The Property Claims Handling Process

Question 1

3 Types of reports

Answer 1

• Preliminary
• Status (or interim)
• Summarized (or captioned)

Question 2

Preliminary reports

Answer 2

usually filed within the first twenty-four hours or up to seven days following assignment of the claim. They acknowledge receipt of the assignment, inform the insurer about initial activity on the claim, suggest reserves on certain coverages, advise the insurer of coverage questions, and request assistance and guidance from file supervisors as to the handling of coverage questions or any aspect of the claim.

Question 3

Status reports

Answer 3

inform the insurer of a claim’s progress and can be filed periodically, generally every fifteen to thirty days following assignment.

Question 4

Summarized reports

Answer 4

detailed narrative reports that follow an established format. They are usually filed within thirty days of the assignment’s date. Summarized reports are used when the loss size or settlement authority exceeds a set amount, when coverage might be denied, and where arson or insurance fraud is suspected and requires further review.

Question 5

Public adjusters are most often involved in

Answer 5

presenting fire claims to insurers

Question 6

Public adjusters fee

Answer 6

10 to 15% of the amount paid under the policy

Question 7

National Association of Public Insurance Adjusters (NAPIA

Answer 7

The association was founded in 1951 and seeks to establish ethical and professional standards for representing insureds before insurers.

Question 8

Scope

Answer 8

A list of the areas damaged that includes the type of damage, a description of the proposed action to take regarding the damaged property (such as repair, replace, remove, or demolish), and the area’s measurements.

Question 9

The statement usually follows this format:

Answer 9

1 The identity of the insured
2 The ownership of, or interest in, the property
3 The existence of other insurance
4 The existence of mortgages or encumbrances
5 The facts and cause of the loss, including the insured’s whereabouts at the time of loss, the presence of any witnesses, and the involvement of the police or the fire department
6 A description of the damaged property, including the nature and extent of the loss or damage to personal and real property, plus information regarding other losses that the policy might cover, such as loss of rent or business income loss
7 The establishment of a basis for subrogation, including identifying individuals or organizations who might be responsible for the damage

Question 10

obtaining a statement might waive

Answer 10

In some jurisdictions, obtaining a statement might waive the insurer’s rights to an examination of the insured under oath; it might also waive the requirement that the insured file a sworn statement in a proof of loss.

This waiver is based on the theory that the insurer has been fully informed of all the information that would normally be supplied by an insured’s compliance with these conditions. Using a nonwaiver agreement avoids the problem of waiving any conditions.

Question 11

A witness canvass involves

Answer 11

contacting residents of the neighborhood, people living around the insured’s residence, or people or businesses near the loss location

Question 12

A preliminary scope is normally provided to the insurer with initial reports, and

Answer 12

it’s also commonly provided to the contractors that have been asked to submit repair or reconstruction bids

Question 13

When the claim is small or uncomplicated

Answer 13

insured’s statement typically would be waived

Question 14

Origin and cause experts

Answer 14

Experts who independently determine how and where a fire began

Question 15

Salvors

Answer 15

Specialists who separate damaged merchandise from undamaged merchandise, prepare inventories of damaged and destroyed property, and establish values of damaged or destroyed business property.

rarely used on homeowners claims except when the amount of loss is large

Question 16

conducting EUOs in these circumstances:

Answer 16

Coverage might be in question
The amount of loss payable is in dispute
Insurance fraud is suspected

Question 17

Which one of the following statements is true regarding subrogation?

Answer 17

The insurer has a right to recover only the amount that it has paid.

Question 18

Transfer of Rights of Recovery Against Others to Us clause in the Insurance Services Office, Inc. (ISO) Commercial Property Conditions reads:

Answer 18

If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:

1. Prior to a loss to your Covered Property or Covered Income.
2. After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following:
   a. Someone insured by this insurance;
   b. A business firm;
   (1) Owned or controlled by you; or,
   (2) That owns or controls you; or
   c. Your tenant.

This will not restrict your insurance.

Question 19

insurer has a right of subrogation implied in law

Answer 19

regardless of whether the policy expresses such a provision

Question 20

subrogation agreement

Answer 20

require the insured to cooperate with the insurer by executing assignment of rights to the insurer

Question 21

waivers of liability or subrogation

Answer 21

Lease agreements between landlords and tenants
construction contracts
etc.

Question 22

waivers of liability or subrogation

Answer 22

If the insurer has not permitted a release of liability by the insured before a loss and the insured has executed a release or waiver before a loss, the insurer will not be liable for the loss claimed under the policy

Question 23

Amount of Subrogation

Answer 23

The insurer has the right to receive only the amount that it has paid.

Question 24

When insureds retain only a deductible amount

Answer 24

insurers commonly pursue recovery of that deductible amount on their behalf

Question 25

The insurer would have no right of recovery for

Answer 25

losses that the insured retains because of lack of coverage, exclusions, or limitations of coverage under the policy. Thus, both the insurer and insured might have rights to recover damages against a responsible third party.

Question 26

Property Subrogation Arbitration Agreement

Answer 26

insurers would have a means of resolving subrogation matters without resorting to litigation

Question 27

reinsurer needs to be given notice of a potential claim

Answer 27

Many insurers set a threshold of 50 percent of the retention as the point at which the reinsurer needs to be given notice of a potential claim

Question 28

specified perils policy

Answer 28

the claimant has the obligation to determine which peril applies to the damaged property

Question 29

open perils policy

Answer 29

causes of loss to the property are covered unless they are specifically excluded. Therefore, if the insurer wishes to deny coverage for a claim, it must prove that the policy excludes the loss.

