Property and Casualty Insurance

Question 1

Basic coverage for policyowner’s home due to 12 perils:

Answer 1

• fire
• lightning
  -windstorm
• hail
• riot or civil commotion
• aircraft
• vehicles
• smoke
• vandalism or malicious mischief
• explosion
• theft
• volcanic eruption

Question 2

Broad Coverage

Answer 2

Protects against a homeowner’s loss due to the perils named under basic coverage plus the following 6 perils, for a total of 18:
- falling objects
-weight of ice, snow, or sleet
- accidental discharge or overflow of water or a steam
- sudden and accidental tearing apart, cracking, burning, or bulging of a steam, hot water, air-condition or automatic fire sprinkler system or of a household appliance
- freezing of a plumbing, heating, air conditioning, or automatic fire sprinkler system or of a household appliance

Question 3

Open-perils coverage

Answer 3

Increased protection designed to protect against all perils except those specifically excluded from coverage. Most comprehensive type of protection for any homeowner to purchase.

• HO-3 nd HO-5 (most popular homeowner’s policies) have open-perils coverage either in full or part.

Question 4

Perils excluded from most homeowners policies

Answer 4

• earthquakes
• floods
• neglect
• war or nuclear hazards
• power failure
• intentional loss

Question 5

Policy Sections

Answer 5

Section I - Covers property losses

Section II - covers liability losses

Question 6

Section I - Coverage A

Answer 6

Insurers dwelling, including additions or other structures attached to the building. Also includes limited coverage on landscaping (trees, grass, shrubs) around dwelling

Question 7

Coverage B

Answer 7

Insures other structures (referred to as “detached structures” in some policies) on premises of dwelling, such as unattached garages, fences and sheds

Question 8

Coverage C

Answer 8

Insures general personal property (i.e., property not specifically named within contract for provision of specific coverage)

Question 9

Coverage D

Answer 9

provides loss-of-use coverage, which includes expenses incurred while dwelling in uninhabitable due to damage caused by covered peril

Question 10

Section II areas of coverage

Answer 10

Coverage E - comprehensive liability insurance

Coverage F - medical payments to others, claims expenses, and damage to property of others

Question 11

HO-2: Broad Form (named perils)

Answer 11

Provides broad coverage for dwelling & personal property. In addition, this form broadens certain perils and adds other perils.

Question 12

HO-3: Special Form

Answer 12

Most popular and widely purchased of basic policies. Real property is covered on open-perils basis, unless specifically excluded. Personal property is covered on a named-perils basis.

• Covers all perils listed in HO-2 and any other not excluded. Value is that this form will cover certain unusual losses not specifically named as perils in HO-2.

For example, suppose an insured homeowner with an HO-2 policy, who lives in a rural area, owns a shed that is damaged when a neighbor’s livestock gets loose. Because none of the named perils addresses this particular situation, the loss will not be covered. However, had the shed been insured under an HO-3 policy, the damage would have been covered because an HO-3 policy generally has no such exclusions.

Question 13

HO-4: Contents Broad (Tenants or Renters) Form

Answer 13

Designed for tenants who do not own their dwelling. Tenant has a need only for personal liability coverage, plus coverage for contents and loss of use. Doesn’t have Coverage A or B (which would be covered by landlord’s policy)

Question 14

HO-5: Comprehensive Form

Answer 14

Similar to HO-3 policy except that Coverage C (personal property) is written on open-perils basis.

Question 15

HO-6: Unit (Condominium) Owners Form

Answer 15

• Differ from those of single-family residence owners because property’s common areas are covered by policies owned by condo association. HO-6 provides coverage for condo owner’s personal belongings and any owned structural part of building. Also provides liability protection.

Question 16

HO-8: Modified Form for Special Risks

Answer 16

Provides coverage for those who live in a older home that has replacement cost exceeding market value. The HO-8 policy uses a functional replacement cost provision for loss. Under the functional replacement cost, the insurance company agrees to pay the amount necessary to repair damage, but the coverage cannot be more than the materials and labor that make the dwelling functionally equivalent to its original style. The HO-8 policy covers basic perils only. Liability and medical payments coverage are also part of the policy.

