R.M. Ch. 10

Question 1

Basic Parts of an Insurance Contract

Answer 1

• Declarations
• Definitions
• Insuring agreement
• Exclusions
• Conditions

Question 2

Declarations

Answer 2

statements that provide information about the particular property or activity to be insured

Question 3

Examples of Declarations

Answer 3

name of the insured, location of property, period of protection, amount of insurance, premium, deductible

Question 4

Definitions

Answer 4

Provide guidance to insureds and courts about intended meaning of terms used in contract

Question 5

Insuring agreement

Answer 5

summarizes the major promises of the insurer

Question 6

The two basic forms of insurance agreement in property insurance are:

Answer 6

• Named perils policy

* “All-risks”/”open-perils” policy

Question 7

Named perils policy

Answer 7

only those perils specifically named in the policy are covered

Question 8

“All-risks”/”open-perils” policy

Answer 8

all losses are covered except those losses specifically excluded

Question 9

Exclusions:

Answer 9

list of things not covered

o Excluded perils
o Excluded losses
o Excluded property

Question 10

Reasons for exclusions

Answer 10

o Some perils are not commercially insurable
o Extraordinary hazards
o Coverage is provided by other contracts
o Moral hazard concerns
o Coverage not needed by typical insureds

Question 11

Conditions

Answer 11

provisions the insured must follow in order to obtain coverage

Question 12

Examples of Conditions

Answer 12

notification of loss, proof of loss, cooperation with insurer

Question 13

Deductible

Answer 13

an amount subtracted from the total loss payment that otherwise would be payable

Question 14

Purposes of deductibles

Answer 14

o Reduce premiums
o Eliminate small claims
o Reduce moral and morale hazard

Question 15

Straight deductible

Answer 15

insured must pay a certain amount before the insurer makes a loss payment

Question 16

Aggregate deductible

Answer 16

all losses that occur during a specified time period are accumulated to satisfy the deductible amount

o Calendar year deductible

Question 17

Coinsurance clause

Answer 17

o Common in property insurance
o Encourages the insured to insure the property to a stated percentage of its insurable value
o Purpose: to promote equity in rating
o If the coinsurance requirement is not met at the time of the loss, the insured must share in the loss

Question 18

Recovery formula

Answer 18

(Insurance carried)
/
(Coinsurance %) (Property value at time of loss)

x Loss-Dctble

Question 19

Coinsurance Example

Answer 19

•	Policy limit				$200,000
•	Deductible				$0
•	Coinsurance %				80%
•	Loss						$80,000
•	Property value at time of loss	$500,000
•	Recovery=[(200,000)/(.8*500,000)]x80,000
o	= $40,000 
•	What if limit was $400,000?

Question 20

Other-insurance provisions:

Answer 20

prevent profiting from multiple insurance coverage of the same loss (which would violate the principle of indemnity)

Question 21

Pro rata

Answer 21

each insurer’s share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property (Property & Casualty)

Question 22

Primary and excess:

Answer 22

the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted (Liability Insurance)

Question 23

Example: Pro Rata Other Insurance Clause

Answer 23

• Assume a piece of property worth $500,000 is covered under 3 insurance policies

o Company A: $300,000 policy limit
o Company B: $100,000 policy limit
o Company C: $100,000 policy limit

• If a $100,000 covered loss occurs to the property, how much does each policy pay?

Question 24

Example: Pro Rata Other Insurance Clause

Answer 24

Example: Primary and Excess Other Insurance Clause

• Assume you coverage under 2 liability policies
• Company A (primary): $100,000 limit
• Company B (excess): $75,000 limit
• If a covered loss of $150,000 occurs:
• Company A would pay $100,000
• Company B would pay $50,000