Question 30

conditions precedent

Answer 30

Conditions that must be met before a loss occurs

Question 31

conditions subsequent

Answer 31

those that must be met after a loss occurs

Question 32

Real property (realty)

Answer 32

Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land.

Question 33

Personal property

Answer 33

All tangible or intangible property that is not real property.

All construction materials are considered personal property until they are incorporated into a building.

Question 34

Fixture

Answer 34

Any personal property affixed to real property in such a way as to become part of the real property.

Question 35

Trade fixtures

Answer 35

Fixtures and equipment that may be attached to a building during a tenant’s occupancy, with the intention that they be removed when the tenant leaves.

is generally synonymous with “personal property” in insurance policies

Question 36

Improvements and betterments

Answer 36

Alterations or additions made to the building at the expense of an insured who does not own the building and who cannot legally remove them.

All improvements and betterments are fixtures

Question 37

many homeowners policies value

Answer 37

real property (the dwelling and other structures) at replacement cost and personal property at actual cash value

Question 38

Adaptation

Answer 38

If property is incorporated into the building or structure and defines the building or structure, it becomes part of the building for insurance purposes.

Question 39

Intent

Answer 39

The intent to move property from one location to another might qualify an item as personal property even though it is bolted to the structure.

Question 40

In life insurance

Answer 40

the beneficiary must have an insurable interest in the life of the insured when the policy is purchased, but not necessarily at the time of the insured’s death

Question 41

The legal bases for insurable interest include these:

Answer 41

Ownership interest in property

Contractual obligations

Exposure to legal liability

Factual expectancy

Representation of another party

Question 42

Contractual rights regarding people

Answer 42

For example, if Anthony does not pay his credit card debt, the credit card company can bring a claim against Anthony for the outstanding balance on the card. However, the credit card company does not have the right to repossess any of Anthony’s property as payment for the debt.

Question 43

Contractual rights regarding property

Answer 43

For example, if Anthony obtains a mortgage loan in order to buy a house, the mortgageholder can repossess the house if Anthony fails to make his mortgage payments.

Question 44

Factual expectancy

Answer 44

A situation in which a party experiences an economic advantage if an insured event does not occur or, conversely, economic harm if the event does occur.

Question 45

Trustee

Answer 45

Someone who has the legal title to a property but is responsible that it be used, handled, and transferred solely for the benefit of the beneficiary.

Question 46

Bailee

Answer 46

The party temporarily possessing the personal property in a bailment.

Question 47

Bailor

Answer 47

The owner of the personal property in a bailment.

Question 48

Joint Tenancy

Answer 48

each owner, referred to as a “tenant,” owns the entire property and has a right of survivorship.

each tenant has an insurable interest in the property’s full value

Question 49

Tenancy by the Entirety

Answer 49

a joint tenancy between a husband and wife.

Question 50

Tenancy in Common

Answer 50

a concurrent ownership of property, in equal or unequal shares, by two or more owners

tenants in common do not have survivorship rights

combined interests are equal to the property value

Question 51

Tenancy in Partnership

Answer 51

concurrent ownership by a partnership and its individual partners of personal property used by the partnership

partnership and all partners have rights of survivorship

combined interests could be many times the actual property value because each partner, and the partnership, would have an interest worth the entire insurable amount

Question 52

Representation of Another Party

Answer 52

Agents, trustees, and bailees

Question 53

Exposure to Legal Liability

Answer 53

A hotelier has an insurable interest in guests’ property.
A tenant has an insurable interest in the portion of the premises the tenant occupies.
A contractor typically has an insurable interest in a building under construction.

Question 54

the BPP, Building and Personal Property Coverage Form

Answer 54

The Mortgageholders condition applies to covered loss to buildings or structures only. The insurer agrees to pay mortgageholders to the extent of their financial interests in the property and “in their order of precedence, as interests may appear.” Therefore, if a property has a first mortgage and a second mortgage, the insurer will pay the holder of the first mortgage first and the holder of the second mortgage second.

Question 55

ISO Loss Payable Provisions endorsement

Answer 55

The endorsement includes space to describe the property in which the loss payee has an interest and indicates which one of these four provisions applies:

The Loss Payable Clause does not provide any right to the loss payee other than the right to have payment of any loss made jointly to the loss payee and the insured.
The Lenders’ Payable Clause provides that a loss payee whose interest in the insured property is established by written agreements, such as bills of lading or financing statements, receives protection similar to that provided by the Mortgageholders condition.
The Contract of Sale Clause provides that a purchaser or seller has the right to have payment of any loss made jointly to the loss payee and the named insured as their interests may appear.
The Building Owner Loss Payable Clause provides that the owner of a building in which the insured is a tenant can be covered as a loss payee. The insurer further agrees to adjust losses to the described building with the building owner who is shown as loss payee. Any loss payment made to the loss payee will satisfy the insured’s claims against the insurer for the owner’s property. The insurer also agrees to adjust losses to tenants’ improvements directly with the insured unless the lease provides otherwise.

Question 56

ISO Additional Insured—Building Owner endorsement

Answer 56

designating the building owner as an additional named insured under the building insurance purchased by the tenant, using an appropriate additional insured endorsement.

Question 57

mortgage clause

Answer 57

If the insurer cancels the policy for nonpayment of premium, it must give written notice of cancellation to the mortgageholder at least ten days before the effective date of cancellation. If the insurer cancels the policy for any other reason, the mortgageholder must receive thirty days’ notice. If the insurer elects not to renew the policy, it must give the mortgageholder ten days’ notice.

Question 58

The insurer’s right to an EUO

Answer 58

is not waived if the claims representative takes informal statements from the insured as long as the claims representative has issued a reservation of rights letter

Question 59

If this occurs, and if a second chance at the EUO is not possible, the EUO may not be able to take place.