Question 17

General Exclusions (8)

Answer 17

• ordinance or law: building codes continually change, and when partial loss is incurred, cost of bringing room up to code is considered “betterment” and is not covered.
• earth movement: excludes coverage for loss caused by earth movement, except direct loss by fire, explosion, theft, or breakage of glass.
• water damage: excludes damage from external water (i.e. ground water), but not damage from internal water (i.e., pipe burst)
• power failure: denies coverage for losses resulting directly from interruption of power or other utility services (i.e., neighborhood power outage as opposed to specific outage at home)
• neglect
• war
• nuclear hazard
• intentional loss

Question 18

Personal Property Coverage and Exclusions

Answer 18

Standard policies cover personal property at 50% of dwelling coverage and typically most policies only provide limited coverage for valuable personal property.

Only viable method to provide sufficient coverage is to add personal property endorsement or purchase separate inland marine policy.

Question 19

Personal Property Exclusions

Answer 19

Nine classes of property are usually excluded under Coverage C of all homeowners forms:
1) articles separately described & specifically insured under a floater
2) animals, birds, or fish
3) motorized land vehicles
4) aircraft and their parts
5) property of roomers, boarders, and other unrelated tenants
6) Property contained in an apartment that is regularly rented or held for rental to others by insured
7) property rented or held for rental to others away from premise
8) books of account, drawings, etc. containing business data
9) credit cards or fund transfer cards, except as provided under heading of additional coverages

Question 20

Personal Property Endorsement

Answer 20

For high-value items, like those listed in the previous section, adequate protection generally is available as an endorsement to the policy. Coverage is in the amount of the item’s stated value or appraised value, not the replacement cost or ACV. For this reason, a client may be required to provide appraisals, invoices, photographs, or other evidence of ownership to obtain coverage.

Question 21

Flood Insurance

Answer 21

Predominant provider is federal government through National Flood Insurance Program (NFIP). If property is located in nonpreferred flood zone, mortgage company will usually require homeowner to purchase.

Question 22

Earthquake Insurance

Answer 22

These policies generally have deductibles that may be as high as 10% of the face amount of the policy. The reason for this is to avoid having to process numerous small claims after an earthquake, which allows the underlying insurance company to keep the premiums down and focus on larger claims.

Question 23

Inland Marine Insurance

Answer 23

Inland marine insurance is protection for personal property that is in transit or that
can be transported. Inland marine insurance usually is written with open perils coverage (meaning, all perils, except for those specifically excluded, are covered). A primary benefit of open perils coverage is that it extends the coverage to theft and loss. Coverage may be written with little or no deductible, or, depending on the insurer and the insured’s wishes, a higher deductible. As is true with other types of insurance, the greater the deductible, the lower the premium.

You may see this coverage identified as inland marine (floater), personal property floater, scheduled personal property endorsement, or personal articles floater, but for exam purposes, they represent the same coverage. Generally, this form of insurance is used to cover valuable personal property, rather than more common, lower-value property (e.g., a fine art collection rather than a blender in the kitchen). Inland marine insurance may be the only way to fully cover certain items that have coverage limits built into the standard homeowners policy.

The insured needs some sort of appraisal or receipt to verify the value of the property being insured. Additionally, coverage usually is for a stated (appraised) value rather than the replacement cost or ACV (i.e., depreciated value).

An inland marine policy is one way to overcome problems related to an insurer’s pair or sets settlement option. When one item of a pair (or set) is lost, stolen, and/or damaged, the pair or sets option allows the insurer to only pay for the one item—not the set. This can create problems, as the value of the set is often greater when all the parts are there. By using an inland marine policy, it may be possible for the insured to recoup a greater amount of the loss related to the one piece.

Question 24

Coinsurance Provision

Answer 24

To ensure that premiums received are sufficient to cover claims, insurance companies usually include a coinsurance provision that requires a home to be insured for at least 80% of its replacement cost in order for partial losses to be covered completely. If an individual does not maintain insurance equal to 80% of the replacement cost at the time of loss, a partial loss will be covered at either the actual cash value (ACV) (i.e., replacement cost minus depreciation) or according to the coinsurance penalty formula (or partial loss formula), whichever amount is greater.

