Property and Liability Insurance (L3) Flashcards
Risk Management
- Fundamental component of a comprehensive financial plan
- When constructing a plan, major risk exposures must be examined
- Advisor must be knowledgeable about risks associated with both property and liability
Property Insurance
- Provides for losses on
○ Houses
○ Condominiums
○ Automobiles
○ Boats
○ Other property assets
Liability Insurance
Protects individuals against financial losses associated with legal action, generally due to property damage, personal injury, or loss of income
Homeowners and Automobile Insurance
- Package policies that include coverage for both property and liability
- Additional Coverage for personal liability protection, in excess of the liability protection afforded on automobile and homeowner package polices, is available in a Personal Liability Umbrella Policy (PLUP)
Insurance
- An appropriate risk management tool for financial protection against losses associated with one’s…
○ Automobile
○ Home
○ Personal liability due to the loss frequency of loss
AND due to the potential for a very high severity of
loss
Homeowners (HO) Insurance
3 basic forms of coverage
○ Basic Coverage
○ Broad Coverage
○ Open Coverage
Basic Coverage (“named perils”)
○ Protects the home owner from losses associated with 12 named perils:
1. Fire
2. Vehicle (damage caused by vehicles)
3. Lightning
4. Smoke
5. Windstorm
6. Vandalism OR malicious mischief
7. Hail
8. Explosions
9. Riots OR civil commotion
10. Theft
11. Aircraft
12. Volcanic Eruptions
Broad Coverage (“named perils”)
○ Provides protection from losses associated with 18 named perils (includes the 12 “Basic Coverage” perils plus losses associated with these 6 named perils
1. Falling objects
2. The weight of ice, snow, sleet
3. Accidental discharge or overflow of water or
steam
4. Sudden and accidental cracking, burning, bulging
of appliances
5. Freezing of plumbing, heating, air condition, fire
sprinkler system, or appliance
6. Sudden and accidental damage from artificially
generated electrical currents
Open Perils (“all-risks”)
○ Provides protection from losses associated with all perils, except those that are specifically excluded.
○ Open perils policy provides more comprehensive coverage than the basic and broad policies
General Exclusions from Most HO Policies
○ Movement of the ground
○ Ordinance or law regulating the construction, repair or demolition of a building or structure
○ Damage from rising water
○ War
○ Nuclear hazards
○ Power failure caused by uninsured peril
○ Intentional acts
○ Neglect
Rule of Thumb –> covered losses must result from something that is “sudden and accidental”. Losses associated with neglect and intentional acts of the insured are NOT covered
Endorsements (HO Insurance)
○ A supplement to an existing policy that provides additional coverage
○ Some of the perils that are excluded from the standard HO insurance policy can be covered by purhcase of an ENDORSEMENT
○ EXCLUDED perils that may be covered by purchase of endorsement include:
§ Sink hole collapse
§ Earthquake
§ Sewage backup
§ Refrigerated property coverage
Section I Coverages (Property Insurance)
- Coverage A: Dwelling
- Coverage B: Other Structures
- Coverage C: Personal Property
- Coverage D: Loss of Use
Coverage A: Dwelling
○ Pays for repairs and replacement for damage to the house and any attached structures
○ Coverages building materials on the premises
○ Losses are paid on a replacement cost basis
○ Replacement cost is the amount necessary to repair/replace the dwelling with materials of the same or similar quality at current material prices (no deduction for depreciation is taken)
○ Some policies require the insured to carry HO insurance of AT LEAST 80% of the replacement cost of the home to be fully covered for partial losses (coinsurance requirement)
○ If less than 80% of the replacement is carried, the insured receives payment for partial losses calculated as follows:
= (Amount of Insurance Carried / Coinsurance Requirement) x Amount of Loss
Coinsurance Formula (TRICK)
Insurance I have…
DIVIDED by the insurance I should have (80% of replacement cost…
TIMES the loss…
MINUS the deductible…
EQUALS the insurance amount
Coverage B: Other Structures
○ Detached structures on the property are covered by HO Insurance
○ Examples include:
§ Detached garages
§ Greenhouses
§ Storage buildings
○ Typically the limit of this coverage is 10% of the Coverage A limit.
○ Losses to other structures are insured on a replacement cost basis
○ Other structures that are used for business purposes are NOT COVERED under a HO policy.