Answer 59

If the demand letter is missing key elements, or if the date, time, or place is unreasonable for the examinee, the demand might not be enforceable

Question 60

EUO examinee must answer

Answer 60

any question relevant to the loss and cannot invoke the Fifth Amendment right against self-incrimination for relevant questions

Question 61

If an examinee does not appear at the EUO’s appointed date and time, the insurer has three options:

Answer 61

Do nothing further. In states in which a claims representative must respond to a proof of loss within a prescribed period, rescheduling may not be an option if the insured has filed a proof of loss.
Send a letter requesting that the examinee contact the claims representative to reschedule the examination.
Send a reservation of rights letter stating that because the examinee failed to appear, coverage for the loss may be denied.

Question 62

Before demanding individual EUO examinations

Answer 62

the claims representative must check the particular insurance policy and law of the applicable state
If the insureds refuse to be examined separately, which occurs sometimes when the law is unsettled, the insurer may file an action with the court for a declaration of the rights of the parties.

Question 63

claims representative can demand an EUO from an insured who is being prosecuted

Answer 63

an insured may refuse to participate in the EUO until after the fraud or arson charges have been decided. When this happens, the insurer could be held liable for bad faith if it refuses to wait and denies the claim because the insured violated the EUO condition. So unless the claims representative’s investigation will be prejudiced by the delay, the claim investigation should be suspended until the insured can cooperate.

Question 64

Detrimental reliance

Answer 64

A situation in which an insured relies on the words or actions of an insurer and that reliance harms the insured’s financial position.

Question 65

Declaratory judgment action (“dec action”)

Answer 65

A legal action in which the insurer (or insured) presents a coverage question to the court and asks the court to declare the rights of the parties under the applicable insurance policy.

Question 66

advance payment receipt

Answer 66

Because the courts have held that payment waives coverage defenses, including the insured’s failure to comply with policy conditions, the insurer must act to avoid a waiver. This is accomplished with an advance payment receipt.

Question 67

Prejudiced (due to late notice)

Answer 67

When an insurer’s ability to investigate, settle, or defend a claim is adversely affected by an insured’s late notice of loss.

Question 68

Homeowners and commercial property policies provide coverage for smoke damage

Answer 68

“including the emission or puffback of smoke, soot, fumes or vapors from a boiler, furnace or related equipment.”1 However, these policies don’t cover smoke, vapor, or gas damage from agricultural smudging or industrial operations.

Question 69

determining whether the damage was caused by lightning or something else

Answer 69

Property policies don’t provide coverage for mechanical breakdown, latent defect, or inherent vice.

Question 70

Commercial property policies exclude explosion of

Answer 70

steam boilers, steam pipes, steam engines, and steam turbines. However, they do provide coverage for damage when such explosions result in fire or when such explosions are caused by burning.

Question 71

A specified perils policy typically includes these three perils that cause water damage:

Answer 71

“Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or automatic fire protective sprinkler system or from within a household appliance”
“Sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, an air conditioning or automatic fire protective sprinkler system, or an appliance for heating water”
“Freezing of a plumbing, heating, air conditioning or automatic fire protective sprinkler system or of a household appliance”

Question 72

exclusion of loss caused by:

(1) Freezing of a plumbing, heating, air conditioning or automatic fire protective sprinkler system or of a household appliance, or by discharge, leakage or overflow from within the system or appliance caused by freezing. This provision does not apply if you have used reasonable care to:

Answer 72

(a) Maintain heat in the building; or
(b) Shut off the water supply and drain all systems and appliances of water. However, if the building is protected by an automatic fire protective sprinkler system, you must use reasonable care to continue the water supply and maintain heat in the building for coverage to apply.

Question 73

ISO Building and Personal Property Coverage Form

Answer 73

also referred to as the BPP, contains a Vacancy condition that may come into play in claims for damage to vacant buildings

The condition states that if the building where a loss occurs has been vacant for more than sixty consecutive days before the loss occurs, the insurer will not pay for any damage caused by sprinkler leakage unless the insured has protected the system against freezing.

Question 74

Clean water

Answer 74

escapes from sources such as broken or leaking pipes, an overflowing sink or tub, or a leaky roof or window

Question 75

gray water

Answer 75

include overflow from dishwashers, washing machines, or toilets; broken aquariums; leaking waterbeds; and stagnant seawater.

Question 76

black water

Answer 76

include sewage, seawater, and water that has collected contaminants by flowing over organic material

Question 77

mold exclusion

Answer 77

Mold is neither a covered cause of loss nor a covered peril under property policies because they have a mold exclusion.

Question 78

Theft Claim index bureaus

Answer 78

National Insurance Crime Bureau (NICB)
National Equipment Register (NER)
Art Loss Register (ALR)

Question 79

Property Claim Services (PCS) of Verisk has defined a catastrophe in the United States, Puerto Rico, and the U.S. Virgin Islands as

Answer 79

an event that causes $25 million or more in direct insured property losses and affects a significant number of policyholders and insurers

Question 80

Violent Crime Control and Law Enforcement Act of 1994

Answer 80

makes insurance fraud a crime when it affects interstate commerce.

Question 81

Federal Mail Fraud Statute

Answer 81

prohibits the use of the United States Postal Service for the purpose of defrauding or obtaining money or property by means of false or fraudulent pretenses, representations, or promises

Question 82

The Racketeer Influenced and Corrupt Organization Act, commonly referred to as the RICO statute

Answer 82

specifies these acts as racketeering activities: arson, theft from interstate shipments, mail fraud, wire fraud, bank fraud, and interstate transportation of stolen vehicles or property. Prosecution under the RICO statute requires at least two acts of racketeering activity

Question 83

Reporting statutes

Answer 83

outline what types of activities must be reported and to which authorities

Question 84

Immunity statutes

Answer 84

grant immunity to those who provide information to public authorities investigating a suspected fraud.

