Insurance Basics 20% Flashcards
4 requirements of a legal contract
- Offer and Acceptance
- Consideration
- Competent Parties
- Legal Purpose
- Offer and Acceptance
mutual consent between the offeror and offeree
E.g. signing the contract
- Consideration
all parties bring something of value
E.g. money in exchange for a car
- Competent Parties
E.g. 18 years old, sober, and sane
- Legal Purpose
the purpose of the contract must be legal.
Utmost Good Faith
A characteristic of insurance contracts: ‘utmost’ meaning the ‘highest degree’ and ‘good faith’ meaning, “act with honesty, fair dealing and full disclosure.” All parties to an insurance contract must act with utmost good faith. It also applies to a fiduciary agent’s
responsibility towards the principal.
Representation
A statement assumed to be true
Misrepresentation
A false or misleading statement
Fraud
Using dishonesty to profit from an insurance policy
Soft fraud
exaggerating a claim
Hard fraud
deliberately causing or faking losses
Express Waiver
Written notice relinquishing a right, claim, or privilege
Implied Waiver
An assumed relinquishing of a right, claim, or privilege
based on practice
Estoppel
if an insurer accepts a practice for a time, it cannot later
refuse coverage because of that practice
Four Kinds of Hazards
- Moral
- Morale
- Legal
- Physical
Moral Hazard
Deliberate, reckless behavior because of
insurance coverage
Morale Hazard
Unpremeditated risky behavior because
of the comfort of insurance protection
Legal Hazard
Increased chance of loss because of legal
action
Physical Hazard
A physical condition that makes a loss
more likely
Negligence in insurance and law
Failure to use a reasonable degree of care in a particular situation, which directly results in damage to another
Negligence Checklist
- the defendant had a legal duty to act or not act in a prescribed manner
- the defendant failed to act accordingly (called a breach of duty)
- the plaintiff suffered actual loss or injury due to the defendant’s action or inaction
- the loss or injury to the plaintiff was a direct result of the breach of duty of the defendant
Special Damages
(Compensatory)
Money awarded for exact value of tangible damages
Proven by providing medical bills, repair bills, etc.
General Damages
(Compensatory)
Money awarded for intangible, emotional damages
decided by court
Losses with subjective value include:
● Expected future losses
● Mental anguish
● Permanent injury
● Loss of reputation
● Pain and suffering
● Future losses due to unemployment
Punitive Damages
Awards money for malicious, willful misconduct on the
part of the tortfeasor
● For intentional acts, such as slander, fraud, violence, oppression, or
recklessness
● Not typically covered in liability insurance
No-Fault Liability: Absolute Liability =
Strict Liability with NO exceptions
No-Fault Liability: Strict Liability
holds a party liable for damages, whether or not they were negligent, when the activity or instrument they are performing is inherently dangerous
Exceptions
1. act of god
2. consent of plaintiff
3. statutory duty
4. act of a third party
5. plaintiff’s own fault
No-Fault Liability: Vicarious Liability
a person can be liable for the negligent acts of someone in their charge.
Often applies to:
● Employers: If John’s negligent act takes place at work, his employer is vicariously liable for his actions
● Parents: If John is under the age of 18, his parents are vicariously liable for his actions
Peril
The actual cause of loss or damage
Lightning, fire, theft and flood
Named Peril
lists each peril that is covered
All Peril (Open Peril/ special)
covers all perils except those specifically excluded
Loss
- Reduction in value of an insured item
- Financial loss due to an occurrence or accident
- For insurers: the amount paid out in a claim settlement
Loss#1: reduction in value of Dan’s car after accident
Loss#2: medical bills for Dan’s injured wrist
Loss#3: what the insurer has to pay Dan for his property damage and injury
Direct Loss
Physical harm to tangible property
● Structural damage to house
● Kitchen walls and cabinets burned by fire
● Flooring damaged by water used to put out fire
Indirect/ consequential loss
an economic loss that results from a direct loss
● Renting a hotel room until home is repaired
● Lost rental income if damages cause a tenant to move out
Consequential loss
another name for an indirect loss that specifically pertains to lost business income
Blanket Coverage
more than one property, type of property, or coverage under a single limit
An example would be a business-owner who has four different store locations but just one insurance policy with a single limit to cover all four.
Specific Limits
Limits that apply to one specific type of property
A Homeowners policy might have specific limits for certain items like jewelry and silverware.
