Study 4 - Anatomy of a Property Policy: Overview

Question 1

What are the three main sections of most personal property policies?

Answer 1

1. Declarations or Coverage Summary
2. Policy Wordings
3. Endorsements or Floaters added to the policy

Question 2

Define package policy.

Answer 2

Any insurance policy that covers two or more lines or types of insurance in the same policy. Also known as a multi-peril policy.

Question 3

Define non-package policy.

Answer 3

An example is the Residential Basic Form, for those who prefer policies simpler or more modest than the
popular packages of property and liability insurance.

Question 4

Define subscription policy.

Answer 4

A single policy covering a risk that is divided among a number of insurers; the policy is issued by the “lead” company (usually the one with the largest percentage) and signed by all participating companies.

Question 5

Define multi-limit policy.

Answer 5

Also known as a multi-limit policy: A policy in which an amount of insurance is shown for the dwelling and a separate amount is shown for the personal property.

Question 6

Define single-limit policy.

Answer 6

Shows one amount of coverage encompassing both the building and personal property.

Question 7

What are the 3 key IBC Homeowners forms?

Answer 7

Homeowners Basic Form
Homeowners Broad Form
Homeowners Comprehensive Form

Question 8

How do the 3 main IBC Homeowners Forms differ?

Answer 8

They differ in property perils;

Homeowners Basic Form:

Question 9

What do the 3 main IBC Homeowners Forms have in common?

Answer 9

• Include personal liability insurance.
• The general organization of their coverage.
• The way minimum amounts of insurance are deteremined for each coverage.
• How the premium for them is calculated.

Question 10

Which 3 clauses are common to most property policies?

Answer 10

• Deductible Clause
• Coinsurance
• Special Limits of Insurance

Question 11

What are additional interests?

Answer 11

Parties not listed as named insured but who would be financially prejudiced by the loss or destruction of insured property. Such parties may include the following: loss payees, leaseholders, mortgagees.

Question 12

Explain rateable contribution.

Answer 12

Rateable contribution applies when more than one policy cover the same interest at the time of loss. The deductibles are aministered based on one contract or two or more contracts.

Question 13

What are the steps to reading a policy?

Answer 13

Step 1. Review the definitions clause.
Step 2. Review the property that is covered.
Step 3. Review the perils that are and are not insured against.
Step 4. Review the basis of claim settlement, duties after a loss, and the Statutory Conditions.

Question 14

What is included in the first section Declarations or Coverage Summary?

Answer 14

Encompasses information found on the application for insurance outlining coverage amounts, location of the property, name of the insured, and property insured.

Usually appears first in the policy, showing details that apply to the other forms. Commonly also bears the words “This policy contains a clause which may limit the amount payable” stamped or printed across its face.

Question 15

What is included in the Policy Wordings?

Answer 15

• Preamble describing the general agreements between the insured and insurer
• Definitions of terms found in the policy
• Coverages
• Extensions of coverage
• Exclusions
• Basis of Claim Settlement
• Additional Conditions
• Statutory Conditions

Question 16

What is included in the wording for Floaters and Endorsements?

Answer 16

Additional insurance provided for items that may be limited in coverage, not covered, or excluded from coverage in the policy contract.

Question 17

Define adverse selection.

Answer 17

Occurs when those with higher risks may purchase insurance in greater amounts than those with lower risks. Much of insurance law and practice is designed to control adverse selection. Insurers protect themselves from adverse selection by attempting to measure risk and either charging more for the higher risks or refusing to cover them at all.

Question 18

Why is the deductible clause important?

Answer 18

Small frequent claims are expensive for insurers. To avoid this expense and to reduce premiums for their insureds, insurers introduce a deductible clause.

Question 19

What ways may deductibles be applied?

Answer 19

Separate items: if the total amount of insurance is subdivided into more than one item, the deductible may apply separately to the amount recoverable under each item.

Occurrence basis: The deductible may apply to an occurrence. That is, the deductible may be subtracted from the total amount of loss or damage arising from a single event insured under all items of the policy.

Loss Paid In Full if Over Deductible: The policy may provide that no loss be paid below a specified amount but a loss greater than this amount will be paid in full.

Question 20

Explain the Coinsurance Clause.

Answer 20

A coinsurance clause in a fire insurance policy obliges the insured to maintain a specified minimum amount of insurance in relation to the value of the property insured, or else share with the insurer any partial loss-becoming, in effect, a coinsurer of the loss. Generally, property policies require the insured to an amount of insurance equal to at least 80% of the actual cash value of the property insured.

Question 21

Explain Special Limits of Insurance.

Answer 21

They are used to limit the insurer\s exposure to certain types of personal property that would otherwise be covered under the blanket limit for personal property. The special limits help prevent skewing of the blanket limit by a few high-valued articles. These items can usually be covered under different policy forms.

Question 22

What are the two groups of Special Limits:

Answer 22

Covered for loss caused by any insured peril:

• Business property
• Securities
• Property of a student temporarily living away from home
• Money, including cash cards, or bullion
• Garden-type tractors, including attachments and accessories
• Watercraft, their furnishings, equipment, accessories, and motors
• Computer software
• Spare automotive parts

Covered for loss caused only by theft:

• Jewellery, watches, gems, fur garments, and fur-trimmed garments
• Numismatic property (coin collections)
• Manuscripts, stamps, and philatelic property (stamp collections)
• Collectible cards
• Bicycles, their equipment, and accessories.

Question 23

Explain loss payee.