Question 85

Industry resources that are useful in identifying and investigating potentially fraudulent claims include

Answer 85

index systems (or index databases), investigative support organizations, and educational organizations.

Question 86

The Art Loss Register

Answer 86

A private online database of stolen artwork that can aid in its identification and recovery.

Question 87

The National Equipment Register (NER)

Answer 87

A national online database that contains information on heavy equipment, construction equipment, and agricultural equipment. Insureds are encouraged to register their equipment online so that if a piece is stolen, the ownership can be traced. NER also provides a used-equipment search in case the claims rep is trying to find a replacement for a stolen or damaged piece of equipment.

Question 88

The NICB

Answer 88

An organization that works with law enforcement to fight all types of insurance crime, including arson. The NICB’s full-time field agents investigate potential criminal activity in insurance claims. The NICB sponsors a Special Investigations Academy to educate claims personnel in all aspects of fighting fraudulent claims.

Question 89

The Insurance Committee for Arson Control (ICAC)

Answer 89

An organization composed of multiple leading insurers that includes participation from organizations such as the NICB and the Independent Insurance Agents & Brokers of America, Inc. ICAC is an educational and communications organization dedicated to fighting arson. It sponsors an annual national arson investigation training seminar, a training program for claims reps that focuses on the law, investigative techniques, and scientific principles related to fighting arson.

Question 90

The International Association of Arson Investigators (IAAI)

Answer 90

A professional association that grants the Certified Fire Investigator (IAAI-CFI) designation to those dedicated to investigating fire origin and cause and who meet education and experience requirements. It also publishes the quarterly Fire & Arson Investigator journal, which includes articles on the law and investigation of arson, as well as listings for educational programs on arson.

Question 91

Fraud

Answer 91

is a general term that encompasses all types of acts intended to deceive another person

It is an intentional deception, by word, deed, or concealment, meant to cause another to part with something of value or to surrender a legal right

Question 92

Misrepresentation

Answer 92

is representing something that is false as a fact, including statements that are only partially true. For example, an insured could misrepresent his or her loss history by revealing only one loss when several have actually occurred.

Question 93

Incendiary fire

Answer 93

An intentionally set fire.

Question 94

Trailer

Answer 94

Fuel configured in a manner to spread a fire.

Question 95

Signs that a fire was incendiary include

Answer 95

multiple fires; trailers; lack of fuel load; lack of ignition sources; incendiary or delay devices; absence, removal, or replacement of contents prior to the fire; or sabotaged fire protection systems

Question 96

The Building and Personal Property Coverage Form’s Duties in The Event Of Loss condition

Answer 96

“As often as may be reasonably required, permit us to … examine your books and records. Also permit us to … make copies from your books and records.”

Question 97

Functional valuation approach

Answer 97

A valuation method in which the insurer is required to pay no more than the cost to repair or replace the damaged or destroyed property with property that is its functional equivalent.

Question 98

Straight-line depreciation method

Answer 98

An accounting method of calculating depreciation by taking an equal amount of an asset’s cost as an expense for each year of the asset’s expected useful life.

Question 99

Accelerated depreciation

Answer 99

Depreciation that occurs more rapidly when an item is first purchased and then more slowly in subsequent years.

Question 100

Decelerated depreciation

Answer 100

Depreciation that occurs slightly for a given time period and then increases rapidly.

Question 101

Obsolescence

Answer 101

The loss of value caused by changes in technology or fashion.

Question 102

Market value

Answer 102

The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller.

Question 103

Broad evidence rule

Answer 103

A court ruling explicitly requiring that all relevant factors be considered in determining actual cash value.

Question 104

Betterment

Answer 104

In insurance terminology, a common way to explain depreciation is with the word(s)

Question 105

Agreed Value

Answer 105

requires the insurer to pay a previously agreed-upon amount for a total loss of property that is subject to this method

Question 106

Buyback of Surrendered Property provision

Answer 106

stating that the insurer will, at the insured’s request, sell the damaged property back to the insured for a price that the insured and the insurer agree on.

Question 107

pair or set clause

Answer 107

the value of property is severely diminished when part of a set is damaged or lost

Question 108

Selling Price

Answer 108

The BPP states that the value of “stock” the insured has sold but not delivered is its “selling price less discounts and expenses you otherwise would have had.”

Question 109

Annual transit policy

Answer 109

Policy that covers all shipments made or received by the insured throughout a one-year policy period.

Question 110

Trip transit policy

Answer 110

Policy that covers a particular shipment of goods specified in the policy.

Question 111

Improvements and betterments

Answer 111

Alterations or additions made to the building at the expense of an insured who does not own the building and who cannot legally remove them.

If the tenant does not repair or replace the improvements promptly, the tenant’s insurer is obligated to pay only a pro rata portion of the original cost, and the ACV or replacement cost is not relevant to loss settlement.

Question 112

Blanket insurance

Answer 112

Insurance that covers either of the following with one limit of insurance: (1) one type of property in one or more separately rated buildings or (2) two or more types of property in one or more separately rated buildings.

Question 113

Flat policy

Answer 113

A property insurance policy without a coinsurance clause.

Question 114

Agreed Value optional coverage

Answer 114

Optional coverage that suspends the Coinsurance condition if the insured carries the amount of insurance agreed to by the insurer and insured.

Question 115

Businessowners Coverage Form (BCF)

Answer 115

The BCF provision applies only to property insured on a replacement cost basis.

The BCF provision does not apply if the insured chooses to receive an ACV settlement on property that is otherwise covered for replacement cost.

