Questions - Chapter 1.2 - The role of Government in the Insurance Industry

Question 1

The conduct of the general insurance industry in Canada is closely supervised and regulated by federal and provincial statutes. Sate what these laws try to ensure.

Answer 1

I) Insurance companies will be financially competent to discharge their obligations.
II) Forms of contracts are drafted fairly.
III) Business is being conducted to the general benefit of the public.

Question 2

List the three main areas of responsibility of the Provincial Superintendent of Insurance.

Answer 2

I) Supervising the terms and conditions of insurance contracts.
II) Licensing insurers, agents, brokers, and adjusters.
III) Monitoring solvency of provincially licensed insurers.

Question 3

State the purpose of the Property and Casualty Insurance Compensation Corporation.
b) What are the amounts that can be claimed under PACICC?

Answer 3

When a bankruptcy occurs and claims cannot be paid, the Corporation pays all valid claims. All participating insurance companies are then charged an assessment to cover the total amount of the claims.

b) A max of $250,000 for all claims arising from a single occurrence. A refund of up to 70% of unearned premiums, subject to a maximum of $700 per policy.

Question 4

Identify the three basic coverages that Insurance Acts state must be in every policy of fire insurance.

Answer 4

I) Fire
II) Lightning
III) Explosion of Natural, Coal, or Manufactured Gas

Question 5

Define “fire”.

Answer 5

Involves the presence of a visible flame or glow. For fire to occur, actual ignition or burning is required,

Question 6

The difference between a ‘friendly fire’ and a ‘hostile fire’.

Answer 6

A friendly fire is one that is contained in its proper receptacle eg, cooking of steaks on a barbecue. A hostile fire is once a fire passes outside the limits assigned to it, eg. fireplace spark catches carpet on fire and spreads.

Question 7

List three other types of losses that are regarded as “fire” losses.

Answer 7

I) Damage caused by water and other extinguishing agents.
II) Physical damage to buildings caused by firefighters.
III) Damage resulting from other actions to prevent the spread of fire.

Question 8

Would lightning damage caused to a building be covered?

b) Would concussion type losses be considered an explosion?

Answer 8

Yes. Every policy which insures against the peril of fire includes coverage for losses caused directly by lightning.

b) The Fire peril is intended to insure explosions caused by the actual ignition of natural, coal or manufactured gas. There’s no coverage for concussion types of explosions as the result of build-up of internal working pressure of items such as hot water heaters.

Question 9

Exclusions are common to all insurance policies and are generally to two types. Identify them.

Answer 9

I) Property excluded

II) Losses Excluded

Question 10

Identify two reasons why exclusions are inserted to remove coverage for property or losses.

Answer 10

I) For which other more specialized coverage forms are available
II) Which are uninsurable.

Question 11

The 14 standard exclusions in fire insurance with the abbreviation ALEC RIC RIC WAM.

Answer 11

A-Application of Heat
L-Lightning Damage
E-Other Electrical Currents
C- Contamination by radioactive material

R-Riot
I-Insurrection
C-Civil Commotion

R-Rebellion, Revolution
I-Invasion
C-Civil War

W-War
A-Act of foreign enemy
M-Military Power

Question 12

Three coverages that insurers provide even though they’re not required to do so by the Insurance Acts.

Answer 12

1) Lightning damage to electrical devices or appliances.
2) Riot.
3) Civil Commotion.

Question 13

In addition to contracts of fire insurance policies, state two other types of policies that are subject to “statutory conditions”.

Answer 13

1) Accident and Sickness Policies

2) Automobile Policies

Question 14

15 Statutory Conditions applicable to contracts of insurance, list them.

Answer 14

1) Misrepresentation
2) Property of Others
3) Change of Interest
4) Material Change
5) Termination
6) Requirements After Loss
7) Fraud
8) Who May Give Notice and Proof
9) Salvage
10) Entry, Control, and Abandonment
11) Appraisal
12) When Loss is Payable
13) Replacement
14) Action
15) Notice

Question 15

Misrepresentation occurs at the time of application.

a) Identify the three forms of misrepresentation.

