Property insurance basics Flashcards
Fire Protection
Fire is an essential covered peril for property insurance. Nearly all policies will cover damage resulting from a hostile fire, which is a fire that burns outside of its intended boundaries or becomes uncontrollable. Property insurance does not cover damage from a fire that was intentionally set and that stays within its intended boundaries, known as a friendly fire.
Frame
The building has a roof, floor, and supports made of combustible material, usually wood, and combustible interior walls. This construction is typically used for private residences.
Joisted Masonry
The building has exterior walls of masonry (stonework) or fire-resistive construction rated for not less than 1 hour, along with combustible floors and roofs. This construction is typically used for private residences and light retail.
Noncombustible
The building and its walls, floors, and structural framework are constructed of noncombustible materials, typically steel frame. This construction is typically used for warehouses and factories.
Masonry Noncombustible
The building has exterior walls of masonry, typically concrete blocks, and noncombustible floors and roofs. This construction is typically used for shopping centers and low-rise office buildings.
Modified Fire-Resistive
The materials used in the walls, floors, and roof of the building must have a fire-resistive rating of at least 1 hour, but less than 2 hours. This construction is typically used for mid- and high-rise office buildings.
Fire-Resistive
The entire building and roof are constructed of reinforced concrete and steel, and must have a fire-resistive rating of at least 2 hours. This construction is typically used for high-rise office buildings and parking garages.
Theft
is the broadest definition, and it includes any act of stealing, including burglary and robbery
Burglary
is the taking of property from inside the premises, a locked safe, or a locked vault by a person who forcibly enters or exits the property
Robbery
is the taking of property from the care and custody of a person who has been threatened with bodily harm or has been harmed
mysterious disappearance
Sometimes property goes missing and the cause of loss is not known
Unoccupancy
refers to a property that contains personal property, but has no occupant
Vacancy
refers to property that contains no personal property and has no occupants. The Vacancy provision specifies how coverage is affected after an extended period of vacancy, typically for more than 60 days of vacancy.
bailee
is a person or organization that has taken the property of another into their care, custody, or control for servicing, repair, or storage.
bailor
The person who retains the ownership of the property that has been taken into a bailee’s care, custody, or control
direct loss
is one that is the immediate result of a peril
indirect loss
also known as consequential loss, is a consequence of a direct physical loss. Indirect losses refer to financial losses, such as loss of income or additional expenses incurred while property is being repaired
All of the following losses are direct losses, except:
Loss of income
primary cause of loss i
proximate cause
concurrent causation
which says that when two perils simultaneously cause a loss (in other words, both perils are the proximate cause), the insurer must pay for the loss even if one of the perils is excluded by the policy.
Inherent vice
refers to a quality within property that causes it to damage or destroy itself, such as spoiled food, rusting, or wear and tear. Inherent vice is not covered by property policies.
Named perils
coverage is a type of coverage that only provides insurance for the causes of loss that are listed in the policy
Open perils
coverage, also called all-risk coverage, provides insurance for all causes of loss that are not specifically excluded under the policy.
Loss Valuation
A property policy pays for losses based on the valuation method contained in the policy, as specified by the Loss Settlement condition, or the method chosen by the insured in an endorsement added to the policy
Actual Cash Value (ACV)
When losses are settled on an actual cash value basis, the policy will pay for the cost to repair or replace the damaged property at the time of loss, minus depreciation
What calculation is used to determine the actual cash value (ACV) of a loss?
Replacement cost – depreciation = ACV
Replacement Cost
Replacement cost is the full cost to repair damaged property or replace damaged property with property of like kind and quality, at current pricing, without a deduction for depreciation. Many property policies providing loss valuation at replacement value require covered property to be insured to a certain percentage of its replacement value, such as 80%. This loss valuation basis may be available by endorsement for policies that automatically pay losses on an ACV basis.
Functional Replacement Cost
Some properties, like older dwellings or Victorian homes, use outmoded or obsolete materials and construction techniques that would make replacing them in their original condition too cost-prohibitive. These properties are often insured on a functional replacement cost basis, meaning the insurer will pay the cost of replacing the property with its functional equivalent.
Guaranteed Replacement Cost
Policies that pay on a guaranteed replacement cost basis will pay the full cost of replacing the dwelling, even if the amount exceeds the policy limits, which none of the other loss valuation methods will do. Often, this coverage will require that the insured allow the insurer to set the replacement cost and automatically increase it as needed. This coverage is not available in every state or from every insurer.
Agreed Value
Some policies insure covered property for an agreed-upon policy limit that is paid in the event of a total loss, regardless of the actual cash value of the property at the time of loss. This basis is useful for articles that are difficult to replace or value, such as fine arts, paintings, and classic automobiles
valued policies
Policies that are written on an agreed value basis are sometimes
Stated Value
Stated amount valuation means that the insurer bases the policy premium on the insured’s statement of the property’s value
Market Value
Though it is less common than the other valuation methods, some policies will value covered property at the market value, which is the price a willing buyer would pay for property purchased from a willing seller under fair market conditions
Salvage Value
The amount for which property can be sold at the end of its useful life is the salvage value. In property insurance, the salvage value is the scrap value of damaged property.