If the limit of insurance on the damaged property at the time of loss is 80 percent or more of the property’s full replacement cost immediately before the loss, the insurer will pay the cost to repair or replace the property, after application of the deductible and without deduction for depreciation, but it will not pay more than the lowest of these three amounts:

The limit of insurance that applies to the lost or damaged property.
The cost to replace, on the same premises, the lost or damaged property with property of comparable material and quality and used for the same purpose. This provision does not require the insured to rebuild on the same premises. But if the insured rebuilds at a new location, the cost is limited to the cost that would have been incurred if the building had been rebuilt at the original location.
The amount that the insured actually spends to repair or replace the lost or damaged property.

If the limit of insurance on the damaged property at the time of loss is less than 80 percent of the property’s full replacement cost immediately before the loss, the insurer will pay the greater of these two amounts, but not more than the limit of insurance that applies to the property:

The ACV of the damaged property.
A proportion of the cost to repair or replace the damaged property, after application of the deductible and without deduction for depreciation. The proportion is the applicable limit of insurance divided by 80 percent of the property’s replacement cost.

Question 116

Building and Personal Property Coverage Form, also referred to as the BPP

Answer 116

Loss payment = ((Amount of Insurance carried/Amount of Insurance required) x Loss) - Deductible
NOTE: “Amount of Insurance required” is usually 80%

Question 117

The insurance-to-value provision contained in homeowners policies

Answer 117

Loss payment =

Limit of insurance/
80% x Replacement Cost x replacement cost of the loss

Question 118

Inflation guard optional coverage

Answer 118

which automatically increases one or more limits shown in the policy declarations by an annual percentage shown in the declarations.

Question 119

A peak season endorsement

Answer 119

that increases the business personal property limit to an amount shown in the endorsement during the period described in the endorsement.

Question 120

A homeowners policy endorsement that increases the policy limits

Answer 120

when there is a total loss to the dwelling and the limit shown in the declarations is insufficient to replace the dwelling. Similar endorsements may be attached to commercial property policies.

Question 121

An additional coverage

Answer 121

such as increased cost of construction, that applies in addition to the policy limit.

Question 122

Valued policy laws

Answer 122

which exist in less than half the states, require insurers to pay the policy limit for a total loss to a covered building.

Question 123

In both commercial and homeowners policies, no deductible applies to

Answer 123

the Fire Department service charge additional coverage.

Question 124

in homeowners policies, no deductible applies to

Answer 124

the credit card, fund transfer card, forgery, or counterfeit money additional coverage.

Question 125

Absorbing Deductible

Answer 125

When the amount of a loss exceeds an applicable limit, the excess amount of the loss that’s not covered can reduce (or “absorb”) some or all of the deductible that would otherwise apply.

Question 126

Special limits of liability

Answer 126

Internal dollar limits on certain specified classes of property that apply regardless of the overall policy limit.

Question 127

Flat deductible

Answer 127

A deductible stated in a specified dollar amount.

Question 128

Percentage deductible

Answer 128

A deductible expressed as a percentage of some other amount, such as the amount of insurance, the covered property’s value, or the amount of the loss.

Question 129

Split deductible

Answer 129

A deductible provision that applies one deductible for most causes of loss but a different, higher deductible for other specified causes of loss.

Question 130

proportional-share method, the pro-rata-share method, or contribution by limits

Answer 130

In addition to loss payment, policy deductibles are proportionally split in cases of overlapping coverage when the two (or more) policies have the same deductible.

If a loss covered by this policy is also covered by:

1. Other insurance, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss

Question 131

primary/excess method

Answer 131

When a policy calls for the primary/excess method to be used and both insurers covering the loss agree which insurer is excess and which is primary, the primary insurer pays first, up to its applicable limit of insurance, and the excess insurer pays the remaining amount of loss, not to exceed its applicable limit of insurance.

If a loss covered by this policy is also covered by:

2. A service agreement, this insurance is excess over any amounts payable under such agreement. Service agreement means a service plan, property restoration plan, home warranty or other similar service warranty agreement, even if it is characterized as insurance.

Question 132

With primary/excess sharing between two insurers, the excess coverage can occasionally pay

Answer 132

the difference in the deductibles under the two policies.

Suppose that ABC Insurance Company’s policy states that its coverage is excess and has a $100 deductible. XYZ Insurance Company’s policy does not have the other-insurance condition, and its policy has a $250 deductible. For a loss, XYZ’s coverage would be primary, and its obligation would be to pay the adjusted claim minus the $250 deductible. ABC’s obligation would be to pay the difference in the deductibles, $250 minus $100, or $150. ABC would be obligated to pay only the difference in the deductibles when, as in this example, ABC’s deductible is smaller than XYZ’s. If XYZ has a smaller or an equal deductible, ABC would have no obligation to pay any part of the claim.

Question 133

What Triggers an Appraisal

Answer 133

The appraisal provision states that either the insured or the insurer may demand an appraisal of the loss—so if either party demands an appraisal, the other party must participate.
However, an insurer that denies coverage altogether waives its right to appraisal.

Question 134

Percentage damage settlements

Answer 134

are often advisable in loss situations where merchandise is only lightly damaged. During these settlements a properly prepared claims rep negotiates a settlement based on the value of the damaged merchandise to the insured. The insured then retains the damaged merchandise and sells it at a reduced price. The insurer benefits from not having to conduct a salvage sale.

Question 135

brands and labels clause

Answer 135

When a label from a popular or prestigious brand is removed from merchandise taken by the insurer as salvage, the value of that salvage to the insurer is reduced.

