TX ALL LINES ADJUSTER COURSE Flashcards
1
Q
WHAT IS THE CONCEPT OF INSURANCE?
A
Through insurance, an individual or group can transfer to an insurance company (“insurer”) the risk of financial loss from a destructive event.
2
Q
WHAT IS THE FUNDAMENTAL PURPOSE OF INSURANCE?
A
The fundamental purpose for insurance is to indemnify policyholders against covered losses, that is, to restore them to the same financial position they were in before the loss.
3
Q
WHAT ARE THE 5 BASICS CONCEPTS OF INSURANCE?
A
- risk
- loss
- exposure
- peril
- hazard
4
Q
WHAT DOES RISK MEAN IN THE INSURANCE WORLD?
A
Risk means the “chance of loss.” The uncertainty of loss is the basic reason for insurance’s existence.
Insurance companies may also use the term “risk” to refer to the insured person, property, or activity.
5
Q
WHAT DOES LOSS MEAN IN THE INSURANCE WORLD?
A
A loss is an unwelcomed and unplanned reduction in economic value.
6
Q
WHAT ARE THE 2 TYPES OF LOSSES IN THE INSURANCE WORLD?
A
A loss can be either direct or indirect
7
Q
WHAT IS A DIRECT LOSS? GIVE AN EXAMPLE
A
A direct loss is the immediate result of an event caused by a covered peril. Ex: Fire
8
Q
WHAT IS AN INDIRECT LOSS? GIVE AN EXAMPLE
A
• An indirect loss is a more remote ramification than a direct loss, but is still a result of loss from a covered peril.Ex: ADDITIONAL LIVING EXPENSES
9
Q
WHAT DOES EXPOSURE MEAN IN THE INSURANCE WORLD? GIVE AN EXAMPLE
A
Exposure is the state of being subject to a possible loss. For example, a motorist is exposed to the risk of being involved in an auto accident that could result in damage to the car, serious injury, lawsuits, or even death.
The term “exposure” also refers to the total extent of risk an insurer faces with an insured. For example, an insurance company that sells workers compensation insurance faces increased exposure as an insured business’s workforce increases.
10
Q
HOW DO INSURERS MEASURE EXPOSURE?
A
Insurers measure exposure by assigning exposure units to the person, property, or event for which insurance is being sought. Exposure units are influenced by the insured item’s market value and risk factors facing it.
11
Q
WHAT IS A PERIL? GIVE AN EXAMPLE
A
A peril is the destructive event that insurance guards against. Examples include: • fire • explosion • windstorm • flood • theft • collision
12
Q
DOES INSURANCE COMPANIES PROVIDE INSURANCE TO ALL TYPE OF LOSSES?
A
An insurance policy provides financial protection against losses caused by specified perils. These are commonly called covered perils.
13
Q
WHAT IS A HAZARD?
A
A hazard is a condition that increases the likely occurrence of a peril or the likely severity of a loss.
14
Q
WHAT ARE THE 3 TYPES OF HAZARDS?
A
MORAL, MORALE AND PHYSICAL
15
Q
WHAT ARE MORAL HAZARDS? GIVE AN EXAMPLE
A
Moral hazards are the tendencies or traits of an individual that increase the chance of a loss. Ex: Alcoholism, smoking, and bad credit
16
Q
WHAT ARE MORALE HAZARDS? GIVE A EXAMPLE
A
Morale hazards are also individual tendencies, but they arise from a state of mind, attitude, or indifference to loss. Not locking one’s car
17
Q
WHAT ARE PHYSICAL HAZARDS?
A
Physical hazards are physical conditions that increase the chance of loss.
18
Q
WHAT ARE LEGAL HAZARDS?
A
Legal or regulatory environment characteristics that affect an insurer’s ability to provide insurance at a premium that fairly reflects its loss exposures.
19
Q
WHAT ARE FIVE WAYS TO MANAGE RISK?
A
- avoiding the risk
- controlling (reducing) the risk
- sharing the risk
- retaining the risk
- transferring the risk
20
Q
WHAT IS RISK AVOIDANCE IN RISK MANAGEMENT? GIVE AN EXAMPLE
A
One way to manage a risk is simply to avoid it. For example, those who do not own a car avoid the risk of having a car being stolen or damaged.
21
Q
WHAT IS RISK CONTROL IN RISK MANAGEMENT?