Question 25

Coinsurance penalty formula

Answer 25

(amount of insurance/amount of insurance required) x loss - deductible

• typically provides greater benefit than ACV

Question 26

Actual Cash Value

Answer 26

Replacement cost minus depreciation

Question 27

Inflation Guard Endorsement

Answer 27

automatically increases dwelling coverage each year by amount tied to index

Question 28

Factors affecting cost of homeowners

Answer 28

• construction
• location
• policy type
• deductible
• insurer

Question 29

Personal Liability

Answer 29

Most homeowners policies are issued as a package policy, which includes the liability coverage listed in Section II. It is possible to purchase a stand-alone, or monoline, policy, which is a comprehensive personal liability (CPL) policy. In addition to paying for damages up to the limits of the policy, the company will pay legal defense costs. The insurance company generally reserves the right to make an out-of-court settlement at its discretion (without obtaining consent from the insured).
PROFESSOR’S NOTE Do not be misled by the comprehensive terminology; CPL policies cover
basic liability. The CPL policy provides coverage for damages payable as a result of the insured inflicting bodily injury or causing property damage that falls under the covered portion of the policy. Note that slander and libel are not covered under the personal liability portion of this policy because the policy will not cover intentional acts.
Under homeowners Section II, the “insured” is the named insured and usually includes any member of the insured’s household who are relatives or minors (21 years or younger) under the care of the insured. It also extends to a child who is residing at college.

Question 30

Liability exclusions

Answer 30

• intentional injury and business/professional activities
• business pursuits
  -rental of property
• professional liability
• motor vehicles
• watercraft
• aircraft
• communicable disease
• other exclusions

Question 31

Medical Payments to Others

Answer 31

• Provides that if someone who is not living at insured’s residence is injured there due to act of insured, company will pay for medical care related to that injury. Negligence not required.

Question 32

Personal Liability Umbrella Policy (PLUP) or Catastrophe Liability Insurance

Answer 32

A PLUP not only increases the coverage that is part of the homeowners and auto policies, it also broadens the overall coverage. Some optional coverages under a homeowners policy, such as personal injury coverage, are standard under an umbrella liability policy.
If the insured gets sued and the claim falls under the insured’s homeowners or auto policy, the appropriate policy will pay first. It is helpful to think of the liability payment that is being made from the auto or homeowners insurance as a deductible to be paid prior to the umbrella liability policy being called upon. If the auto or homeowners policy is not adequate to pay the claim, then the umbrella policy picks up the difference, up to its limit of liability. For this reason, it is typically best to have both the PLUP as well as the underlying policies with the same insurance company.

Should have as much liability coverage as net worth. Exception is high income earners who need higher liability limits even as starting careers and have more debt than assets.

Question 33

PLUP Exclusions

Answer 33

-owned or leased aircraft excluded under the base policy;
- watercraft of the type excluded under the basic homeowners policy;
- damage to rented or borrowed aircraft and watercraft;
- business pursuits;
- professional services, unless the underlying insurance program includes coverage for this risk;
- workers comp
- any act committed by, or at the direction of, insured with intent to cause personal injury or property damage

Question 34

Personal Auto Policy (PAP)

Answer 34

Provides coverage for liability, medical expenses, and property damage. Typically shown in format of 25/50/10, which means liability for bodily injury covered up to $25k per person and $50k per accident, and $10k for property damage liability.

Question 35

Cost of Automobile Insurance determined by 5 primary factors:

Answer 35

• age and gender: < 25 is highest risk, 25 - 75 lower; females lower risk
• use of vehicle: geographical location, pleasure vs. driven to work daily, mileage
• type of vehicle: sports cars, etc. when purchasing insurance on more than one vehicle, premium per vehicle typically lower than if insured by diff. companies
• driver’s record
• credit

Question 36

PAP covers three general types of loss

Answer 36

• legal liability
• injury to insured & family
• damage to vehicle

Question 37

6 parts of a PAP

Answer 37

• Part A: Liability Coverage
• Part B: Medical Payments Coverage
• Part C: Uninsured Motorist Coverage
• Part D: Coverage for Damage to Your Auto
• Part E: Duties After an Accident or Loss
• Part F: General Provisions

Question 38

Who is an insured on an auto policy?

Answer 38

„ The named insured, spouse, and resident relative(s) (e.g., children)
„ Anyone allowed to drive the insured’s covered auto
„ Any person or organization legally responsible for any insured’s use of a covered auto on behalf of that person or organization
„ Any person or organization legally responsible for the named insured’s or family members’ use of any auto or trailer (other than a covered auto or one owned by that person or organization)

Question 39

What is a Covered Auto?

