Property and Casualty (Liability) Insurance Basics Flashcards
Property Insurance Contracts
are designed to transfer the risk of unexpected financial loss from the property owner to the insured for an exchange of a unit of cost called an insurance premium.
Property Policies
cover financial loss related to both real and personal property (buildings and contents)
Liability Contracts
also called casualty policies, focus on reimbursement to third parties when the insured engages in negligent acts that lead to the third party suffering bodily injury, property damage or personal injury
Insurable Interest
is the financial interest a person must have to possess legally enforceable insurance coverage.
Insurable interest exists if
the subject property is lost, damaged, destroyed, or stolen and the insured personally suffers a financial loss.
Insurable interest includes the notion that
while there is a chance for loss (pure risk), there is no chance for economic gain (speculative risk).
Certificate of Insurance (COI)
is evidence from the insurance company to the insured that insurance has been issued In the amount shown as of the date indicated on the certificate.
Binders
is temporary coverage that allows that coverage to be put in force by agents with binding authority from an insurance company.
Binders terminate for two reasons
Once a written policy is issued, it replaces the binder and * If the company rejects the application, the binder terminates, but coverage exists until the moment of application rejection
Underwriting
have been developed in the industry to ensure that insured risks accepted by carriers create a profitable portfolio of business that matches the goals set forth by insurance companies.
A main function of underwriting is
to avoid adverse selection of risks which are risks that have high exposure to loss and, therefore, could undermine the viability of the insurer
what do underwriters do?
review and rate risks, which means they determine which risks to insure and what rate to charge.
producer
also known as an agent, is responsible for collecting from the applicant a large portion of the information that underwriters will use when determining whether a risk is insurable or not and the price the insurer will charge to accept the risk.
standard rates
are the normal average rates assessed on an average risk for coverage.
substandard rating
Greater risks are “rated up” in cost; the higher the risk level – the higher the premium rate.
the expense ratio
is calculated by dividing the total of all incurred losses (including payments to surplus reserves) by all earned premiums, with the resulting percentage expressing the expense ratio of that carrier.
the loss ratio
compares the total incurred losses of the insurer with the total collected insurance premiums but does not consider the underwriting expenses like the combined ratio does.
the combined ratio
totals an insurer’s losses and expenses (cost to acquire, service, underwrite, and reinsure
10 risks). It divides that total by the cumulative amount of earned premiums, and the percentage calculated equals the combined ratio of that insurance company.
rate
is a per-unit pricing mechanism designed to cover the cost of one unit of risk exposure
class rating
takes into consideration a group of insureds that have similar loss exposure and are therefore assessed equal premium ratings
individual rating
If an insured has a complicated property need, then a specified rating will have to be created by the underwriter to reflect the unique aspects of a single individual risk.
judgment rating
is insurance cost rating on a subjective basis determined by how the underwriter is personally influenced.
merit rating
g is used especially in the area of auto insurance rating and is based fundamentally on the driving record of the insured.
manual ratings
are the rates of premium charge for specific units of insurance that are calculated based on averages of claims data for large numbers in a group referred to as manual rating.
loss cost
sometimes called pure premium, are costs an insurance company must pay for claims and include the expenses of administration and claims investigation and is one of the factors in creating viable premium charges
loading charges are made up of
Cost of acquiring a business, including commission paid to an agent; * Administrative expenses (i.e., office and staff overhead costs); * Surplus calculations for unexpected contingencies; * Premium taxes assessed by various governmental bodies; and * Profit expected or desired by the company.
loss reserve
is the funds a company is required by law to set aside to cover any claims that may be filed.
statutory reserves
refer to the minimum amount of cash and securities an insurance company must possess to operate.
hazards
creates an increased possibility that a peril (a cause of a loss) will actually occur
physical hazards
are physical or tangible conditions existing in a manner that makes a loss more likely to occur. Physical hazards can be seen, touched, tasted, smelled, or tripped over, thus causing loss
moral hazards
is created as a result of the personal or subjective thought process of the insured. It can arise from a state of mind related to the indifference of an insured to whatever loss may occur.
peril
is an immediate, specific event that causes a loss. Examples of perils include but are not limited to fire, lightning, windstorm, hail, earthquake, and flooding.
loss
s defined as an unintended, unforeseen reduction or destruction of financial or economic value. A loss
can be further classified as either a direct loss or an indirect loss. An indirect loss is also known as a
“consequential loss.”
direct loss
results when the property is damaged or destroyed by a peril without any intervening cause. The peril would be the proximate cause
concurrent cause
refers to a loss where two perils are involved at the same time. However, one is a covered peril, and the other is excluded. Generally, in cases of “current causation,” the policy is required to pay the loss.
concurrent policy
identical coverage under two or more policies written on the same property; usually results in an overlap of coverage
non-concurrent policy
coverage of different elements of the same property by two or more insurance policies. The coverage does not overlap.