Replacement cost
the value of replacing property with material of like kind and quality at current prices without deduction for depreciation
Actual cash value
The value of repairing or repacing damaged property at the current replacement cost mnys applicable depreciation
Functional Replacement cost
The cost to replace property that performs the same function with similar efficiency. Replacement property is not identical to the property being replace
specific limit
insures a single item of property for a single limit of insurance. For example, a Dwelling policy insures one dwelling for $100,000
blanket limit
insures multiple items of property for a single amount of insurance that applies to all covered property
Scheduled limits
insure multiple items of property on a single policy with a different limit applying to each item, as scheduled in the Declarations. For example, one Farm policy insures the residential dwelling for $100,000 and a barn for $200,000.
Which of the following best describes scheduled limits of insurance on a property policy?
They insure multiple items of property on a single policy, with a specified limit per item
Deductible
A deductible is a specified amount of each loss that the insured must bear as a way to share the cost of a loss, often applicable to each occurrence. Property insurers typically subtract the deductible from the amount of loss when making the claim payment.
Deductibles are an underwriting tool that the insurer uses to reduce the number of small claims. A large number of small claims may increase the likelihood of moral hazards, increase the financial costs of the policy, or take away from the insurer’s ability to pay larger, more urgent claims. By accepting a larger deductible, the insured’s premium may be reduced.
Deductibles apply to property insurance policies. They typically do not apply to casualty insurance policies.
Coinsurance
Insurance to value is the amount of insurance sufficient to cover a total loss to the insured property. For example, if a home is valued at $500,000, but the owner only carries $300,000 in coverage, it lacks full insurance to value, as the amount of insurance is not enough to cover a total loss. This puts the insured at a greater danger of financial loss in the event of a total property loss.
To encourage insureds to purchase and maintain insurance to value, many property policies include a Coinsurance provision. This provision requires an insured to carry a certain percentage of the property’s total valuation (usually 80%) in order for losses to be paid in full. If the insured carries less than the required percentage, the policy will only pay an amount proportionate to the amount of insurance carried. The coinsurance formula is:
Coinsurance Percentage x Current Replacement Cost = Amount of Insurance Required
(Amount of Insurance Carried ÷ Amount of Insurance Required) x Amount of Loss = Amount Payable before deductible
Coinsurance only applies to partial losses. In the event of a total loss, the policy would pay up to its specified limit of insurance.
Which of the following is not true of coinsurance?
It applies in the event of a total loss
Loss Settlement
This condition specifies which loss valuation method will apply to the property insured under the policy. Though the claim payment will be based on the appropriate valuation method, the insurer will not be liable beyond the actual amount necessary to repair, rebuild, or replace the damaged property. Claim payment is also subject to the appropriate policy limit.
Loss Payment
This condition specifies how the insurer will make payment for loss and what applicable time frames must be honored when submitting claim documents.
Right of Salvage
The right of salvage is the right of the insurer to take possession of damaged property after paying for its loss. The salvage belongs to the insurer.
Abandonment of Property
Abandonment is when the insured surrenders damaged property to the insurer for repair or disposal. Property policies prohibit the abandonment of property, and the insurer will not accept it. Arranging for repair or disposal is the insured’s responsibility, unless otherwise elected.
Mortgage Clause
In property policies, the Mortgage clause specifies how the policy protects a mortgagee’s financial interest. Payment can be made to mortgagees only up to its insurable interest in covered property and in order of precedence. The mortgagee must comply with certain requirements if the insured’s claim is denied and the mortgagee wishes to collect under the policy:
It must pay any premium due under the policy on demand if the insured fails to do so
It must notify the insurer of any change in ownership or occupancy, or any substantial change in risk of which the mortgagee is aware
It must submit a proof of loss to the insurer if the insured fails to do so, typically within 60 days after receiving notice that the insured failed to do so
If the insurer is cancelling or nonrenewing the policy because the insured failed to pay the premium, the insurer must provide the mortgagee advance written notice (typically 10 days’ notice) before cancelling or nonrenewing, giving the mortgagee the opportunity to pay the necessary premium.
The Mortgage clause on a property insurance policy allows the mortgagee to do all of the following, except:
Be the sole recipient of any claim payment
Loss Payable Clause
Similar to the Mortgage clause, the Loss Payable clause designates a loss payee as a beneficiary of the policy. A loss payee is a party that is paid first in the event of a loss to property in which it has insurable interest, such as a creditor, lender, or lienholder.
No Benefit to Bailee
Coverage does not apply if loss payment benefits a bailee. Because bailees are legally responsible for property in their care, property insurance policies exclude coverage for the insured’s property that the bailee must protect and insure. Bailees can insure the property of others in their care, custody, or control using commercial property coverages available to them.