Answer 15

a) A false description of the property to the prejudice of the insurer.
) Misrepresentation of a material fact.
c) Fraudulent omission of a material fact.

Question 16

Explain the effect of misrepresentation on a Contract of Insurance.

Answer 16

The onus to prove misrepresentation rests with the insurer. The insurer will be able to void the policy if it can prove misrepresentation was directly linked to the loss. Eg. an insured says they have electric heat when in fact they have a wood burning furnace and a fire loss occurs over the defective wood burning furnace.

Question 17

Define “material fact”.

Answer 17

A material fact is a fact which the insurer has determined as crucial in determining:
I) Whether a policy will be issued
II) Amount of premium to be charged.
III) Conditions, if any, to be applied if a policy is issued,

Question 18

List two examples of what might be considered material facts.

Answer 18

Details concerning previous claims and details regarding previous cancellations.

Question 19

A “change of interest” is generally not allowed in fire insurance contracts. State four situations where a change of interest would be allowed.

Answer 19

1) An authorized assignment under the Bankruptcy Act.
2) A change of title by succession.
3) A change of title by operation of law.
4) A change of title of death.

Question 20

A Material Change is any change with the control and knowledge of the insured which I) and II) .

Answer 20

I) Arises after the policy has been issued and,

II) Serves to increase the chance of loss.

Question 21

When a material change is reported to the insurer it may: I) or II).

Answer 21

I) Return the unearned premium and cancel the policy or;

II) Retain the risk and advise the insureds in writing of the additional premium required.

Question 22

Explain the effect an unreported material change may have on a loss.

Answer 22

When a loss arises out of an unreported material change, there’s no coverage provided by the policy. If the insured was not aware of such a change in risk to the insurer, the policy must respond to pay the loss.

Question 23

If an insurer wishes to cancel the policy, they may do so at any time giving the insured written notice giving: I) or ii).

Answer 23

I) 15 days notice of termination by registered mail or;

II) 5 days written notice of termination personally delivered.

Question 24

Any excess premium, or unearned premium, must accompany the notice and will be calculated on what basis?

Answer 24

The Pro rata premium

Question 25

If the insured requests cancellation, any refund of premium will be calculated on what basis?

Answer 25

The Short Rate premium

Question 26

If an insured loss should occur, the insured is required to give notice to the insurer I) and II).

Answer 26

I) Forthwith give notice thereof in writing to the Insurer;

II) Deliver as soon as practicable to the Insurer a proof of loss verified by a statutory declaration.

Question 27

Define Fraud.

Answer 27

A deliberate attempt to deceive, with a view to securing some profit,

Question 28

“Fraud” occurs at the time of loss. What portion of a claim would an insurer be allowed to deny if they were able to prove that the insured committed fraud?

Answer 28

When the insurer is able to prove fraud, it is entitled to deny the entire claim.

Question 29

State two parties who may give notice and proof of loss if the insured is unable or refuses to give notice and proof?

Answer 29

The agent of the Insured named in the contract and a mortgagee.

Question 30

The Insurance Act provides for an “appraisal” in three instances when there is a dispute as to the value of:

Answer 30

I) The value of property insured
II) The property saved
III) The amount of the loss

Question 31

After completion of the loss, how long does the insurer have to pay the loss?

Answer 31

Within sixty days after completion of a proof of loss, unless the contract provides for a shorter period.

Question 32

The insurer, instead of making payment may repair, replace, or rebuild the property giving the insured written notice. If the Insurer elects to repair, how many days written notice must be given to the insured?

Answer 32

Thirty days after receipt of the proof of loss.

Question 33

If the insurer does decide to repair, rebuild, or replace, this must commence within what time period following receipt of the proofs of loss?