Question 136

Small Losses

Answer 136

the claims rep should streamline the process by determining, without consulting outside salvors or forensic accountants, an estimate of the insured’s actual loss, and then applying policy conditions to conclude the claim fairly and efficiently.

Question 137

The maximum, or break point, that an insurer should pay if an insured’s merchandise is left with the insured is

Answer 137

40%

Question 138

The maximum, or break point, that an insurer should pay if an insured’s merchandise is left with the insured is

Answer 138

60%

Question 139

Settlement should be made a loss figure between

Answer 139

40% (the least that the merchant would accept) and 60% (the most that the insurer would pay).

Question 140

Replacement cost

Answer 140

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.

Question 141

Trade discounts and allowances

Answer 141

Reductions from the stated purchase price, given by the supplier, for such reasons as purchasing in bulk or paying in a timely manner.

Question 142

Incoming freight charges

Answer 142

The amount that the insured pays to have goods shipped to the insured’s premises from a supplier.

Question 143

A common policy definition of stock

Answer 143

“merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.”

Question 144

the BPP, covers stock on an ACV basis unless both of these statements are true:

Answer 144

The insured has obtained the Replacement Cost optional coverage, which is ordinarily indicated in the policy declarations.
The Including “Stock” option is shown in the declarations.

Question 145

stock that has been sold but not delivered

Answer 145

is covered for its selling price

Question 146

When the insured’s own employees perform handling services

Answer 146

the costs cannot be included in the goods’ replacement cost.

which, they may prefer if they are approaching coinsurance limits

Question 147

Loss leaders

Answer 147

are grocers’ way of enticing customers to come into their stores to purchase temporarily marked down items as well as other goods priced at retail prices.

Question 148

Out-of-sight merchandise

Answer 148

Merchandise that has been damaged beyond recognition.

Question 149

Book value (net depreciated value)

Answer 149

An asset’s historical cost minus accumulated depreciation.

Question 150

Income statement

Answer 150

The financial statement that reports an organization’s profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues.

Question 151

Balance sheet

Answer 151

The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date.

Question 152

Cost of goods sold

Answer 152

An expense representing the cost of merchandise sold to customers during the period.

Beginning inventory
+additions to inventory
=amount that could have been sold during the year
-End inventory (amount NOT sold that year)
=Cost of goods sold

Question 153

Cost-to-sales ratio

Answer 153

Cost of goods sold
/
retail sales

Question 154

Obtaining an accurate ending inventory figure requires a physical inventory, which is not possible for out-of-sight merchandise.

Answer 154

However, the cost of goods sold since the last physical inventory, on December 31, 20X1, can be determined using the retailer’s cost-to-sales ratio and the dollar amount of its retail sales from the date of the last physical inventory to the date of the loss. If retail sales since the last physical inventory were $84,000 and the cost-to-sales ratio is 56 percent, the cost of goods sold for this period is $84,000 × 0.56, which equals $47,040.

Question 155

Determining Book Value

Answer 155

What could have been sold
-what was sold
=what remains in inventory

Question 156

Book Value Method

Answer 156

Beginning inventory
\+Additions to inventory
=Amount that could have been sold
-Cost of goods sold
=Value of inventory remaining on date of loss

Question 157

Methods of Accounting for Salvage Proceeds

Answer 157

Sale on account of insurer
Sale on account of insured
Sale on account of whom it may concern
Sale in which insured coinsures

Question 158

Sale on account of insurer

Answer 158

If the claims rep and insured agree on the merchandise’s full insured value and the insurer pays the insured the agreed amount before the salvage sale occurs, the salvage is sold on account of the insurer. This means that the insurer receives the net sale proceeds for its own account:

Question 159

Sale on account of insured

Answer 159

If the claims rep and the insured agree on the merchandise’s full insured value and the salvage sale occurs before the claim is settled, the salvage is sold on account of the insured. This means that the net sales proceeds are paid directly to the insured. To settle the claim, the insurer then pays the insured the agreed upon full value of the merchandise minus the net sales proceeds that were paid directly to the insured:

Question 160

Sale on account of whom it may concern

Answer 160

If the salvage sale occurs before the claims rep and the insured can agree on the value of the lost or damaged property, the salvage is sold on account of whom it may concern. This method is often used when the damaged items are perishable goods. The net proceeds of the salvage sale are held by the salvor until the claims rep and the insured agree on the merchandise’s full insured value; then the insured receives the proceeds. To settle the claim, the insurer then pays the insured the agreed upon full value of the merchandise minus the net sales proceeds that were paid directly to the insured:

Question 161

Sale in which insured coinsures

Answer 161

Insureds with inadequate limits of coverage and who are required to bear a coinsurance penalty share in net proceeds of the salvage sale in the same percentage as the loss. This is the calculation, assuming a 25 percent coinsurance penalty:

The claims rep should be familiar with the law in the jurisdiction of the claim because the insured may be entitled to first-dollar recovery on salvage, regardless of coinsurance.

Question 162

Peak Season Limit of Insurance endorsement

Answer 162

Endorsement that covers the fluctuating values of business personal property by providing differing amounts of insurance for certain time periods during the policy period.

Question 163

Value Reporting Form

Answer 163

A commercial property form that bases the insured’s premium for business personal property on the values that the insured reports to the insurer periodically during the policy period.

Question 164

Major features of the Value Reporting Form include these:

Answer 164

Reporting requirement
Limit of insurance
Penalties
Treatment of specific (nonreporting) insurance

Question 165

Penalty for Failure to Submit Required Reports on Time

Answer 165

the insurer will pay no more than 75 percent of the amount that would otherwise have been paid

Question 166

If at the time a loss occurs the insured has failed to submit any required report after the first required report has been made

Answer 166

the insurer will pay no more than the values last reported for the location at which the loss occurred.