Third party provisions
Must pay premium if insured fails to pay
must notify insurer of change in ownership or occupancy
Must submit proof of loss if unsured fails to
Loss payable clause
for creditors lenders or lienholders with insurable interest in property
allows them to be a beneficiary of the policy
No benefit to bailee
bailee is a person or organization with care, custody or control of property for servicing , repair or storage
Bailees do not benefit from the name insureds policy
need separate policy
Pair or Set Clause
A Loss to a Pair or Set condition describes how the insurer will cover a partial loss to property that comes as a pair or set, such as a pair of earrings or a fine china dinnerware set. The clause recognizes that the value of the pair or set is comprised of the value of each individual part and the value of the pair or set as a whole—the total value is greater than simply the sum of its parts.
In the event of a loss to part of a pair or set, the insurer may eith
Appraisal
Appraisal addresses disputes about the amount of a property loss, and it may be requested by either the insurer or the insured. Each party selects its own appraiser, and the appraisers select an umpire. Agreement by any two parties settles the loss. Each party pays the costs of its own appraiser, and the parties share the cost of the umpire and the appraisal process. Appraisal is not used to determine whether the policy provides coverage for a loss.
Recovered Property
If the insured or insurer recovers lost or stolen property after the insurer has made payment under the policy, that party must notify the other party of the recovery. The insured may keep the claim payment (and give up their right to the recovered property) or retain the recovered property (and return the claim payment). If the insured chooses to retain the recovered property, the insurer will pay for recovery and repair expenses
Standard Fire Policy
The standard fire policy (SFP) of New York is the foundation for almost all property insurance policies issued today. This policy is written based on 165 lines, which are standardized by law to describe coverages. States that use the standard fire policy enforce the requirement that insurers cannot write a property policy that is more restrictive than the 165 lines.
The SFP provides coverage for direct loss resulting from fire, lightning, and the removal of property from premises endangered by fire or lightning.
pro rata liability
As required by the standard fire policy, property policies must use a loss valuation basis that is not more restrictive than:
Actual cash value basis
Which term describes coverage that applies only to loss by the perils stated in a policy?
Named perils
Which of the following statements best describes the Other Insurance condition on a standard property insurance policy, when two separate property policies provide coverage for the same loss?
Each policy pays its pro rata share of the loss
When coverage applies to a property loss by any peril except those that are specifically excluded, the policy is written on which basis?
Open perils
What is the term for a dwelling that is uninhabited, but has household furniture inside?
Unoccupied
A basic form property insurance policy protecting a building and its contents provides which of the following?
Coverage against limited named perils
If the insured and insurer do not agree on the value of a property loss, what condition would apply?
Appraisal
When a property policy values property on a stated value basis, how would the insurer settle a total loss?
The insurer pays the lesser the insured’s reported value of the property and the property’s actual cash value
Which of the following statements about a property policy is false?
The purpose of coinsurance is to have the insured retain part of the risk
Which term describes coverage that applies only to loss by the perils stated in a policy?
Named perils
After a partial loss to property that is included in a set, the insurer may:
Pay the difference between the actual cash value of the property before and after the loss
When property is difficult to replace or value, like fine art pieces, insurers will often use which valuation basis to settle covered losses?
Agreed value
A basic form property insurance policy protecting a building and its contents provides which of the following?
Coverage against limited named perils
After a covered partial property loss, the insured must retain an amount of the loss, and that amount is subtracted from the insurer’s claim payment. This amount is known as:
deductible
An insured’s property is stolen, and the loss is covered by the insurer. A few weeks after the insured receives the claim payment, the stolen property is located and returned to the insured. The insured can:
Keep the claim payment and surrender the returned property to the insurer
An insured has a pair of pearl earrings insured by a property policy. One of the earrings is lost, and the loss is covered by the policy. The claim payment from the insured will equal:
The lost value of the single earring, plus the lost value of the earrings as a pair
Loss of income suffered by a storeowner after their store is destroyed in a fire is considered a(n):
All of the following are methods of loss valuation, except:
blanket value
actual cash value
stated amount
replacement cost
What is the term for a dwelling that is uninhabited, but has household furniture inside?
Unoccupied
The insurer’s promise to pay covered claims within a specified time frame after receiving the sworn proof of loss is included in which section of the policy?
Conditions
An insured has a Homeowners policy, and a mortgage holder is shown in the Declarations. If the insured is denied a claim because they failed to submit a proof of loss, the mortgage holder may still receive loss payment if they do all of the following, except:
Acquire the insured’s financial records and make them available for insurer inspection
Which of the following best describes the situation when a property has neither contents nor occupants?
Vacancy
M owns a building that is insured for $40,000 with an 80% coinsurance requirement. A loss of $10,000 occurs, and the replacement cost of the property at the time of loss is $100,000. How much will be recovered?
5,000
Which of the following methods of writing insurance is used to provide insurance on properties at different locations, using a single policy, and a single limit of insurance?
Blanket
An insured owns a home with a replacement cost of $300,000 and a market value of $250,000. What is the most a valued policy will pay in the event of a total loss without a deductible?
The policy limit
When filing a property insurance claim, the insured is required to do all of the following, except:
Hire an appraiser
An insured puts $50,000 of covered inventory into storage, where the items are later damaged by a covered peril. What provision on the insured’s property policy prevents the storage facility from collecting any payment from the insured’s claim?
A
No Benefit to Bailee
A basic form property insurance policy protecting a building and its contents provides which of the following?
Coverage against limited named perils
