Property and Casualty Flashcards
How is the replacement cost calculated in ACV?
Actual cash value is generally defined as current replacement cost ($3,000) minus physical depreciation.
(Definition) Actual Cash Value:
is generally defined as replacement cost minus physical depreciation.
What is the main requirement to have property insured?`
Insurable Interest (financial interest)
Real Property
Land, and most things attached the land (I.E: Buildings, Vegetation)
Personal Property
All tangible property not classified as real property
Two type of loss to real or personal proerty
- Direct
2. Indirect
Direct Loss
Loss directly caused by a peril
Indirect Loss/ Consequential Loss
Occurs secondary, or as a consequence of the loss
To collect under an insurance policy, a person must…..?
a person must suffer financial harm from a loss that the insurance covers.
How does an insured a have an insurable interest?
The risk of financial harm arising from the loss
What must happen in order to an insured to make a claim?
An insurable interest must exist at the time of a loss in order for the insured to make a claim on the loss.
Most property and casualty policies are contracts of………?
indemnity.
Functional Replacement Cost
Functional replacement cost is the amount that it would cost to repair or replace the damaged building with less costly common construction materials and methods that are functionally equivalent to the obsolete, antique, or custom construction materials and methods that were originally used.
Market Value
The market value of property is the amount for which it could be sold if the buyer and the seller are under no unusual pressure.
Stated Amount
When a property insurance policy uses the stated amount approach, the value of insured items is listed in a “schedule” that is made a part of the policy.
Corinne purchased her home with a 10 percent down payment and a 90 percent mortgage from Sidney Bank. Why does Sidney Bank have an insurable interest in Corinne’s house?
The bank faces the possibility of a loss if Corinne’s house is damaged or destroyed.
The property owner and the mortgage holder both have an insurable interest in Corinne’s home, because both will suffer a loss if the home is damaged.
A fire severely damages Tyrone’s home, making it uninhabitable. He moves his family to a hotel while the house is repaired. The additional expenses incurs in housing the family are considered what type of loss?
The additional expense of a hotel is not the direct result of the fire, but an indirect consequence.
Joel renews his homeowners insurance policy on January 15. He sells the house to Sandi on March 15. One week later a fire destroys the house. Joel makes a claim on the policy for the loss of the house. What will the insurance company do?
Since Joel did not own the house when it was destroyed, he cannot suffer a financial loss from its destruction. He did not have an insurable interest in it after he sold it. Therefore, he cannot collect on his claim. If Sandi insured the house with her own homeowners policy, she can file a claim under that policy. However, she cannot file a claim under Joel’s policy.`
The leather couch in Rosendo’s family room cost $2,500 when he bought it new 5 years ago. The couch was expected to last 25 years. Today the couch would cost $3,000 new. A pipe above Rosendo’s family room burst, and the couch’s water damage is beyond repair. Rosendo’s homeowners policy, which covers water damage, provides actual cash value coverage on personal property. Disregarding any deductibles, what amount should Rosendo’s insurer pay?
Actual cash value is generally defined as current replacement cost ($3,000) minus physical depreciation. In this case, the couch had used up 20 percent of its expected life, so 20 percent of the current replacement cost is deducted for physical depreciation.
Cause of a loss
Peril
Conditions that increase the likely number of losses
Hazards
are individual physical characteristics that increase the chance of loss
Phys. Hazard
are tendencies or traits of an individual that increase the chance of a loss
Moral Hazards
individual tendencies, but they arise from a state of mind, attitude, or indifference to loss
Morale Hazards
What can increase the likelihood of loss resulting from a peril?
Hazards
For a loss to be covered under a property insurance policy, the cause of loss (peril) must be….?
Proximate Cause of Loss
Proximate Cause of Loss
the cause that sets in motion an unbroken chain of events leading to the loss. It may or may not be the immediate cause of the loss
A property insurance policy that uses the named perils approach includes a list or description of the perils that are covered.
Named Peril
is theft of property from within a premises by a person who unlawfully enters the premises.
Burglary
is a theft during which force is used or threatened.
Robbery
Celia put her laptop computer on a shelf in back of the classroom before taking an exam. She was the last to finish the exam, and when she got ready to leave, she discovered her computer was missing. Fortunately, Celia learned that her homeowners insurance policy covered this type of loss, which insurance practitioners commonly refer to as:
Mysterious disappearance
Mysterious disappearance is a term used by insurance practitioners for situations in which covered property disappears from a known place and was probably stolen.
Which one of the following perils is least likely to be covered under a property insurance policy that covers buildings and contents against the basic causes of loss?
Property insurance policies covering basic causes of loss invariably include coverage for fire, lightning, and explosion. Falling objects coverage is more likely found in a broader policy that covers a longer list of perils.
A dump truck collided with a tall oak tree in Marian’s front yard. The tree fell onto her house, breaking a glass picture window and knocking a lamp off the table inside it. Sparks from the lamp started a fire that destroyed half the house. What is the proximate cause of the damage to Marian’s house?