primary insurance
is the first to cover claims.
excess insurance
– if a primary policy reaches its limit of liability and funds are still required to cover the loss, additional insurers pay the excess amount above the sum paid by the primary insurer.
insurance policy
is defined as a document that details all the terms and conditions of a contract of insurance, including the duties of both the insured and the insurer, as well as the instances that will result in loss payments.
policy application
s a printed form upon which all applicant answers and information is recorded and signed by the applicant, which will be forwarded to the underwriter of a company for evaluation.
application
is an offer by a proposed insured to an insurance company for insurance coverage and, if accepted by the company, will be attached to and becomes part of the policy contract
declarations
is the face/first page of the policy
the insuring clause
(also known as the insuring agreement) is the section of an insurance policy that spells out the specific obligation being assumed or promised by the insurance company on behalf of the insured when a covered loss occurs. The insuring agreement also may state the perils covered, indicating whether they are named or open.
conditions
A policy’s conditions describe the rights and duties of the insurance company and the insureds
exclusions
limit the scope of coverage in an insurance contract by specifically listing any causes of loss for which coverage will not exist.
exclusions are included in contracts because
an insurance company would go bankrupt if it covered every cause of loss. Exclusions are also sometimes present because the type of policy purchased covers one type of loss, while a different type of policy covers a different area of loss.
supplementary coverage
allows insurers to provide limited coverage for property, perils, or other items that are otherwise excluded and not covered by an insurance policy.
endorsements
are written additions or changes to an existing contract of insurance currently in force.
specific insurance
covers real and personal property at one location.
blanket insurance
covers multiple locations under one contract and one set of contract terms.
attractive nuisance
is a feature or condition on an insured property that is both hazardous and attractive to children.
actual cash value
is the current replacement cost minus depreciation
replacement cost
means what the insured property will cost today, brand new at the time of the loss, in order to replace the damaged item.
depreciation
means the use, or wear and tear, that any property experiences over time, which reduces the value of that property because it has been used.
functional replacement cost
requires that a claim be paid based on what the cost to repair or replace is by using common, less expensive building materials to replace old, obsolete, antique, or custom materials or methods which are no longer cost feasible. FRC emphasizes restoring the property to market value because replacement costs would be significantly greater or even impossible to recreate.
market value
is the price a property will sell in the regular marketplace when neither the seller nor the buyer is forced to terms.
agreed value
is coverage available through specialty insurance companies
stated value
means the insurance company accepts the property owner’s stated value of the insured property when the policy is issued but does not issue any formal agreement with that value in the event of a claim.
valued policy
is a legal requirement in some, but not all, states requiring the insurer to pay the full value as stated in the policy declarations in the event of a total loss, even if the actual cash value is less. The law mandates the full amount of coverage to be paid.
tort
is a civil action involving the wrong of one individual against another
simple negligence
is defined as the failure to act in a reasonable or prudent manner
gross negligence
is a more serious act because it involves a reckless disregard for the need to act in a reasonable manner regardless of the potential for harm
willful and wantan
Not only does the negligent individual recklessly disregard reasonable standards of care, but they are aware of the probability that some form of bodily harm or property damage will occur.
comparative negligence
assigns negligence to the parties involved based on their degree of responsibility for any losses caused by the occurrence under review
pure standard states
the injured party collects as a percentage of the negligent party’s responsibility, no matter how low or high.
the 49% rule
the injured party cannot collect any amount unless the defendant is at least 51% at fault.
the 50% rule
the injured party is only allowed to collect compensation if they are no more than half at fault for their own injuries.
contributory negligence
the person pursuing a claim could not hold the other party liable if the court ruled that the claimant had partly contributed to their own injury.
assumption of risk
a party knew of an existing risk and understood injury was possible, yet the injured party went ahead and subjected themself to the risk anyhow
absolute liability
exists when a person subjects another party to a dangerous or hazardous condition present on their property, including the idea of harboring a wild animal on the premises
strict liability
occurs when a consumer purchases a product and uses it as directed, but the product still injures them.
vicarious liability
applies when one person is legally responsible for the actions of another person.
damages
are monetary amounts awarded to an injured party when the action or inaction of a negligent party is found to be liable (responsible) for a loss, which can include harm to people (bodily injury) and/or damage
to property
compensatory damages
compensate an injured party for loss caused by an at-fault party.
special damages
are the actual “out-of-pocket” expenses incurred by an injured party. Special damages include bills from doctors, hospitals, therapists, and even lost wages from the inability to work
general damages
compensate a victim for all the inconveniences associated with their loss and includes the concepts of “pain” and “suffering.”
punitive damages
Courts assess punitive damages when a negligent party is guilty of “outrageous” behavior (not quite intentional harm, but very close).
