INTRODUCTION TO COMMERCIAL PROPERTY INSURANCE (551-1) Flashcards
4 Types of Loss Exposure
- Property loss exposure: the possibility of damage to property which the firm has a financial interest
- Liability loss exposure: the possibility that a claim will be made against the firm by someone seeking money damage or some other legal remedy
- Personnel loss exposure: the possibility that a key person in the firm will die, retire, resign or become disabled, depriving the firm of hard to replace skills and knowledge
- Net income loss exposure: the possibility of a reduction in net income
Firms manage loss exposures by applying the 6 step risk management process. Explain the 6 steps
- Identify loss exposures: identify loss exposures in all four loss exposure categories
- Analyze loss exposures: estimate the frequency and severity of loss for each exposure
- Examine the available risk management techniques: consider the cost of each risk management technique that could be used to manage each loss exposure.
- Choose the best technique(s): Select the most effective and economical technique(s)
- Implement the technique(s): Put the chosen technique(s) into action
- Monitor the results: Monitor the results of those techniques and revise the risk management program as needed
6 Risk Control Techniques
- Exposure avoidance: abandon or avoid the loss situation, thus eliminating all possibility of loss (don’t preform operations with a high risk of fire, such as welding or spray painting ) A firm that avoids ever incurring a particular loss exposure is practicing proactive avoidance. A firm that eliminates an existing loss exposure is practicing abandonment.
- Loss prevention: reduces loss frequency. (Build a masonry home, not a wood frame home.)
- Loss reduction: reduces loss severity. (Install a sprinkler system.)
- Separation: disperses resources over two or more locations
- Duplication: creates copies or spares of important items and stores them at separate locations (Photocopy contracts)
- Diversification: spreads loss exposures over several projects, products , markets, and/or regions. (Create more than one product. Buy stocks from companies in different industries.)
2 Risk Financing Techniques
- Retention: generates funds from within the firm to pay for losses.
- Transfer: generates funds from outside the firm to pay for losses, through either insurance or noninsurance transfer
Fire exposures
Fire consists of three elements: a heat source, oxygen and fuel. A fourth element, an uninterrupted chain reaction allows a fire to grow and spread. Fire prevention focuses on removing one of those four elements, often through fire-resistant building construction. Pre-loss fire control techniques include: controlling heat sources from fuels, using fire stops, fire walls, and fire divisions to help stop fires from spreading. Internal fire extinguishment methods include sprinkler systems, guard services and fire brigades. External fire extinguishment methods include public fire departments.
Burglary, robbery and employee theft exposures
Burglary: theft with forcible entry
Robbery: theft by threat or use of bodily violence
Employee theft: theft committed by an employee against his employer.
To control theft losses: prevent or delay the criminal’s access, detect him, and/or identify him
Methods to control employee theft include accounting controls, access controls, background checks and separation of duties
Explosion exposures
Fire type explosion loss control measures include fire control measures, suppression equipment with rapidly reacts to a pressure increase, and venting that directs pressure to open air or a solid barrier. Pressure vessel explosion loss control measures include inspection, maintenance, proper operation, and safety release valves
Windstorm exposures
Use wind-resistant construction, install shutter and blinds, maintain roofs and walls, secure outside property, and keep trees and utility poles away from buildings.
Flood exposures
Avoid high water and low ground, build dams, build channels and open areas to direct and hold flood waters, sandbags during floods. install pumps to remove water, use equipment that resists dampness and flood water pressure and develop plans to move property to higher ground.
Earthquake exposures
Avoid earthquake-prone areas and use earthquake resistant construction, which can be either a rigid design that will resist earthquake forces or a flexible design that will move with and absorb earthquake forces.
Commercial property insurance
Covers property loss exposures for business and nonprofit organizations
Multiline (package) policy
Covers two or more lines of business.
Monoline policy
Covers one line of business. Many firms cover most of their property and casualty loss exposures through a multiline policy, then add one or more monoline policies to provide coverage not available through the multiline policy.
Casualty
An accident, mishap or disaster
Standard form
Developed by the ISO (Insurance Services, Office, Inc.), the AAIS (American Association of Insurance Services), or another insurance advisory organization
Nonstandard form
Developed independently by an insurer or broker
Commercial package policy (CPP)
multiline policy with two or more ISO commercial likes coverage parts. Under the ISO’s Commercial Lines Manual (CLM) rules, a CPP requires one building and/or business personal property form and one commercial general liability. Each coverage part includes declaration forms, a coverage form, sometimes a general conditions form, and any applicable endorsements. Each coverage part is combined with a common declarations page and a common policy conditions form to form a policy.
Liability
Any type of insurance that protects an individual or firm from the risk that they may be sued and held liable for something (ex. malpractice, injury, negligence)
Businessowners’ policy (BOP)
Freestanding package policy that provides property and liability coverage for small to medium-sized businesses. Typical BOP coverage includes building and business personal property, business income and extra expenses, and the equivalent of commercial general liability. The insurer benefits from reduced adverse selection and handling costs and simpler rating. The insured benefits from convenience and lower premiums.
Output policy
Combines several commercial property coverages into one policy form with associated endorsements. Compared with standard commercial package policy forms, the output policy offers extra property coverage enhancements and broader coverage.
Common commercial policy: cancellation condition
The insured can cancel at any time by sending written notice to the insurer. The insurer can cancel at any time by sending written notice to the first named insured, with 10 days’ notice in cases of nonpayment of premium and 30 days’ notice for all other reasons. The insurer sends any premium refund to the first named insured. In almost all states, state law superseded the cancellation condition,
Common commercial policy: changes condition
Only the first named insured has the authority to request changes. The policy can only be changed by written endorsement issued by the insurer. In practice, verbal changes not yet confirmed by written endorsement are usually binding.