Answer 39

Not all vehicles owned by an insured may be insured. A covered auto is defined as follows: „ Any vehicle listed in the declarations section of the policy „ Any new vehicle that meets the eligibility requirements of the PAP – The company must be notified of the need for coverage within 14 days of obtaining it. In some states, the notification must be within 30 days.
„ Any utility-type trailer owned by the insured, excluding mobile homes and other large trailers
„ Any vehicle the insured is using as a substitute for a covered vehicle that cannot be used because of – breakdown, – repair, – servicing, – loss (theft), or – destruction

Question 40

Medical Payments Coverage for Auto Policy

Answer 40

Unlike the medical payments to others coverage under a homeowners policy, this coverage provides benefits to the insured, any family member, and anyone else occupying the insured vehicle. Occupying is defined to include “in, on, or about; upon; getting in, on, out of, or off of” the vehicle. The benefits must be required because of an accident and the benefit payment must be needed within a limited period of time (e.g., two or three years) depending on the state. Funeral expenses are included as benefits. Benefits also extend to injuries received while a covered person is a pedestrian or riding a bicycle if he is struck by a licensed vehicle or trailer.

Question 41

Exclusions to Medical Payments for Auto Policies

Answer 41

„ Vehicles with less than four wheels „ Autos used to carry persons or property for a fee „ Autos owned by or furnished for regular use of the named insured—other than the covered auto
„ Autos owned by or furnished for regular use of family members—other than the covered auto
„ Autos operated without a reasonable belief that the user is entitled to do so „ Trucks used in business „ Injuries sustained while occupying any vehicle intended for use as a residence or premises
„ Injuries sustained in course of employment (workers’ compensation covers these) „ Injuries caused by discharge of nuclear weapons, war, civil war, et cetera „ Injuries caused by nuclear reaction, radiation, or radioactive contamination „ Injuries sustained in a vehicle at a facility for racing, if competing in a race, practicing for a race, or planning to race

Question 42

Uninsured and Underinsured Motorist Coverage

Answer 42

Uninsured motorist coverage provides protection for an insured who is involved in an accident with another driver who has no insurance. It covers the same insureds as the rest of the policy. In addition to the normal insureds, this section also covers any person who is entitled to recover damages because of an injury to a covered person (e.g., the spouse of an injured party). When another driver is at fault and has no insurance, or if an accident is a hit and run, this coverage provides payment for the loss.

Uninsured motorist coverage is often combined with underinsured motorist coverage. Underinsured motorist coverage is necessary in situations where an at-fault driver has insurance, but with very low limits. This coverage is added to the PAP by endorsement.

Technically, uninsured motorist coverage will not pay in this circumstance because the negligent driver actually does have insurance. To allow the injured driver to be made whole, underinsured coverage is needed. Many policies automatically include underinsured coverage when uninsured motorist coverage is selected. However, because this is not always true, it’s best to check.

Question 43

Physical Damage Coverage

Answer 43

Two parts
1) damage by collision
2) comprehensive (other-than-collision) damage

Question 44

Damage by collision coverage on auto policy

Answer 44

• covers when insured hits something or vehicle is overturned
• possible (and common) to have collision deductible that is larger than comprehensive deductible.
• Collision coverage pays for damage to a covered auto whether or not the insured is at fault. Examples of such damage include breaking off the outside mirror when backing out of a garage, bumping into a steel and concrete post in a parking lot, or being rear-ended by another drive

Question 45

Comprehensive Coverage on Auto Policy

Answer 45

• For something other than collision (ex. fire, wind, hail, vandalism)
• Pays for damage when insured is not at fault

Question 46

Actual Cash Value (ACV) provisions of auto policy

Answer 46

The PAP covers damage on an ACV basis. ACV is the replacement cost minus depreciation. Unlike under a homeowners policy, there is no replacement cost coverage under the standard PAP. The valuation used is the amount required to repair or replace the property with that of like kind and quality. This takes into consideration the condition of the property at the time of loss (i.e., depreciation).