A
If risk cannot be avoided, it may be controllable through risk prevention or risk reduction measures
22
Q
UNDER THE TERM RISK CONTROL, HOW IS RISK PREVENTION MEASURED? GIVE AN EXAMPLE
A
Risk prevention measures reduce the likelihood that a loss will occur. For example, shoveling snow off a sidewalk makes it less likely a visitor will slip and fall.
23
Q
UNDER THE TERM RISK CONTROL, HOW IS RISK REDUCTION MEASURED? GIVE AN EXAMPLE
A
• Risk reduction measures reduce the severity of any loss that does occur. Having fire extinguishers does not keep fires from starting, but when available and used, they often limit fire damage.
24
Q
WHAT IS RISK SHARING IN RISK MANAGEMENT? GIVE AN EXAMPLE
A
Groups share the financial burden of a loss suffered by any member of the group. EX POOLING IS A MODERN EXAMPLE OF RISK SHARING. Groups of cities or other municipalities may organize a formal arrangement by which they share one another’s losses of a common nature (e.g., flooding) through pooled resources.
25
WHAT IS RISK RETENTION IN RISK MANAGEMENT? GIVE AN EXAMPLE
Risk retention is simply accepting a risk and dealing with a loss using personal funds.
With insurance policies, deductibles are a risk retention device. Deductibles shift small losses to the policyowner, leaving the insurance to cover more serious losses.
26
WHAT IS RISK TRANSFER IN RISK MANAGEMENT? GIVE AN EXAMPLE
Transferring the risk of loss to a third party—is the basis for most insurance today. . In exchange for paying a premium, an individual or business can transfer the risk of loss to an insurance company through an insurance policy.
27
WHAT IS A INSURABLE RISK?
ONLY PURE RISK ARE INSURABLE
28
ARE ALL PURE RISK INSURABLE?
NO, IN ORDER TO BE INSURABLE A RISK MUST CONFORM TO THE FOLLOWING STANDARDS AND REQUIREMENT
1. A covered loss must be definite as to time, cause, and location. It must be clear that a covered loss has occurred.
2. The value of the item to be insured must be measurable. Without this, it would not be possible to determine premium rates and claim amounts.
3. The insured event must be accidental or outside the insured's control. Only losses that occur due to chance are insurable.
4. MUST NOT BE A CATASTROPHIC EVENT SUCH AS, WAR OR MASSIVE EARTHQUAKE
5. The risk must be part of a large group of similar risks that the insurance company can use to predict future losses.
6. Only pure risks (e.g., the risk of a house burning) are insurable; speculative risks are not.
Speculative risks—those that offer the chance of gain as well as loss—are not insurable. It is not insurance’s role to protect a person’s loss in situations where the result may just as easily had been a gain, such as gambling
Pure risk involves only the chance of a loss. Gain is not possible such as the possibility of loss of a home as a result of a fire
29
WHAT DOES ADVERSE SELECTION MEAN? GIVE AN EXAMPLE
Adverse selection means to "select against." It is the tendency of those at greater-than-average risk of loss to seek insurance. In other words, people who are at the greatest risk of loss are also the ones most likely to do whatever is necessary to buy insurance to cover that loss.
30
WHAT IS A IMPORTANT FUNCTION OF THE UNDERWRITING PROCESS?
An important function of the underwriting process is to protect the insurer against adverse selection.
31
WHAT IS THE LAW OF LARGE NUMBERS?
Insurance is largely based on statistics, probabilities, and averages that are wrapped up in the law of large numbers.
32
WHY DO INSURANCE COMPANIES USE THE LAW OF LARGE NUMBERS?
The law of large numbers makes it possible for insurance company actuaries (i.e., insurance mathematicians) to predict losses among a group of similar risks, as long as there are a sufficiently large number of risks to observe.
33
WHAT ARE THE TWO TYPES IF PROPERTY AND CASUALTY INSURANCE?
* stock insurance companies
| * mutual insurance companies
34
WHAT ARE OTHER TYPES OF INSURANCE?
* reciprocal insurers
* fraternal benefit societies
* Lloyd's associations
* self-insurance groups
* captive insurance companies
* risk retention groups
* purchasing groups
* reinsurance companies
35
WHO OWNS STOCK INSURANCE COMPANIES?
Stock insurance companies are owned by stockholders who purchase shares of stock as an investment. If profitable, stock insurance companies may pay stock dividends to their stockholders.
36
WHO OWNS MUTUAL INSURANCE COMPANIES?
Mutual insurance companies are owned by their policyholders.
Mutual companies issue participating policies which distribute the company’s surplus “profit” to policyowners in the form of policy dividends.
37
WHAT IS A COUNTY MUTUAL INSURANCE COMPANY?