§ Separate coverage must be obtained for these
structures
Coverage C: Personal Property
○ Includes tangible moveable property owned by the insured
§ Furniture
§ Entertainment equipment
§ Music collection
§ Videos
§ Paintings
§ Books
§ Clothing
§ Etc
○ Typically the limit of this coverage is 50% of the Coverage A limit
○ Losses to personal property are insured on an actual cash value basis
○ A replacement cost endorsement can be purchased to enhance personal property coverage
Personal Property LIMITS
§ $200 - money, bullion, coin collections, and bank notes
§ $1,500 - securities, bills, evidence of debt, airline tickets, and manuscripts
§ $1,500 - theft of jewelry, watches, gems, precious metals, and real furs
§ $1,500 - watercraft, including trailers (not boat affiliated) and equipment
§ $2,500 - theft of firearms
§ $2,500 - theft of silverware, gold-ware, pewter-ware, and similar property
Personal Property Coverage EXLUSIONS
○ Animals, birds, and fish
○ Articles separately described and specifically insured
○ Motorized land vehicles used off premise
○ Property of roomers OR boarders not related to the insured
○ Aircraft and parts
○ Furnishing on property rented out to others
○ Property held as samples, held for sale, or sold but not delivered
○ Business date, credit cards, and fund transfer cards
○ Business property held away from the residence premises
Coverage D: Loss of Use
- Pays for additional living expenses incurred when the insured is unable to occupy the dwelling due to damages caused by a covered peril.
- May ALSO pay for lost rental income during the period in which the property is uninhabitable
- Typically, the limit of this coverage 30% of Coverage A limit for:
○ HO-2
○ HO-3
○ HO-4
○ HO-5 - Limit of this coverage 10% of Coverage A
○ HO-8 - Limit of this coverage 50% of Coverage C
○ HO-6
Section II Coverages (Liability and Medical)
- Coverage E: Personal Liability
- Coverage F: Medical Payments to Others
Coverage E: Personal Liability (damage to others)
○ Pays for claims that result from bodily injury and property damage to others, when the insured or members of the insured’s resident family ARE RESPONSIBLE:
○ MINIMUM coverage is typically $100,000 per occurrence
○ The insurer will also pay for legal defense and settlement costs associated with a claim
Coverage F: Medical Payments to Others
○ Pays ALL necessary medical expenses WITHOUT REGARD TO LIABILITY for others arising out of the insured’s activities, premises, or animals
○ Medical expenses must be incurred within 3 years of the accident
○ Insurance policies limit the amount of medical expenses that are paid. Options vary by insurance company and state
§ $1,000 - $5,000 (Basic Policies)
§ $10,000 (upper limit for some companies
○ DOES NOT pay for medical expense incurred by the insured or a member of the insured’s household UNLESS the member of the household is a residence EE.
Coverage E and F, do NOT pay for injuries/damages:
○ That are expected or intended by the insured
○ Resulting from the insured’s business OR professional activities
○ Resulting from the rental of the premises
○ Arising out of premises the insured owns, rents, or leases to others that have not been declared an insured location
○ Arising out of ownership or use of warcraft, motorized vehicles, and aircraft
○ Caused by war or nuclear weapons on any kind
○ Caused by the transmission of a communicable disease
○ Arising out of sexual molestation, corporal punishment, or physical/mental abuse
○ Arising out of the use, sale, manufacture, delivery, transfer, or possession of a controlled substance other than legally obtained prescription drugs
Homeowners (HO) Insurance Policy Forms
HO-2 Broad Form
HO-3 Special Form
HO-4 Renters Policy
HO-5 Comprehensive Form
HO-6 Condominium Owners Form
HO-8 Modified Coverage Form
HO-2 Broad Form
Provides coverage on a broad perils basis (18 named perils)
HO-3 Special Form
○ Provides Coverage on an “open-perils”, or “all-risks” basis
○ Special form of HO insurance
○ If a specific peril is NOT EXCLUDED from coverage in the policy, the policy covers losses associated with that peril
○ Personal Property coverage under HO-3 policy is still provided on a named perils broad form basis.
HO-4 Renters Policy
○ Provides coverage for RENTERS and TENANTS
○ DOES NOT cover the dwelling or other structures
○ Provides personal liability coverage
○ Provides coverage for personal contents (Coverage C) on a broad perils basis (MINIMUM amount sold is $6,000)
○ Provides for loss of use of the premises (EQUAL to 30% of personal property coverage)
HO-5 Comprehensive Form
○ Provides coverage on an “open perils”, or “all-risks” basis
○ COMPREHENSIVE HO Insurance
○ Very similar to the special form of HO insurance (HO-3), with one major change. An HO-5 policy provides personal property protection on an open perils, instead of a broad perils basis.