The collision
3 broad classes of legal wrongs
- Crime
- Tort
- Breach of contract
Why does the government enforce criminal law?
to protect the legal rights of its population.
Contract law protects the legal rights of …..?
parties that have voluntarily entered into contractual agreements.
Tort law protects…..?
the rights of individuals from other civil wrongs.
The four elements of negligence are:
- a duty of care,
- a breach of the duty of care,
- a proximal connection between the breach and the loss or damage that results from the breach
- Damages resulting from the breach.
There are two broad categories of civil damages:
- compensatory damages
2. punitive damages
The two types of compensatory damages that can arise out of an injury are:
- special damages
2. general damages
Punitive damages are imposed only when:
when the defendant acted in an especially outrageous manner
The three most common defenses to a negligence suit, are based upon?
Plaintiff’s conduct
Under strict liability, the law holds people responsible for injuries or damage
even when they have not been careless or negligent.
Vicarious liability
is involved when one person is legally responsible for the acts of another.
Under the attractive nuisance doctrine,
a party can be held liable for maintaining something on its property that appeals to curious children even though the children are trespassers.
Allan’s Carpet Cleaning Service removed the stains from Cleo’s red family room carpet—and also removed most of the color. To prove that the damage to her carpet was caused by Allen’s negligence, Cleo must be able to prove all the following, EXCEPT:
The cleaning solution Allan used contained chlorine.
The elements of negligence are duty of care, breach of the duty of care, proximate causation, and damages.
Francisco’s children have grown up and moved away, but the tree house that Francisco built for them now draws other neighborhood children despite Francisco’s handmade “No Trespassing” sign. If a neighbor’s child is injured by falling from the tree house, Francisco might be held liable for the child’s injuries under what legal doctrine or principle?
Attractive Nuisance
Under the attractive nuisance doctrine, a party can be held liable for maintaining something on its property that is attractive to curious children even though the children are technically trespassers.
Kristie opens the remote-controlled gate to the mansion where she lives to allow her friend Marta to enter the grounds. Kristie does not realize that a vacuum cleaner salesman follows Marta through the open gate. Kristie’s watchdogs are trained to attack intruders, and they injure both Marta and the salesman. Which of the following statements is true?
Kristie has less of an obligation to the uninvited salesman than she has to her invited friend Marta.
A property owner has less of an obligation to a trespasser (the uninvited salesman) than to an invitee (Marta).
Rafael was seriously injured when his car collided with Eugene’s car at an intersection. A court determined that the accident was 99 percent Eugene’s fault, but Rafael was not entitled to recover from Eugene because Rafael was 1 percent at fault. On what defense was this court’s determination based?
Contributory Negligence
Policy lists perils that are NOT covered, and All other perils are covered
Open Perils (special perils)
Policy lists perils that ARE covered
Named Peril (specified perils)
If a loss involves at least one covered peril, loss is covered even if other perils not covered
Concurrent Causes of loss
• Separate policy that covers perils not covered by commercial property policy (e.g., earthquakes and floods)
Difference in Conditions (D-I-C)
(failure to use degree of care reasonably necessary to avoid causing injury)
Negligence
• Plaintiff must prove all 4 conditions existed to hold defendant (insured) liable:
- Duty of Care (does defendant have a duty of care?)
- Breach of Duty of Care (did defendant fail in that duty of care?)
- Causation (was the accident’s proximate cause the result of defendant’ breach of duty of care?)
- Damages (did the accident result in legally compensable injury or damage?)
• Defenses to Negligence
- assumption of risk
- contributory negligence
- comparative negligence
Strict (Absolute) Liability vs. Vicarious Liability
- strict: Liable by nature of the cause of loss even when not careless
- vicarious: Legally responsible for the actions of another
Rates vs. Premiums
- Rate: Cost of insurance per unit of exposure
* Premium: Periodic payment required to maintain coverage (equal to insurance rate times number of exposure units)
• Rate:
Cost of insurance per unit of exposure
• Premium:
Periodic payment required to maintain coverage (equal to insurance rate times number of exposure units)
Miles is told that his application for auto insurance was rejected based on information in his motor vehicle report (MVR). Which of the following is material underwriting information that might have appeared on Miles’ MVR?
his driving under the influence (DUI) conviction
An MVR provides details about an auto insurance applicant’s driving history, which includes conviction of various violations, accidents, license suspensions, and license restrictions.
QBS Insurance Company uses class rating to determine the premiums for its auto insurance policies. This means that the rate for every insured driver is
determined by placing the driver and vehicle into a class with other similar drivers and vehicles.
With class rating, all insureds with similar characteristics are placed into the same rating class and are charged the same rates.
Loss costs are usually the largest component of an insurance rate. What do loss costs reflect?
the insurer’s expected losses for each exposure unit while the policy is in force
Loss costs are a rating component that reflects the insurer’s estimate of the amount of money it expects to pay for each exposure unit during the period when the policy is in force.
