Property and Casualty (Liability) Insurance Basics

Question 1

Property Insurance Contracts

Answer 1

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.

Question 2

Property Policies

Answer 2

cover financial loss related to both real and personal property (buildings and contents)

Question 3

Liability Contracts

Answer 3

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

Question 4

Insurable Interest

Answer 4

is the financial interest a person must have to possess legally enforceable insurance coverage.

Question 5

Insurable interest exists if

Answer 5

the subject property is lost, damaged, destroyed, or stolen and the insured personally suffers a financial loss.

Question 6

Insurable interest includes the notion that

Answer 6

while there is a chance for loss (pure risk), there is no chance for economic gain (speculative risk).

Question 7

Certificate of Insurance (COI)

Answer 7

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.

Question 8

Binders

Answer 8

is temporary coverage that allows that coverage to be put in force by agents with binding authority from an insurance company.

Question 9

Binders terminate for two reasons

Answer 9

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

Question 10

Underwriting

Answer 10

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.

Question 11

A main function of underwriting is

Answer 11

to avoid adverse selection of risks which are risks that have high exposure to loss and, therefore, could undermine the viability of the insurer

Question 12

what do underwriters do?

Answer 12

review and rate risks, which means they determine which risks to insure and what rate to charge.

Question 13

producer

Answer 13

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.

Question 14

standard rates

Answer 14

are the normal average rates assessed on an average risk for coverage.

Question 15

substandard rating

Answer 15

Greater risks are “rated up” in cost; the higher the risk level – the higher the premium rate.

Question 16

the expense ratio

Answer 16

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.

Question 17

the loss ratio

Answer 17

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.

Question 18

the combined ratio

Answer 18

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.

Question 19

rate

Answer 19

is a per-unit pricing mechanism designed to cover the cost of one unit of risk exposure

Question 20

class rating

Answer 20

takes into consideration a group of insureds that have similar loss exposure and are therefore assessed equal premium ratings

Question 21

individual rating

Answer 21

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.

Question 22

judgment rating

Answer 22

is insurance cost rating on a subjective basis determined by how the underwriter is personally influenced.

Question 23

merit rating

Answer 23

g is used especially in the area of auto insurance rating and is based fundamentally on the driving record of the insured.

Question 24

manual ratings

Answer 24

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.

Question 25

loss cost

Answer 25

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

Question 26

loading charges are made up of

Answer 26

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.

Question 27

loss reserve

Answer 27

is the funds a company is required by law to set aside to cover any claims that may be filed.

Question 28

statutory reserves

Answer 28

refer to the minimum amount of cash and securities an insurance company must possess to operate.

Question 29

hazards

Answer 29

creates an increased possibility that a peril (a cause of a loss) will actually occur

Question 30

physical hazards

Answer 30

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

Question 31

moral hazards

Answer 31

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.

Question 32

peril

Answer 32

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.

Question 33

loss

Answer 33

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.”

Question 34

direct loss

Answer 34

results when the property is damaged or destroyed by a peril without any intervening cause. The peril would be the proximate cause

Question 35

concurrent cause

Answer 35

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.

Question 36

concurrent policy

Answer 36

identical coverage under two or more policies written on the same property; usually results in an overlap of coverage

Question 37

non-concurrent policy

Answer 37

coverage of different elements of the same property by two or more insurance policies. The coverage does not overlap.

Question 38

primary insurance

Answer 38

is the first to cover claims.

Question 39

excess insurance

Answer 39

– 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.

Question 40

insurance policy

Answer 40

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.

Question 41

policy application

Answer 41

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.

Question 42

application

Answer 42

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

Question 43

declarations

Answer 43

is the face/first page of the policy

Question 44

the insuring clause

Answer 44

(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.

Question 45

conditions

Answer 45

A policy’s conditions describe the rights and duties of the insurance company and the insureds

Question 46

exclusions

Answer 46

limit the scope of coverage in an insurance contract by specifically listing any causes of loss for which coverage will not exist.

Question 47

exclusions are included in contracts because

Answer 47

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.

Question 48

supplementary coverage

Answer 48

allows insurers to provide limited coverage for property, perils, or other items that are otherwise excluded and not covered by an insurance policy.

Question 49

endorsements

Answer 49

are written additions or changes to an existing contract of insurance currently in force.

Question 50

specific insurance

Answer 50

covers real and personal property at one location.

Question 51

blanket insurance

Answer 51

covers multiple locations under one contract and one set of contract terms.

Question 52

attractive nuisance

Answer 52

is a feature or condition on an insured property that is both hazardous and attractive to children.

Question 53

actual cash value

Answer 53

is the current replacement cost minus depreciation

Question 54

replacement cost

Answer 54

means what the insured property will cost today, brand new at the time of the loss, in order to replace the damaged item.

Question 55

depreciation

Answer 55

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.

Question 56

functional replacement cost

Answer 56

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.

Question 57

market value

Answer 57

is the price a property will sell in the regular marketplace when neither the seller nor the buyer is forced to terms.

Question 58

agreed value

Answer 58

is coverage available through specialty insurance companies

Question 59

stated value

Answer 59

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.

Question 60

valued policy

Answer 60

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.

Question 61

tort

Answer 61

is a civil action involving the wrong of one individual against another

Question 62

simple negligence

Answer 62

is defined as the failure to act in a reasonable or prudent manner

Question 63

gross negligence

Answer 63

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

Question 64

willful and wantan

Answer 64

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.

Question 65

comparative negligence

Answer 65

assigns negligence to the parties involved based on their degree of responsibility for any losses caused by the occurrence under review

Question 66

pure standard states

Answer 66

the injured party collects as a percentage of the negligent party’s responsibility, no matter how low or high.

Question 67

the 49% rule

Answer 67

the injured party cannot collect any amount unless the defendant is at least 51% at fault.

Question 68

the 50% rule

Answer 68

the injured party is only allowed to collect compensation if they are no more than half at fault for their own injuries.

Question 69

contributory negligence

Answer 69

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.

Question 70

assumption of risk

Answer 70

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

Question 71

absolute liability

Answer 71

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

Question 72

strict liability

Answer 72

occurs when a consumer purchases a product and uses it as directed, but the product still injures them.

Question 73

vicarious liability

Answer 73

applies when one person is legally responsible for the actions of another person.

Question 74

damages

Answer 74

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

Question 75

compensatory damages

Answer 75

compensate an injured party for loss caused by an at-fault party.

Question 76

special damages

Answer 76

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

Question 77

general damages

Answer 77

compensate a victim for all the inconveniences associated with their loss and includes the concepts of “pain” and “suffering.”

Question 78

punitive damages

Answer 78

Courts assess punitive damages when a negligent party is guilty of “outrageous” behavior (not quite intentional harm, but very close).