Actual Cash Value (ACV)
A valuation method that takes into account an item’s depreciation
● Same as fair market value and depreciated value
● ACV offers lower premiums for less coverage
● Formula: Replacement Cost minus depreciation
Replacement Cost
A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation
Can be determined through simple market research
● No depreciation
● Based on the replacement cost at the time of loss
● Higher premiums
Depreciation
An item’s estimated loss of value due to wear, tear, and age
Can usually be determined with:
● Standard Depreciation Schedules
● Estimating Software
Annual Depreciation:
replacement cost divided by the item’s useful life
Accumulated Depreciation:
the item’s Annual Depreciation multiplied by its age
Functional Replacement Cost
● Pays to replace an outdated, obsolete item with a functionally equivalent item not an identical item
● Level of coverage falls between RC and ACV
Replacement Cost: Obsolescence
● When something is no longer used or wanted, despite being in good working order
● Usually a result of a newer, improved alternative
● Causes rapid depreciation
Valued Policy (a.k.a. Agreed Value or Guaranteed Value):
A valuation method that assigns a set value to each insured item
● Value is determined prior to the issuance of a policy
● Avoids the confusion of assessing appreciation or depreciation
Stated Amount (Stated Value)
● Property value is stated by the insured when applying for insurance
● When loss occurs, policy pays up to the stated amount or ACV, whichever is less
Policy Structure
D. I. C. E.
- Declarations
- Definitions
- Insuring Agreement or Clause
- Additional/Supplementary Coverage
- Conditions
- Exclusions
- Endorsements
Declarations
● Names of both parties (insured and insurer)
● Policy number
● Location & description of insured item
● Value of insured item
● Dates of the policy (beginning and end)
● Amount and limit of coverage
● Deductible
● Premium
Definitions
● Not technically essential, but common in policies
● Defines terms used to write policy including “collision,” “decay,” “like kind and quality
● Includes important language for producers to know
The Insuring Agreement summarizes:
● What is covered
● Which causes of loss are covered
● Any services provided
● Any exclusions to coverage
● The maximum limit of policy coverage in dollars
Conditions
The insurer specifies any limits or qualifications the policyholder must meet.
If a jewelry store owner wants to purchase an insurance policy, the conditions section may require that a security guard be present whenever the store is open.
Exclusions
list what the policy does not cover.
Common Exclusions (in nearly all property policies):
● Earthquakes
● Flooding
● War
● Nuclear hazards
● Intentional acts
Endorsements (riders, addendum, attachment)
are additions to the policy that can:
● Add or reduce insurance coverage
● Change policy provisions
● Change the premium price after the policy period ends
Insurance
Transfers risk of financial losses from one party to another
Insured
Individual or organization that pays premiums in exchange for protection
Insurer
Company, group, or government agency offering financial protection
Common Policy Provisions
● Provisions with in the policy establish terms of the agreement
●Insurance policies are standardized forms, most of which are created by ISO or AAIS
What are ISO and AAIS?
● National organizations
● Produce standardized insurance forms for insurers to use
● Collect statistical data
● Provide rating information
● Work with state regulators on behalf of subscribing insurers
Policy Period:
inclusive period between inception and termination dates
Insured:
person or organization purchasing the policy
First Named Insured:
first person or entity listed on dec page
Deductible
The amount the policyholder must pay out-of-pocket before the insurer will pay for losses
● Lets the policyholder decide how much risk he is willing to take
● Found on the declarations page of an insurance contract
Three Types of Deductibles
- Fixed
- Percentage
- Franchise
Liability Insurance never has a deductible, except for very rare exceptions.
Fixed Deductible
A specific, set amount
Percentage Deductible
The insured pays a percentage of the insured risk’s value
Some policies combine fixed and percentage deductibles
Franchise Deductible
Policy kicks in only after the loss exceeds a predetermined amount
● If losses are below the deductible, the insurer pays nothing
● If losses are above the deductible, the insurer pays 100% of the damage
Coinsurance
Encourages the insured to purchase an adequate amount of coverage, typically at
least 80% of a property’s value
● Financially protects the insurer
● Imposes a penalty on coverage for partial losses if the property is not fully insured– 80% of its RC
Other Insurance /Apportionment
Guidelines for settling claims when more than one policy covers the damages
This clause enforces Principle of Indemnity by keeping people from “double recovering” for a loss.
Other Insurance Primary
Policy pays up to the limit, regardless of presence of another policy
Excess
Policy only pays once the Primary policy’s limits have been exhausted
Contribution by Equal Shares
● Each policy pays an equal share of the loss up to lowest policy limit
● Process repeats until loss is paid in full or all policy limits have been reached