Common commercial policy: examination of books and records condition
The insurer has the right to audit the insured’s books and records related to the policy during the policy period and up to three years after termination
Common commercial policy: inspections and surveys condition
The insurer has the right to inspect the insured’s premises and operations during the policy period.
Common commercial policy: premiums condition
The first named insured is responsible for paying the premium and receives any return premium due from the insurer.
Common commercial policy: transfer of rights and duties condition
The insured cannot transfer the rights or duties und the policy without the insurer’s written consent. If the named insured dies, the insured’s rights and duties and automatically transferred to the insured’s legal representatives.
Policy condition
Any provision the qualifies an otherwise enforceable promise in an insurances policy.
Commercial property: concealment, misrepresentation or fraud condition
Coverage is void if you commit related fraud or intentionally conceal or misrepresent any material facts related to any coverage, claim, or your insurable interest.
Commercial property: control of property condition
Any act of neglect by anyone to your property when it is out of your control will not affect coverage.
Commercial property: insurance under two or more coverages condition
We will not pay more than the actual amount of your loss, no matter how many coverages apply.
Commercial property: liberalization condition
If we broaden coverage without additional premium within 45 days before inception or during the policy period, you have broadened coverage.
Commercial property: no benefit to bailee condition
(a bailee holds the property of another (the bailor) for some purpose beneficial to one or both parties) No one else have custody of covered property benefits from this insurance. Coverage continues for you. Coverage is not voided if you are the bailee of the property that is damaged. We may seek recovery from any negligent third party.
Commercial property: other insurance condition
If the other policy has the same terms, conditions, and provisions as the BPP the other insurer shares losses with us on a pro rated basis. If the other policy has different terms, conditions, and provisions, we’ll pay on an excess basis.
Commercial property: policy period, coverage territory condition
Policy period is shown by the dates listed on the declarations page. Coverage begins at 12:01 AM standard time at your address. Coverage territory is these US, Puerto Rico, and Canada.
Commercial property: transfer of rights of recovery against other to us conditions
After we’ve paid we reserve the right to recover from a responsible third party. You can not impair our right of subrogation. You may waive your rights before a loss. After a loss, you may waive your right only against
a. another insured under this policy
b. a business that owns or controls you, and/or
c. your tenant
Commercial property: actual cash value (ACV) valuation condition
Replacement cost minus depreciation. Replacement cost is determined at the time and location of loss; it is not original cost. Depreciation reflects the property’s remaining useful life; not its accounting depreciation
Commercial property: replacement cost (RE) valuation condition
The cost to replace the property with new property, determined at the time and place of loss
Commercial property: selling price valuation condition
Stock that you’ve sold but not yet delivered is valued at its sales price minus both discounts and unincurred expenses
Commercial property: coinsurance condition
Encourages insurance-to-value by penalizing insureds who do not buy coverage to (typically) 80-100% of the property’s full value. If the amount of insurance is less than the total value of the insured property tie the coinsurance percentage, we’ll pay (the amount of insurance times the amount of loss) divided by (the property value at the loss times the coinsurance percentage).
(did/should x loss) - deductible = amount payable
(limit of insurance/(value of covered property x coinsurance percentage)) x amount of covered loss - deductible = amount payable
Premium = (value of covered property x coinsurance percentage) x (rate/per amount of insurance)
Commercial property: duties in the event of loss or damage condition
You must promptly give us notice of loss, file a policy report if laws may have been broken, protect the covered property from further loss, give us complete inventories of the damaged and undamaged property including values, let us inspect the property and you records, let us question you under oath if we ask and send us a signed sworn statement of loss if we request it.
Commercial property: appraisal condition
If you and we disagree on property value or loss amount, either of us can demand that we hire our own appraiser. The two apprisers can then, together, select an umpire. Values and amounts agreed on by any two of those three shall bind both you and us.
Commercial property: loss payment condition
We may (it’s our decision to) pay the value of the lost property or pay the cost of repairing or replacing it.
Commercial property: recovered property condition
If property is recovered after loss settlement, you can have it back if you repay us. We’ll pay recovery and repair costs.
Commercial property: vacancy condition
If a tenant’s building area is vacant for 60 or more consecutive days before the loss we won’t pay for a. any loss caused by vandalism, sprinkler leakage (unless you took steps to avoid freezing), building glass breakage, water damage, theft or attempted theft.
b. We’ll pay you only 85% of what we’d otherwise pay for loss
*The Vacancy Permit endorsement brings full coverage for vacant building for additional premium
Commercial property: mortgageholders condition
We’ll pay for covered loss to each mortgagee (the lender in the mortgage, typically a bank) in the order in which they appear. If we deny your claim because of you acts or omissions, the mortgagee can still collect for loss if it
a. pays the premium when you don’t
b. submits a signed, sworn proof of loss within 60 days of when we ask: and
c. has notified us of any changes in ownership, occupancy, or material risk known to it.
We’ll give the mortgagee at least 10 days’ notice if we cancel for nonpayment or do not renew the policy. If we cancel for any other reason we’ll give the mortgagee at least 30 days’ notice.
Loss payable provisions endorsement
Contains four options:
- Loss payable: the loss payee is entitled only to joint loss payment with the insured
- Lender’s loss payable: a loss payee whose interest in the insured property is established through written agreement (receipts, bills of lading) is entitled to joint loss payment
- Contract of sale: the buyer or seller in a contract is entitled to joint loss payment as their (both parties) interest may appear (abbreviated ATIMA)
- Building owners loss payable: the owner of the building in which the insured is tenant is entitled to payment for losses to discribed building