Question 167

Penalty for Inaccurate Reports

Answer 167

Insurer’s payment (not to exceed limit) =

(value reported/actual value x loss) - deductible

Question 168

Period of restoration

Answer 168

The period during which business income loss is covered under the BIC forms; it begins seventy-two hours after the physical loss occurs and ends when the property is (or should have been) restored to use with reasonable speed. (With regard to extra expense coverage, it begins immediately after the physical loss occurs.)

Question 169

The Business Income insuring agreement in the Business Income (and Extra Expense) Coverage Form contains a definition of “business income” that has two elements

Answer 169

net income

normal operating expenses, including payroll

Question 170

The Business Income and the Extra Expense insuring agreements are subject to a

Answer 170

single limit of insurance

Question 171

Civil Authority

Answer 171

Covers business income loss and/or extra expenses incurred by the insured caused by action of civil authority that does not allow access to the described premises when property at a location within one mile of the described premises is damaged by a covered cause of loss. The coverage time frame is limited.

Question 172

Alterations and New Buildings

Answer 172

Extends business income and extra expense coverage to new buildings or structures, alterations, or additions at the described location.

Question 173

Extended Business Income

Answer 173

Covers business income loss occurring for up to sixty days after the damaged property has been repaired and operations have resumed, but not beyond the date that the insured could have restored its business income to the amount that would have been earned if no direct physical loss had occurred.

Question 174

Interruption of Computer Operations

Answer 174

Pays up to $2,500 in any one policy year for loss of business income resulting from interruption of computer operations under very restricted coverage provisions.

Question 175

The Business Income (and Extra Expense) Coverage Form

The coverage form also grants a Newly Acquired Locations coverage extension, but only if

Answer 175

50 percent or greater coinsurance is indicated in the policy declarations. The coverage amount is limited, and the acquisition and its value must be reported to the insurer within thirty days.

Question 176

The Business Income (and Extra Expense) Coverage Form
The Optional Coverages section of the coverage form includes three optional coverages that the insured can purchase to omit or suspend the Coinsurance condition:

Answer 176

Maximum Period of Indemnity, Monthly Period of Indemnity, and Business Income Agreed Value.

Question 177

The Business Income (and Extra Expense) Coverage Form

A fourth optional coverage, Extended Period of Indemnity

Answer 177

extends the Extended Business Income additional coverage from sixty days to up to two years. A number of time periods are available in thirty-day increments.

Question 178

Amounts of insurance stated in Interruption of Computer Operations and Newly Acquired Locations are payable in addition

Answer 178

to the policy limit.

Question 179

The period of restoration for extra expense coverage under a business income and extra expense form begins

Answer 179

Immediately after the physical loss occurs.

Question 180

Payments made under Civil Authority, Alterations and New Buildings, and Extended Business Income do not increase

Answer 180

the stated policy limit.

Question 181

Owners’ equity (net worth)

Answer 181

The balance sheet value that represents the difference between total assets and total liabilities as of the balance sheet date and that represents the value of the owners’ interest in the business.

Question 182

Cost of goods sold

Answer 182

An expense representing the cost of merchandise sold to customers during the period.

Question 183

Gross profit

Answer 183

An income statement value that represents sales or operating revenue minus the cost of goods sold.

Question 184

Gross margin (gross profit margin)

Answer 184

The percentage of sales remaining after deducting the cost of goods sold from sales, calculated by dividing gross profit by sales.

Question 185

Mark-up

Answer 185

Gross profit expressed as a percentage of cost of goods sold.

Question 186

Depreciation expense

Answer 186

An accounting method that spreads out the expense of a purchase over the life expectancy of the item.

Question 187

Net income

Answer 187

The difference between revenues (such as money received for goods or services) and expenses (such as money paid for merchandise, rent, and insurance).

Question 188

net assets

Answer 188

In a not-for-profit organization, the difference between assets and liabilities

Question 189

Directly showing the purchase of inventory

Answer 189

as periodic lump sums to represent expense on the income statement would skew the income statement because the purchase of inventory and the resale of it are not perfectly timed.

Question 190

Once an item of inventory is sold

Answer 190

its cost appears as an expense on the income statement by operation of the cost of goods sold formula.

Question 191

operating expenses

Answer 191

Expenses must be incurred in the business’s ordinary operations to be recorded as

Question 192

capital expenditures

Answer 192

Purchases of land, buildings, or equipment

These capital expenditures appear on the balance sheet but do not appear as one-time lump sums on the income statement.

Question 193

capital expenditures appear on the income statement gradually over time, normally as a

Answer 193

depreciation expense

Question 194

Depreciation is a common

Answer 194

operating expense

Question 195

Claims representatives must be careful not to confuse

Answer 195

net income (all operating revenue less all operating expenses) with gross profit (all operating revenue less cost of goods sold).

Question 196

Coverage problems or limitations aside, insurance claims convert other types of assets on the balance sheet into

Answer 196

Cash

Question 197

extra expenses

Answer 197

Expenses, in addition to ordinary expenses, that an organization incurs to mitigate the effects of a business interruption.

An extra expense may be covered under an organization’s business income coverage if the extra expense reduces the business income loss, but only up to the amount that the business income loss is actually reduced.

Question 198

Continuing expenses

Answer 198

Expenses that continue to be incurred during a business interruption.

Question 199

If the organization has purchased true extra expense coverage

Answer 199

most extra expenses are covered regardless of whether they reduce the business income loss.

Question 200

Methods for Calculating Business Income Losses

Answer 200

define business income as the sum of the net income (net profit or loss before income taxes) that would have been earned or incurred plus continuing normal operating expenses incurred, including payroll. The same sum can be derived by starting with the gross profit that would have been earned and subtracting noncontinuing expenses.