What two things does an insurance company’s loss ratio for a given period compare?
losses and premiums
A water damage exclusion in Sadie’s property insurance policy excludes coverage for any damage that might be caused by a flood. If Sadie wants flood coverage, from where can she get a flood insurance policy?
the federal government’s National Flood Insurance Program
The declarations of their homeowners insurance policy lists Rich and Allyson as the named insureds. However, the policy’s definition of “insured” indicates that relatives living in their household are also insureds. This would seem to include their young sons Kyle and James. When this policy uses the word “you,” to whom is it referring?
“You” refers to the named insured and his or her spouse. Kyle and James are insureds, but they are not named insureds, nor are they included in the definition of “you.
Coworkers who live near her residence ride to work in Felicia’s car and help pay for her gas and other expenses. An exclusion in Felicia’s auto insurance policy says it does not cover a vehicle while it is carrying persons for a fee but then seems to contradict that statement by saying the exclusion does not apply to a share-the-expense carpool. What is this apparent contradiction?
An exception to an exclusion
Some exclusions, like this one, contain exceptions that specify circumstances to which the exclusion does not apply. If Felicia were carrying passengers to make a profit, this “taxicab” exclusion would apply, but because they are merely sharing expenses, the exclusion does not apply, and her coverage is not impaired.
A provision in Alden’s auto insurance policy states, “We will pay for direct and accidental loss to your covered auto and its equipment.” What is the name for this broad statement?
An insuring agreement
An insuring agreement, which might also be called an insuring clause, is a very broad statement that sets forth the insurer’s basic promises under the policy.
A provision in Alden’s auto insurance policy states, “We will pay for direct and accidental loss to your covered auto and its equipment.” What is the name for this broad statement?
An insuring agreement
An insuring agreement, which might also be called an insuring clause, is a very broad statement that sets forth the insurer’s basic promises under the policy.
• Parties entitled to coverage?
- Insureds and secured creditors (mortgage holders, loss payees)
- “No Benefit to Bailee” Provision
Liberalization clause
• Named insured benefits from policy enhancement at next renewal
Conditions affecting property insurance coverage
- Policy limits (limit of liability)
- Deductibles
- Coinsurance (requires the insured to buy a limit of insurance at least equal to a specified percentage of the full insurable value of the covered property, e.g., 80%)
- Restoration of limits
- Policy period
Conditions after loss (Insured)
Notify insurer of loss
• Notify police if theft or other law violation
• Protect property from further harm
• Cooperate with insurer
• Sworn proof of loss within 60 days of insurer’s request
• Conditions after loss (Insurer)
- Salvage: Insurer may salvage total loss property
- Subrogation: Insurer may recover claim payment from party responsible for loss
- Appraisal: Independent appraisal when insured and insurer cannot agree on value
Statements in an insurance policy are referred to as:
policy provisions or clauses.
When a policy contains more than one coverage,
it is common for each coverage to have its own insuring agreement, exclusions, definitions, and conditions.
What does the coverage territory provision in a property and casualty insurance policy explain?
where coverage applies
The building that houses Margarita’s business has an insurable value of $500,000. Margarita insures this building for $300,000 under a property insurance policy with an 80 percent coinsurance clause. Ignoring any deductible that might apply, if the building sustains exactly $20,000 in damage due to a covered peril, how much will the insurer pay Margarita?
Less than 20,000
Because her property is underinsured, the coinsurance clause in Margarita’s insurance policy reduces the amount that the insurer will pay for a covered loss. To recover $20,000 for this loss, she should have purchased limits of at least $400,000 (that is, 80 percent of the $500,000 building’s insurable value).
Following a heated argument with her drunken boyfriend, Mona sets his bed on fire. The boyfriend escapes unharmed, but the house is damaged. Mona’s homeowners insurance policy has a standard mortgage clause that names First Credit Union as mortgage holder. As regards this fire loss, what will the insurer do?
pay First Credit Union to the extent of its insurable interest, but not pay anything to Mona because she intentionally started the fire
Jed is purchasing his home with a 20 percent down payment and a mortgage from Second Bank. Which of the following statements concerning Second Bank is correct?
Jed’s insurance policy can protect Second Bank’s interest in Jed’s home.
As mortgagee or mortgage holder, Second Bank has an insurable interest in Jed’s home that serves as collateral for the mortgage. To protect its interest, Second Bank will require Jed to name Second Bank as mortgage holder in Jed’s property insurance policy.
Price differentials in insurance rates that fail to reflect equitably the differences in expected losses and expenses will result in
Unfair Discrimination
If an insurer sells a personal lines policy and uses credit information to underwrite the policy or rate the risk, when must the insurer disclose this fact to the consumer?
Either when presenting the application or when the application is taken.
If the insurer fails to give the renewal terms and a statement of the amount of premium due at least 45 days before the policy’s expiration date
the insurer automatically extends the existing policy for a period of 45 days. (The premium for this extended period is prorated based on the premium that applies to the existing policy
In a conflict between the insurance policy and the summary disclosure form, the provisions of which document will prevail?
the provisions of the policy prevail.
