Key Terms & Concepts Chapter 3

Question 1

Define insured

Answer 1

The person named on the policy and any of the following living in the residence:

• spouse
• relatives of either
• anyone under 21 under the care of the named and their spouse
• students living living away from home while they attend school

Question 2

What is the principle of indemnity?

Answer 2

The principle of indemnity ensures that an insurance contract protects you from and compensates you for any damage, loss, or injury. The purpose of an insurance contract is to make you “whole” in the event of a loss, not to allow you to make a profit.

Question 3

Define Actual Cash Value

Answer 3

The value of the lost or damaged property after depreciation has been applied.

Question 4

Three factors considered in determining depreciation

Answer 4

• condition of the lost or damaged property
• market resale value
• life expectancy of the property

Question 5

Define Replacement Cost

Answer 5

Replacement cost is the amount needed to replace the lost or damaged property at today’s prices. Depreciation is not considered.

Question 6

Define Guaranteed Replacement Cost

Answer 6

Coverage is provided in the event of a total loss, the insurance company agrees to pay for the costs to rebuild the dwelling even though the amount of insurance purchased by the insured may be less than what is needed to do that.

Question 7

Define Valued Basis

Answer 7

The insured and the insurer will have agreed in advance what the value of the property would be in the event of a future loss. This amount is obtained from a qualified appraiser.

Question 8

Describe Proximate Cause

Answer 8

Coverage is provided only when the loss or damage is from a peril that was the proximate cause. Proximate meaning immediate, nearest, direct, next in order. this means that a proximate cause is that which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces injury and without which the injury would not have occurred.

Question 9

Define direct loss

Answer 9

Direct loss or damage is loss or damage that results when a peril insured by the policy actually is responsible (the proximate cause) for the damage or destructions of insured property.

Question 10

Define indirect loss

Answer 10

Indirect loss or damage arises as a consequence of a direct loss to other insured property from an insured peril. Also called consequential damage and collateral damage.

Question 11

Define Agency agreement

Answer 11

Agreement between insurance company and brokerage outlining the terms and conditions of their contract.

Question 12

Define binding authority

Answer 12

Binding authority is an agreement between an insurance company and a brokerage. It allows the brokerage to commit the company to a new policy without needing approval from the underwriting department.

Question 13

Define Insurance Binder

Answer 13

An insurance binder is temporary. It’s issued by an authorized representative. It serves as proof of insurance, will outline the basic terms, coverages, deductibles, and named insureds that will appear ​in your contract.

A binder is subject to all the terms of the pending contract, unless it is noted otherwise.

Question 14

What might happen if a broker exceed the binding authority of their Agency Agreement?

Answer 14

If a broker binds a risk exceeding the amount limited in their Agency Agreement, they may face an Errors and Omissions claim against their brokerage.