic advantage if an insured events does not occur or, conversely, economic harm if the event does occur

Question 3

Agent

Answer 3

In the agency relationship, the party that is authorized by the principal to act in the principal’s behalf

Question 4

Trustee

Answer 4

Someone who has the legal title to a property but is responsible that it be used, handled, and transferred solely for the benefit of the beneficiary

Question 5

Bailee

Answer 5

The party temporarily possessing the personal property in a bailment

Question 6

Bailor

Answer 6

The owner of the personal property in a bailment

Question 7

Joint Tenancy

Answer 7

Each owner (tenant) owns the entire property and has a right of survivorship

Question 8

Tenancy by the Entirety

Answer 8

Joint tenancy between a husband and wife

Question 9

Tenant in Common

Answer 9

A concurrent ownership of property, in equal or unequal shares, by two or more owners. Tenants do not have survivorship rights

Question 10

Tenancy in Partnership

Answer 10

Concurrent ownership by a partnership and its individual partners of personal property used by the partnership. All partners have rights of survivorship.

Question 11

Insurance to Value

Answer 11

Insurance written for an amount approximating the full value of the asset(s) insured

Question 12

Loss Frequency

Answer 12

The number of losses that occur within a specified period

Question 13

Loss Severity

Answer 13

The amount of loss, typically measured in dollars, for a loss that has occurred.

Question 14

Insurable Interest

Answer 14

An interest in the subject of an insurance policy that is not unduly remote and would cause the interested party to suffer financial loss if an insured event occurred

Question 15

Insurance-to-value Provision

Answer 15

A provision in property insurance policies that encourages insurers to purchase and amount of insurance that is equal to, or close to, the value of the covered property

Question 16

Coinsurance Clause

Answer 16

A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured’s property value

Question 17

Coinsurance Formula

Answer 17

Amt payable = Limit of Ins
——————
Value of property x Coinsurance

Multiplied by total amt of covered loss

Amount payable = Did/Should x Loss

Did = The amount of insurance carried (policy limit)

Should = The minimum amount that should have been carried to meet the coinsurance requirement based on the Insurable value at the time of the loss

Question 18

Agreed Value Optional Coverage

Answer 18

Optional coverage that suspends the Coinsurance condition if the insured carries the amount of insurance agreed to by the insurer and insured

Question 19

Inflation Guard Protection

Answer 19

A method of protecting against inflation by increasing the applicable limit for covered property by a specified percentage over the policy period

Question 20

Peak Season Endorsement

Answer 20

Endorsement that covers the fluctuating values of business personal property by providing differing amounts of insurance for certain time periods during the policy period

Question 21

Actual Cash Value

Answer 21

Cost to replace property with new property of like kind and quality less depreciation

Question 22

Replacement Cost

Answer 22

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation

Question 23

Market Value

Answer 23

The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller

Question 24

Broad Evidence Rule

Answer 24

A court ruling explicitly requiring that all relevant factors be considered in determining actual cash value

Question 25

Agreed Value Method

Answer 25

A method of valuing property in which the insurer and insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss

Question 26

Functional Valuation Method

Answer 26

A valuation method in which the insurer is required to pay no more than the cost to repair or replace the damaged or destroyed property with property that is it’s functional equivalent

Question 27

Damages

Answer 27

Money claimed by, or a monetary award to, a party who has suffered bodily injury or property damage for which another party is legally responsible

Question 28

Dollar Trading

Answer 28

An insurance premium and loss exchange in which the insured pays the insurer premiums for low value losses, and the insurer pays the same dollars back to the insured, after subtracting expenses

Question 29

Self-insured Retention (SIR)

Answer 29

A dollar amount specified in an insurance policy that the insured must pay before the insurer will make any payment for a claim