AN INSURANCE COMPANY THAT OPERATES IN A LIMITED GEOGRAPHIC AREA. EX: SELLING FARM INSURANCE IN A SMALL GEOGRAPHICAL AREA.
Many county mutuals today sell a wide array of insurance products in broader geographical regions.
38
WHAT IS A RECIPROCAL INSURER OR RECIPROCAL EXCHANGE?
A reciprocal insurer is an unincorporated group of members that insure each other by exchanging contracts of indemnity that obligate them to collectively pay any member’s covered loss. Reciprocal insurance is essentially a form of self-insurance that prefunds coverage of future losses through the members’ premium deposits.
39
WHAT IS A FRATERNAL BENEFIT SOCIETIES AND WHY WOULD THEY NEED INSURANCE?
Fraternal benefit societies are organizations of people who share a common ethnic, religious, or vocational affiliation. They may provide insurance to their members through fraternal insurers whose insureds are usually restricted to members of the society.
40
WHAT IS LLOYD'S ASSOCIATION OR LLOYDS OF LONDON?
One of the world's oldest and best-known insurance organizations—is not an insurance company. A member can be either a person or a company, and each member's liability is limited. It is a forum where brokers may find individuals who are willing to help underwrite complex, unique, and large risks.
41
WHAT IS A SELF INSURER?
Self-insurers are businesses that are financially able to self-fund certain risks. They set aside funds to pay claims as well as the administrative costs of running an internal insurance program.
*Sometimes smaller companies band together to form a self-insurance group through which they provide workers compensation benefits to injured employees. These are "shared-risk" pools, and members of the group are responsible for each other's losses. If the self-insured group has a poor year, group members could be charged an assessment.
42
WHAT IS A CAPTIVE INSURANCE COMPANY? WHAT ARE THE TWO TYPES OF CAPTIVE INSURANCE COMPANIES?
A captive insurance company is an insurance company designed to cover the risks of the "parent" organization(s) that own it:
1. Single-owner captives (or single-parent captives) are owned by a single company for which they provide insurance.
2. Association captives (also known as group-owned captives) are owned by and cover the risks of a group of organizations.
43
UNDER THE CAPTIVE INSURANCE COMPANIES, WHAT IS A RISK RETENTION GROUP AND WHAT ACT WAS IT CREATED UNDER?
RISK RETENTION GROUP WAS CREATED THROUGH THE FEDERAL RISK RETENTION ACT OF 1981 (AMENDED IN 1986), RISK RETENTION GROUPS (RRGs) are a form of captive insurance company that provide their members—who are both the insureds and owners of the RRG—with coverage for all types of liability risks except workers compensation.
44
UNDER THE FEDERAL RISK RETENTION ACT OF 1981 (AMENDED IN 1986), WHAT DID THIS ACT AUTHORIZE?
The federal Risk Retention Act also authorizes the formation of PURCHASING GROUPS As with RRGs, members of a purchasing group must have similar businesses or activities, and one purpose of the group must be the purchase of liability insurance on a group basis.
45
WHAT IS AN REINSURANCE COMPANY?
A INSURERS THAT SHARES THE RISK WITH OTHER INSURERS TO MINIMIZE THE RISK. USUALLY, A FORMAL AGREEMENT IN WHICH BOTH THE RISK AND THE PREMIUM ARE SHARED WITH ONE OR MORE REINSURANCE COMPANY.
46
WHAT IS A CEDING COMPANY OR CEDENT?
INSURER SEEKING TO TRANSFER SOME OF ITS RISK
47
WHAT IS A REINSURING COMPANY?
THE INSURER ACCEPTING SOME OF THE RISK BEING TRANSFERRED
| *The ceding company pays a premium to the reinsurer for its share of coverage.
48
IN A CEDING AND REINSURING RELATIONSHIP, WHAT HAPPENS IN A EVENT OF A LOSS?
When a reinsured loss occurs, the reinsurer pays the ceding company for its share of the claim.When a reinsured loss occurs, the reinsurer pays the ceding company for its share of the claim. The policyowner may never be aware of this arrangement; claims are paid entirely by the ceding company that issued the policy.
49
WHAT ARE 5 OTHER WAYS AN INSURER CAN BE CLASSIFIED?
* commercial versus government insurers
* admitted versus nonadmitted insurers
* domestic, foreign, and alien insurers
* financial strength
* distribution systems
50
WHAT IS AN "COMMERCIAL VS. GOVERNMENT INSURERS"?