Answer 23

• Generic term for someone other than the named insured to whom the proceeds of insurance will be paid.
• Most lenders insist on evidence of fire insurance. Rather the issue separate policies to cover the respective interests, it is simpler to issue a single policy in the name of the borrower and include the lender’s interest.
• Any cheque issued by the insured t settle a claim will be drawn jointly in the names of the insured and the loss payee. The parties themselves will determine the disposition of the proceeds to reduce or discharge the loan.
• Only the named insured may instruct the insurer to show loss payable to the lender.

Question 24

What is a chattel mortgage?

Answer 24

A type of mortgage that conveys an interest in property other than land and buildings as security for a debt.

Question 25

What is a Mortgage Clause?

Answer 25

• A mortgage clause creates a separate contract between the mortgage and the mortgagee and so protects the mortgagee even if the named insured is unable to recover because a condition of the policy has been breached.
• A standard mortgage clause devised by IBC was accepted by almost all lending institutions in Canada
• amends Statutory Condition 8 permitting the mortgagee to give notice of loss immediately on becoming aware of it and proof of loss as soon as practicable.

Question 26

What obligations do mortgagees have under the Mortgage clause?

Answer 26

• the mortgagee must notify the insurer immediately on learning of any vacancy or non-occupancy extending beyond 30 consecutive days, any transfer of interest, or any increase in hazard
• mortgagee must pay, on reasonable demand, for any increased hazard from time it existed until policy is cancelled or expires
• mortgagee, having been indemnified for a loss, relinquished to the insurer its rights against the insured-though only to the amount of loss paid to the mortgagee.
• mortgagee’s payment under policy may be limited by amounts payable to mortgagee under other valid insurance.

Question 27

What is the role of Brokers and Agents?

Answer 27

• Obtain all relevant information about the risk from the insured to determine whether the insurer is able to insure the risk.
• Assess the risk and determine what coverage the insured will require
• Complete the application, eliciting all material information from the client and further confirming the risk fits the insurer’s guidelines. If the broker or agent has binding authority, the risk will be bound.
• With the insured’s help, answer any questions the underwriter may have about the insured or the risk.
• Help the insured if a loss is reported.

Question 28

What is the role of Underwriters?

Answer 28

• Review the application to determine whether it meets the insurer’s underwriting guidelines
• Determine that the coverage requested is appropriate for the insured and insurer
• Help the broker or agent with any coverage that needs to be added
• Accept or reject the policy or modify the policy to enable the risk to fit within the insurer’s guidelines.
• When a loss arises, help the broker or agent and the claims department with any questions that may arise. Review the risk in conjunction with any new information supplied by the claims department.

Question 29

What are the steps in Claim Adjustment?

Answer 29

Step 1. Does the loss fall within the policy period?
Step 2. Does the loss fall within the insuring agreement?
Step 3. Do any exclusions apply?
Step 4. Do any endorsements apply?
Step 5. Have all policy conditions been met?
Step 6. Is there a deductible to be applied?
Step 7. How much should be paid?
Step 8. Any other reason not to pay the claim?
Step 9. Pay the claim.
Step 10. Notify the underwriter of any information material to the risk that the insurer may be unaware of.

Question 30

What determines the scope of coverage under a property insurance policy?

Answer 30

It is determined by the interplay of all of it elements, such as perils, hazards and exclusions.

Question 31

Why is the concept of fortuity important in property insurance policies?

Answer 31

Insurable perils are accidental events. The property policy is not intended to be a maintenance policy - intentional acts and expected events such as wear and tear are excluded.

Question 32

How does named-perils coverage differ from all-risks coverage?

Answer 32

• Named perils coverage insures against direct physical loss or damage caused by only the listed perils. The onus is on the insured to prove the loss or damage was cause by an insured peril and that no exclusion of coverage applies.
• All risks coverage insures against direct physical loss or damage cause by any peril, provided that the peril is not excluded. The onus is on the insurer to prove that an exclusion applies, otherwise the physical damage is insured.

Question 33

What are specified perils? How do they differ from named perils?

Answer 33

Specified perils are a set of perils identified, or specified, in an all-risks form as applying to property that would otherwise be covered for all risks. Some of the exclusions that limit coverage are qualified by exceptions to those exclusions in the form of specified perils. The exclusion applies to all losses except a loss that is caused by one of the specified perils. Named perils are insured by the policy.

Question 34

Under what circumstances can loss or damage caused by fire be excluded under a fire insurance policy?

Answer 34

A fire insurance policy may exclude fire if it results from:

• property undergoing a heat process (but resulting damage to other property is covered)
• riot, civil commotion, war, invasion, act of foreign enemy, hostilities, civil war, rebellion, revolution, insurrection, or military power
• radioactive contamination
• deliberated set by an insured (innocent co-insured regulations)

Question 35

What does the term riot mean?

Answer 35

an act or threat of violence by one or more persons who are part of an assembly of three or more persons, which act or threat of violence might give rise to damage to property or injury to persons.

Question 36

Under what named peril(s) in a property policy would coverage be provided for hurricanes and tornadoes?

Answer 36

Windstorm or hail

Question 37

What coverage is typically available for loss or damage caused by earth movement?

Answer 37

Earthquake endorsements.

Question 38

In what ways does the term flood tend to be misused?

Answer 38

People perceive flood to mean any accumulation of large amounts of water in a dwelling - which is not always insurable.

Question 39

What are the two main categories of hazard?

Answer 39

• Physical Hazard: arising from the physical condition or characteristics of the object that is insured
• Moral Hazard: arising from the character, interest, habits and integrity of the insured or person concerned.

Question 40

What are sub-limits, and why might they be included in a property policy?

Answer 40

Since the insurer has no way of knowing what personal property the insured has, the property policy does limit the insurer’s exposure with maximum limits on certain types of property. Sublimits apply only to very specific types of property (for example furs, jewellery, coin collections) and do not address other exposures.