HO-6 Condominium Owners Form
○ Provides coverage for condominiums
○ Coverage for inside structure of their unit and all of its contents (the outside structure is owned, maintained and insured by the association)
○ Covers the same perils provided in the HO-2 and HO-4 forms (broad perils coverage)
○ But DOES NOT provide building coverage other than for additions and alterations
○ Like renters’ insurance (HO-4), the MINIMUM amount of personal property coverage (Coverage C) that can be purchased is $6,000
○ Loss of use (Coverage D) is limited to 50% of the Coverage C Limit
HO-8 Modified Coverage Form
○ Modified form policy
○ Provides repair cost coverage (instead of providing replacement cost coverage) for damage to property
○ Provides “functional replacement cost” coverage
○ Typically insures older homes that may be quite expensive to repair if the insurance is required to use original construction materials and workmanship
Automobile Insurance
Personal Auto Policy (PAP) covers liability, property damage, the covered automobile and medical payments that is organized into the following parts:
- Part A - liability coverage
- Part B - medical payments coverage
- Part C - uninsured motorist coverage
- Part D - coverage for damage to the insured’s automobile
- Part E - duties after an accident or loss
- Part F - general provisions
Part A - liability coverage (bodily injury and property damage)
- Liability covers bodily injury and property damage to other for which the insured driver is deemed to be responsible.
- The amount of minimum coverage required to be carried by the insured varies from state to state
○ Most states have split limit policies
○ Some states have combined single limits that cover
both bodily injury and property damage - Split policy
○ The liability for “bodily injury per person/ bodily injury per accident / property damage”
○ 50/100/50
§ $50,000 of bodily injury coverage per person
§ $100,000 of bodily injury coverage per
accident
§ $50,000 of property damage coverage - Combined single limit policy
○ FIXED amount of coverage that the insurance
company pays, whether the loss is attributable to
bodily injury or property damage.
Part B - medical payments coverage
- Provides coverage for medical expenses sustained in an accident
- Extends to the injured insured OR occupants of the insured’s car, regardless of who caused the accident
- Specifies 2 groups of insured persons
○ The insured and family members of the insured
§ Medical payments coverage if hurt while
driving a covered automobile, OR as a
passenger in a covered automobile, OR if
insured as a pedestrian when struck by an
automobile
○ Other persons who occupy the insured’s covered
automobile
§ Medical payments coverage if hurt as a
passenger in the insured’s owned covered
automobile
§ Part B coverage DOES NOT extend to
passengers if a non-covered automobile driven
by the insured - Medical payments coverage limits are SIGNIFICANTLY LESS than liability limits
Part C - uninsured (under-insured) motorist coverage
○ Referred to as UM or UIM coverage
○ If the UM or UIM party is at fault, this coverage will pay the property damage or bodily injury of the insured who carries this type of coverage
Part D - coverage for damage to the insured’s automobile
- Comprehensive and collision coverages are designed to repair/replace the insured’s automobile when it is damaged
- Collision Coverage
○ Pays if the automobile is damaged in an accident
with another vehicle OR an object such as a fence,
tree, garage door, lake, etc.
○ Also covers damage resulting from a single-car
accident that involves the automobile rolling over
which might be due to ice on the road or happen in
heavy rain - Comprehensive Coverage
○ Helps pay repair/replace a vehicle that is stolen OR
is damaged in an incident that is NOT a collision.
○ Defined as “other than collision coverage” and
provides coverage for insured automobiles damaged
by perils that are NOT considered collisions
including:
§ Fire
§ Theft
§ Vandalism
§ Weather-related (falling tree, flood,
earthquake, hurricane, sinkhole)
§ Running into animals
§ Riots
§ Falling objects
- An automobile insurance policy covers the insured driving in any US state and Canada.