Question 47

Transportation Expense under Auto Policy

Answer 47

If your client’s insured auto becomes unavailable due to loss by damage or theft, the policy will provide a limited amount of money to help with alternate transportation. This benefit normally has a daily (e.g., $20 per day) and a claim (e.g., $600) limit. This may be used for the cost of a rental vehicle, bus fare, or train fare. It applies only to covered losses, and requires the auto to have collision coverage.

Question 48

Towing and Labor

Answer 48

• must be added to PAP by endorsement
• Benefit amounts such as $25, $50, or $75 may be added

Question 49

Part F: General Provisions of PAP

Answer 49

• bankruptcy of insured doesn’t eliminate insurer obligations
• Changes in the policy must be done by endorsement. General premium changes may be made only on the policy anniversary date. A liberalization clause is included as well. It provides that if the insurer wants to improve the coverage for its policies without increasing the premium, it doesn’t need the approval of the insured.
• Coverage will not be provided where there is fraud on the part of the insured. This would include fraudulent statements or conduct related to an accident or loss.
• The policy states that if the insured does not comply with her duties under the policy, she may take no “legal action against us.” State law may negate this provision.
• Subrogation clause provides insurance company a right to recover payment made for any loss which insured was not ultimately liable
• right regarding termination
• The transfer of the insured’s interest in the policy section emphasizes that a transfer may not take place without the written consent of the insurer. This is an assignment provision (similar to those found in life insurance policies).
• The final subsection describes what happens when two or more policies cover a single automobile and there is a loss. It points out that the maximum benefits paid will be the highest limit provided under either policy, but policy maximums will not be combined.

Question 50

Endorsements for Auto Policy

Answer 50

„ Extended liability coverage is available for various automobiles that would normally be excluded.
„ A named nonowner policy endorsement provides insurance for an individual who does not own a car, but who may borrow one. This provides protection when the owner of the borrowed car may not have any insurance, or may not have adequate insurance.
„ A miscellaneous-type vehicle endorsement extends coverage to motorcycles, motor scooters, and recreational vehicles such as all-terrain vehicles, minibikes, and go-carts, among others. This endorsement modifies the covered auto and covered persons definitions found in the policy.
„ A separate motor home endorsement and a snowmobile endorsement is available when the miscellaneous-type vehicle endorsement is used.
„ Because the PAP is an actual cash value policy and some vehicles would not have adequate coverage under the ACV method, there is a special endorsement for antique and classic automobiles. This is essentially an endorsement for a maximum specified value. Taking into consideration the condition and depreciation of the vehicle, the policy provides for payment of the lesser of – the stated amount, – the ACV, or – the cost of repair or replacement.

Question 51

Business Insurance Packages - 4 approaches

Answer 51

1) Combination of monoline forms, which are insurance policies that cover only one type or limited number of types of loss
2) packaged coverage policies
3) commercial package policy (CPP) for large businesses
4) Business owner’s policy (BOP) for smaller businesses

Question 52

7 broad categories of coverage for comprehensive coverage for business

Answer 52

• commercial property insurance
• boiler and machinery insurance
• transportation insurance
• crime insurance
• commercial liability insurance
• commercial auto insurance
• worker’s comp & employer’s liability insurance

Question 53

Packaged Coverage Products for Businesses - include following forms on contract

Answer 53

• common declarations form: This contains information about the insured, policy date and term, and the premium for applicable coverages.
• common policy conditions form: This contains provisions common to most types of coverage. It includes provisions concerning changes to the policy, examination of books and records, inspections and surveys, premiums, and transfer of rights and duties.
• Common Conditions Form: This contains provisions peculiar to this type of coverage. It includes provisions concerning concealment, control of property, insurance under two or more coverages, legal action against the insurer, liberalization of coverage, no benefit to bailee, other insurance, policy period, coverage territory, and transfer of rights of recovery.
• Exclusions

Question 54

Business Owner’s Policy (BOP) - Four Parts & general characteristics

Answer 54

• Part One: Business owner’s policy conditions
• Part Two: Business Owner’s Property Coverage
• Part Three: Business Owner’s Causes of Loss and Exclusions
• Part Four: Business Owner’s Liability Coverage
• Covers both property and liability coverages. No specific standard package.