The commercial insurance companies discussed so far in this lesson are not the only source of insurance protection in the United States. Several notable state and federal government programs are important sources of insurance protection.
Federal government insurance programs include:
• Social Security Insurance (formally known as Old-Age, Survivors and Disability Insurance, or OASDI)
• Medicare (formally known as Supplemental Medical Insurance, or SMI)
• the National Flood Insurance Program (NFIP)
• crop insurance
• the Federal Deposit Insurance Corporation (FDIC)
State government insurance programs include:
• workers compensation
• unemployment insurance
• state-run medical insurance plans
51
WHAT IS "ADMITTED VS. NONADMITTED INSURER"?
An admitted insurer is a company licensed to do business in the state or country in which it writes applications.
A nonadmitted insurer is an insurance company that is not licensed to do business in a certain state but is authorized to sell surplus lines insurance there.
52
WHAT IS AN UNAUTHORIZED INSURER?
An unauthorized insurer is any organization that presents its products as “insurance” although neither it nor its products have been approved by any department of insurance in the jurisdiction(s) where it operates. In short, unauthorized insurance is fake insurance.
53
WHAT IS A DOMESTIC INSURER?
An insurer is a domestic company in the state where it is domiciled (i.e., headquartered).
54
WHAT IS A FOREIGN INSURERS?
An insurer is a foreign company in every state outside of its state of domicile.
55
WHAT IS AN ALIEN INSURER?
A company that is domiciled outside the United States is an alien company in every U.S. state where it is admitted.
56
WHY IS FINANCIAL STRENGTH IMPORTANT?
An insurance company’s financial strength and ability to pay claims is important to the insurance-buying public and to the state insurance regulators that license and certify it.
57
WHAT IS A DISTRIBUTION SYSTEM?
Insurance companies can be classified by the type of distribution system(s) they use to sell their products. In the property and casualty insurance field, the most common distribution systems are:
• the independent agency system
• the exclusive agency system
• direct marketing (also called direct response)
• insurance brokers
58
WHAT IS AN INDEPENDENT AGENCY SYSTEM?
In the independent agency system, insurers use independent agents who sell insurance on a commission or fee basis for one or more insurance companies. An independent agent retains ownership, use, and control of policy records.
59
WHAT IS A DIRECT MARKETING SYSTEM OR DIRECT RESPONSE MARKETING?
Insurers using a direct marketing system sell insurance directly to consumers through their employees (who must be licensed as producers in the states where their customers reside). Consumer solicitations are made through mass media and social media promotions that invite consumers to contact the insurer directly.
60
WHAT IS THE DIFFERENCE BETWEEN A BROKER AND AN AGENT?
Unlike insurance agents, who legally represent insurance companies, insurance brokers are independent contractors who represent the insurance applicant or policyholder and typically sell products from more than one insurer.
61
How is insurance regulated?
Insurance is a highly regulated business. Government entities enact and enforce laws to regulate the insurance industry for the protection of consumers and for the preservation of the insurance system as a whole.Most insurance regulation is done by the states, not by the federal government (though there are some federal regulations that impact the insurance industry)
*Among other powers, a state's insurance commissioner (also called a director or superintendent) has the authority to conduct hearings, stop insurers and producers from engaging in unfair or unethical activity, or suspend an insurer's or producer’s license to transact business
62
WHAT ARE SOME STATE INSURANCE DEPARTMENT THAT ARE ENGAGED IN REGULATORY ACTITIVIES?
* insurer licensing requirements
* solvency regulation
* investment regulation
* rate regulation
* policy form regulation
* market conduct regulation
63
WHAT HAPPEN WHEN A INSURER IS FOUND TO BEEN ENGAGED IN IMPROPER MARKET CONDUCT?
INSURERS MAY BE SUBJECT TO REGULATORY SANCTIONS
64
WHY IS AN INSURANCE COMPANY FINANCIAL STRENGTH IMPORTANT?
An insurance company’s financial strength and ability to pay claims is important to the insurance-buying public and to the state insurance regulators that license and certify it.
65
WHAT ARE SOME NAME OF ORGANIZATIONS THAT PROVIDE INSURANCE COMPANY RATING SERVICES?
* A.M. Best Company
* Conning & Company
* Demotech
* Fitch Ratings • Moody's
* Standard and Poor's
* Weiss Ratings
66
DO ORGANIZATIONS THAT PROVIDE INSURANCE COMPANY RATING COMPANY RATE THE SAME?