- However, the same policy DOES NOT cover the insured in Mexico as Mexico does not recognize US automobile liability policies
- EXLUSIONS include:
○ Intentional acts
○ Normal wear and tear
○ Losses resulting from violations of the law
○ Losses that are catastrophic to the insurer (nuclear
war)
○ Some exposures that require an additional
premium - Common Limitations/Exclusions to an automobile
insurance policy are:
○ Named Driver. Some policies only cover household
residents specifically named in the policy
○ Excluded Driver. Excludes persons specifically
named in an endorsement attached to the policy
○ Intentional Acts. Excludes coverage for losses by
intentional acts
○ Racing. Coverage is excluded if the auto is used in
a racing event
○ Vehicles with fewer than four wheels are NOT
covered. - Premiums
○ Following factors affect premiums:
§ Age for younger drivers
§ Marital status
§ Credit score
§ Driving record and claims history
§ Location where the car is kept
§ Type of car
§ Use of the car and mileage
§ Possibly the credit score of the insured
§ Policy coverage and deductibles
Legal Liability
- Categories of legal liability to which individuals are exposed are:
○ Torts (civil wrongs)
○ Breach of contracts
○ Criminal offenses - Liability insurance covers certain classes of TORTS, but is DOES NOT cover breaches of contracts or criminal offenses
- If an individual is liable for civil wrong, that cause injury to another, the individual is required to make RESTITUTION.
3 General Types of TORTS
○ Intentional Interference
○ Strict and absolute liability
○ Negligence
Intentional Interference
- An intentional act committed against another that causes injury liability insurance policy.
○ Intentional criminal acts are generally not covered under liability insurance policy.
○ Slander and Libel (while intentional act) are usually covered under personal liability insurance policy.
○ Slander - defamation or harm caused by verbal statements
○ Libel - defamation caused by a written statement
Strict and absolute liability (workers compensation)
- Occurs as a result of legislation in which one party is held legally liable REGARDLESS of who is responsible for the injury.
- Responsible parties have few defenses (Absolute liability = responsible parties have NO defense)
Negligence
- An act or failure to act with appropriate care, and bodily injury or property damage results from such actions or inactions
- “Prudent Man” standard - used to determine whether an individual has acted with appropriate care.
○ Met if a reasonable person confronted with the
same circumstances would have performed the
same acts - Direct Negligence
○ Acts or omissions directly attritable to an individual - Vicarious liability
○ An individual is held at least partially responsible
for negligent acts performed by someone else.
Defenses of Negligence
- Assumption of the risk
○ The injured party fully understood and recognized the dangers that were involved in an activity and voluntarily chose to proceed.
○ NOT available in all states - Negligence on that part of the injured party
○ Contributory negligence, in which there is evidence that the injured party DID NOT look out for his own safety.
○ Contributory Negligence theories often result in the entire action failing
○ Contributory negligence, in which the amount of damage is adjusted to reflect the injured party’s proportion of contribution to the cause of the injury - “Last clear chance” rule
○ States that a claimant who is endangered by his own negligence may recover if the defendant has a “last clear chance” to avoid the accident and failed to do so.
Personal Liability Insurance (PLP) and Personal Liability Umbrella Policy (PULP)
- Most people have liability insurance as part of their PAP and HO policy.
- PLUP provides an additional layer of protection after the underlying liability limits on a PAP or HO policy have been exhausted
- 2 important factors:
○ Earning power
○ Net worth - PLP or PULP is used to provide protection for those higher types of claims
- PULP will not be used WITHOUT the PULP carries insisting on certain level of underlying liability coverages for both auto and home
- PULP policy supplements the underlying liability coverages on auto and home (or renters) and usually provides $1M or more in coverage
- PULP do NOT cover ALL liabilities
○ Criminal acts and Intentional acts are NOT covered
○ Slander and Libel are the exceptions (COVERED)
Business and Professional Property and Liability Insurance
- Business owners and professionals face similar risks to those of individuals, mainly losses from property damages and losses from liability
- Product liability insurance
○ Acts that can expose a company to product liability
include:
§ Manufacturing a harmful product
§ Selling a defective product
§ Packaging the product inappropriately
§ Providing insufficient directions or warnings
for use.
Commercial Package policy (CPP)
- Covers loss of assets from various perils and some liability
- The coverages, similar to HO policies, include basic, broad, or open perils
- DOES NOT cover losses from flood and other exclusions (earth movement)
- A business owner can add an endorsement for business interruption (lost profits)
- Businesses also have Automobile Package Policies (BAP) covering physical damage to autos and liability
Commercial Liability Umbrella Policy (CLUP)
- Businesses often find the need to buy excess liability coverage
- Manufacturers of products may need products liability insurance