Question 55

Commercial Package Policy (CPP)

Answer 55

The commercial package policy (CPP) operates in a similar fashion to the BOP. It is a package of monoline forms that can be modified (to some extent) as needed by the individual company (which typically will be larger than companies using the BOP). The CPP usually includes coverage for buildings and contents, along with general liability coverage. Most package prices provide a discount compared with purchasing the same coverages as individual policies. Additional coverages, including commercial automobile exposures, can be added.

Commercial property coverage forms define the property to be insured and describe the additional coverages and coverage extensions that are applicable. (These only apply when the insured complies with the 80% coinsurance requirement.)

Question 56

Commercial Liability Insurance (CGL)

Answer 56

These policies generally protect against nonautomobile liability that does not involve injuries to employees (although coverage can be added that applies to automobile and/or employee liabilities). Most carriers include crime coverage with their standard package, and some automatically include surety coverage.

Question 57

Employer’s Liability Insurance

Answer 57

Employer’s liability insurance may be needed to protect an employer against suits filed by employees. If an employer is a manufacturer of a product that harms an employee and it can be shown that the employer/manufacturer was negligent in producing the product, the employee can bring a suit against the “manufacturer” of the product. The purpose of employer’s liability insurance is to provide protection from these suits.

Question 58

Directors’ and Officers’ Errors and Omissions Insurance

Answer 58

Over the past few years, there has been a significant increase in the number of lawsuits filed against boards of directors and officers of all types of organizations. It is important for you as a planner to encourage every client who may be thus involved to verify that directors’ and officers’ errors and omissions insurance is in place. If it is not, and the organization won’t purchase it, your client may have a significant financial exposure.

Question 59

Employment Practices Liability Insurance

Answer 59

In the past few years there has been an increase of lawsuits dealing with inappropriate employment practices. These include wrongful termination, sexual harassment, and discrimination in the workplace. Employment practices liability insurance provides protection for those losses that occur even when the employer is attempting to prevent the activity that gives rise to the lawsuit. Government-imposed fines and penalties generally are not covered; however, some insurance companies will cover punitive damages. The cost of legal defense typically is included.

Additionally, commercial liability coverages exist to protect against such things as automobile liability, bailee liability, common carrier liability, and general liability.

Question 60

Malpractice Insurance

Answer 60

There is no standard form for malpractice insurance. There are a relatively select group of providers offering this insurance to the medical field, and generally, each of those companies designs its own form. Companies that do offer malpractice insurance provide different forms for various specialties rather than using a one-size-fits-all approach. Interestingly, there is no exclusion for intentional acts with most malpractice insurance. Again, what doctors, dentists, and other medical professionals do intentionally may have an undesirable outcome.

Question 61

Errors and Omissions (E&O) Insurance

Answer 61

When a professional is in a position to cause fiscal (financial) harm (as opposed to physical harm) to a client, those types of liabilities will generally call for the use of errors and omissions insurance rather than malpractice insurance. An accountant, lawyer, insurance agent, stockbroker, or financial planner would use this form of insurance. Very little difference exists between the general structure of this form and malpractice insurance. All of the issues discussed previously also apply to this form of professional liability insurance.

Question 62

Commercial Umbrella Liability Coverage

Answer 62

Umbrella liability coverage is available for businesses to extend and expand coverage, in the same way such policies work for individuals. As with personal umbrella coverage, there is no standard form of commercial umbrella liability policy (also called a blanket catastrophe excess liability policy). Also, like individual umbrella policies, the commercial form requires substantial underlying liability coverage. Generally, if a potential liability exists, the potential source of liability must first be covered by an underlying policy.

Question 63

Worker’s Compensation Insurance

Answer 63

• Benefits are funded through premiums paid by employer
• insurer is the state, and benefits paid are usually percentage of employees’ average weekly pay (s.t. max amounts) for employees injured on job, and these benefits are considered final
• medical benefits paid are not subject to deductibles or coinsurance
• benefits are not taxable income
• death benefits also payable to family members

Question 64

Unemployment Compensation

Answer 64

• Not so much indemnity insurance (to make one whole) as it is in lieu of salary
• Benefits determined by previous wage levels and generally payable for 26 weeks from time individual loses job
• these are fully taxable to recipient
• employer pays tax under Federal Unemployment Tax Act (FUTA) to fund unemployment benefit.
• most states do not require payment of this benefit if the worker has voluntarily left employment status with the employer and is not the subject of a job layoff or job cutback program.