Question 201

Reconciliation

Answer 201

The process of matching the net income and continuing expenses projections with the actual sales made and expenses incurred during the loss period.

Question 202

Business income insurance

Answer 202

defines business income as the net income that would have been earned had no physical loss occurred plus continuing normal operating expenses incurred, including payroll
Therefore, in a business income claim, continuing expenses are included in the amount of business income loss covered, and noncontinuing expenses are not.

Question 203

Extra Expense

Answer 203

don’t qualify as continuing expenses because they’re incurred as a result of an accidental event, so they aren’t considered normal operating expenses
so they
can’t be included in the amount of business income loss payable under business income coverage.

Question 204

Extra expenses are covered, to differing extents, under these ISO coverage forms:

Answer 204

Business Income (and Extra Expense) Coverage Form (CP 00 30)
Extra Expense Coverage Form (CP 00 50)
Business Income (Without Extra Expense) Coverage Form (CP 00 32)

Question 205

The Insurance Services Office, Inc. (ISO) Business Income (Without Extra Expense) Coverage Form includes

Answer 205

The Expenses to Reduce Loss additional coverage.

up to the amount of income that would have been if no loss

Question 206

In the Insurance Services Office, Inc. (ISO) homeowners policy forms, Coverage D—Loss of Use covers, under a single limit, three types of loss that can occur when a residence can no longer be lived in because of a direct physical loss

Answer 206

Additional Living Expense, Fair Rental Value, and Civil Authority Prohibits Use

Question 207

Civil Authority Prohibits Use

Answer 207

If a civil authority prohibits you from use of the “residence premises” as a result of direct damage to neighboring premises by a Peril Insured Against, we cover the loss as provided in 1. Additional Living Expense and 2. Fair Rental Value above for no more than two weeks.

Question 208

Shipper

Answer 208

The person or organization shipping goods, often the seller of the goods.

Question 209

Consignee

Answer 209

The person or organization that receives property being transported by a carrier.

Question 210

Common carriers

Answer 210

Airlines, railroads, or trucking companies that furnish transportation to any member of the public seeking their offered services.

Question 211

Contract carriers

Answer 211

Carriers that furnish transportation services to shippers with whom they have contracts.

Question 212

Act of God

Answer 212

A natural and unavoidable catastrophe that interrupts the expected course of events.

Question 213

Inherent vice

Answer 213

A quality of or condition within a particular type of property that tends to make the property destroy itself.

Question 214

Bill of lading

Answer 214

A document acknowledging receipt of goods from the shipper, given by the carrier, which includes the terms of the contract of carriage for the goods.

Question 215

Charter

Answer 215

A travel contract in which transportation is temporarily hired for a specific trip.

Question 216

Generally, the party that owns the goods at the time they are damaged

Answer 216

bears the loss

Question 217

A common carrier’s liability for goods shipped in foreign trade to or from the U.S. by sea is specified under the

Answer 217

U.S. Carriage of Goods by Sea Act (COGSA)

Question 218

Domestic shipments over either inland waterways or the coastwise sea lanes by common carrier are subject to another U.S. law,

Answer 218

the Harter Act, unless the carrier and shipper agree to be subject to COGSA.

Question 219

COGSA provides for a package limitation,

Answer 219

which limits the carrier’s liability to $500 for loss to a single package or customary freight unit (such as each metric ton of grain). The Harter Act does not include a package limitation.

Question 220

The liability of air carriers engaged in international service is governed by the rules of

Answer 220

the international Warsaw Convention

Question 221

The bills of lading used for international flights limit the shipper’s recovery for cargo loss to

Answer 221

$9.07 per pound of cargo when no value is declared to the carrier

Question 222

Ex Point of origin

Answer 222

buyer takes delivery of goods at the point of origin specified in the terms

Question 223

FOB Vessel (Free on Board)

Answer 223

Buyer assumes responsibility for loss as soon as the goods are placed aboard the vessel at the port named in the terms

Question 224

FAS Vessel (Free along side)

Answer 224

buyer assumes responsibility for loss as soon as the goods are placed alongside the vessel at the port named in the terms

Question 225

CIF ( Cost, insurance, freight)

Answer 225

seller quotes a price that include the cost of insurance and all transportation charges incurred to the named destination.
The buyer assumes responsibility for loss or damage as soon as the goods are placed into the custody of the ocean carrier or delivered on board the vessel.

Question 226

Motor truck cargo liability policy

Answer 226

Policy that covers a trucker’s liability for damage to cargo of others being transported by the trucker.

Question 227

Released value bill of lading

Answer 227

A bill of lading in which the carrier charges a lower freight rate (called a “released rate”) in return for the shipper’s allowing the carrier to limit its liability for cargo losses.

Question 228

trailer spotting

Answer 228

an insured will leave a trailer (without the truck) at a customer’s location for loading or unloading

Question 229

Contractors equipment floater

Answer 229

A policy that covers mobile equipment or tools while located anywhere in the coverage territory.

Question 230

Constructive total loss

Answer 230

A loss that occurs when the cost to repair damaged property plus its remaining salvage value equals or exceeds the property’s pre-loss value.

Question 231

Builders risk policy

Answer 231

Policy that covers a building in the course of construction, including building materials and supplies while on or away from the building site.

Question 232

Soft costs

Answer 232

Various incidental expenses that may result from physical loss or from a delay in completion of a construction project, such as interest, real estate tax, advertising, architects and engineers fees, and legal and accounting fees.

Question 233

Clerk of the works

Answer 233

An employee of a contractor who has sole responsibility for the daily supervision of each project component to ensure that materials, methodology, and quality of workmanship meet engineering specifications.