Answer 33

Forty five days after the receipt of the proof of loss.

Question 34

When policies insure against a wide range of perils, insurers generally incorporate “Additional Conditions”. List these five conditions.

Answer 34

1) Notice to Authorities
2) Sue and Labour
3) No Benefit to Bailee
4) Pair and Set
5) Parts

Question 35

Explain the requirement placed upon the insured when there has been loss due to certain criminal acts.

Answer 35

The insured shall give immediate notice to the police or other authorities having jurisdiction.

Question 36

When there’s a loss or damage to only one item of a pair or set, the loss is not a total loss. Give an example of a loss to demonstrate your understanding of this condition.

Answer 36

A reasonable and fair proportion of the total value of the set but in no event shall loss or damage be construed to mean total loss of set.

Question 37

List the six other legislated requirements contained in all contracts of fire insurance.

Answer 37

1) Contents of Insurance Policies Legislated
2) Removal Coverage Legislated
3) Limitation of Liability Clauses - Usage Legislated
4) Right of Subrogation Legislated
5) Waiver of Term or Condition
6) Effect of Delivery of Policy

Question 38

List the six details that are to appear on every policy of insurance.

Answer 38

1) Parties to the Contract
2) Policy Period
3) Loss Payables or Payee if any
4) Types of Insurance Coverages and Amounts for Which Insurer May Be Liable
5) Rate and Premium Charged
6) Subject Matter of Insurance

Question 39

Identify three conditions applicable to the “Removal Clause”.

Answer 39

1) This law requires insurers to respond only when “insured property is necessarily removed from the location specified to prevent loss, destruction, or damage or further loss, damage or destruction.
2) The amount of insurance available for any loss to the property while at the unnamed location will be reduced by the amount paid for the loss at the named location.
3) The insurer is obligated to provide coverage at the unnamed location for the least of 7 days or the unexpired term of the policy.

Question 40

What’s the requirement when a contract of insurance contains any clause which allows the insurer to pay an amount which is less than that purchased by the insured?

Answer 40

“This policy contains a clause (s) that may limit the amount payable” will be printed in red ink on the face page of the policy.

Question 41

Identify two types of “limitation clauses”.

Answer 41

1) Deductible clause: The most common is the occurrence basis deductible in which “there is only one deductible applied to the total amount claimed for loss or damage arising out of a single event.” In contrast, the separate item basis deductible clause provides for the application of the deductible to each class of property loss or damaged by a peril.
2) Co-Insurance Clause: When insuring commercial or farming property the insurer requires the insured to purchase an amount of insurance which is a minimum to the equivalent of 80-90% of its value. When the amount is less than the insured is obligated to share in any future loss.

Question 42

Your client has a building valued at $300,000 and insured for $120,000. Assuming a loss of $60,000 and an 80% co-insurance clause, calculate the loss payment.

Answer 42

• Did/**(Should =value x co-insurance requirement) x Loss = Settlement
  $120,00/ ($300,000 x 80%) x $60,0000 = ?
  $120,000 / $240,000 x $60,000 = $30,000
  The insured suffered a penalty of $30,000.

Question 43

Your client has a building valued at $300,000 and insured for $120,000. Assuming a total loss and an 80% co-insurance clause, calculate the loss payment.

Answer 43

$120,000/ ($300,000 x 80%) x $300,000 = ?

Co-Insurance applies to partial losses only. The insured would receive $120,000.

Question 44

By use of example, explain the concept of subrogation.

Answer 44

Subrogation means to put into another’s shoes. The Insurance Acts allow the insurer to place itself in the insured’s shoes in respect of their right to recover the amount of their loss from the responsible party. The action commenced against the responsible party is taken in the insured’s name.

Question 45

Who can make changes to an insurance policy?

Answer 45

Insurance underwriters have the authority to make changes. Its their responsibility to accept or reject risks on behalf of the insurer.