They use different labels and different criteria in determining their rating categories, these rating agencies generally measure insurers' present and future financial strength and claims-paying ability. Grades are assigned to each insurer based on various factors including:
• capital
• liquidity
• management
• competitive advantages
• ability to raise capital to finance strategic plans
*Somewhat like a school report card, grades generally range from A++ (superior) to D (insolvent or in liquidation). The exact grades vary by rating agency.
67
HOW ARE INSURANCE COMPANIES CLASSIFIED? GIVE SOME EXAMPLES
INSURANCE COMPANIES ARE CLASSIFIED BY THE TYPE OF DISTRIBUTION SYSTEM(S) THEY USE TO SELL THEIR PRODUCTS.
The most common distribution systems are:
• the independent agency system
• the exclusive agency system
• direct marketing (also called direct response)
• insurance brokers
68
WHAT IS THE RELATIONSHIP BETWEEN AN INDEPENDENT AGENCY SYSTEM AND INSURERS?
In the independent agency system, insurers use independent agents who sell insurance on a commission or fee basis for one or more insurance companies. An independent agent retains ownership, use, and control of policy records.
69
WHAT IS THE RELATIONSHIP BETWEEN EXCLUSIVE AGENCY AND INSURERS?
In the exclusive agency system, insurers use exclusive agents to sell their products. Sometimes called captive agents, exclusive agents represent a single insurance company or, in some cases, a group of insurance companies under similar management.
70
WHAT IS DIRECT RESPONSE MARKETING OR DIRECT MARKETING SYSTEM? AND HOW ARE CONSUMER SOLICITATIONS MADE?
insurers using a direct marketing system sell insurance directly to consumers through their employees (who must be licensed as producers in the states where their customers reside). Consumer solicitations are made through mass media and social media promotions that invite consumers to contact the insurer directly.
71
WHAT IS A SURPLUS LINES BROKER?
ITS A SPECIAL TYPE OF BROKER THAT PLACES EXCESS AND SURPLUS LINES INSURANCE COVERAGE WITH NONADMITTED INSURERS.
* SURPLUS LINES BROKERS DEAL WITH THE APPLICANT BROKER OR AGENT AND DO NOT DEAL DIRECTLY WITH THE INSURANCE BUYER.
* SURPLUS LINES BROKERS PROVIDE INSURANCE COVERAGE THAT OTHERWISE WOULD NOT BE AVAILABLE IN A CUSTOMER'S RATE
72
WHO MONITORS SALE PRACTICES OF INSURANCE PRODUCERS OPERATING IN THEIR STATE? AND WHAT IS THE PURPOSE?
STATE INSURANCE REGULATORS, THIS help assure consumers are being provided accurate information and treated fairly. Regulators are especially watchful for producers who engage in misrepresentation, deceptive or false advertising, or unfair discrimination.
73
IN RESPECT TO INSURANCE PRODUCERS, WHAT ARE THE TWO TYPES OF LICENSE THEY CAN CARRY IN ORDER TO SELL INSURANCE?
All insurance producers must be licensed in every state where they sell insurance. They must hold a resident license in their home state and a nonresident license in every other state where they transact insurance
74
WHAT ARE SOME DIFFERENCES BETWEEN A RESIDENT LICENSE AND AN NONRESIDENT LICENSE?
* Resident licenses are granted only to applicants who pass a state examination covering insurance fundamentals and state insurance laws. Some states also require resident license candidates to complete a regulator-approved prelicense education program. APPLIES TO THEIR HOME STATE
* Nonresident licenses typically do not require passing an exam or completing an education program, provided the producer is properly licensed in his or her home state. APPLIES TO ANY OTHER STATE THEY TRANSACT INSURANCE IN EXCEPT THEIR HOME STATE
75
WHAT ARE THE FIVE REQUIREMENTS OF A ENFORCEABLE CONTRACT?
* an offer
* acceptance of the offer
* consideration by both parties
* competent parties
* legal purpose
* A CONTRACT IS AN AGREEMENT BETWEEN TWO OR MORE PARTIES
* A contract involves legally binding promises. The party making a promise is known as the promisor and the party to whom the promise is made is known as the promisee.
76
UNDER A LEGAL CONTRACT, WHAT IS A OFFER?
In the typical insurance transaction, the applicant (offeror) makes the offer to the insurance company (offeree) through a signed application plus a premium deposit.
77
UNDER THE LEGAL CONTRACT, WHAT ARE THE INSURERS 3 OPTIONS UNDER THE TERM ACCEPTANCE?
Upon receipt of an application (offer), the insurer (offeree) has three options:
• accept the offer by issuing the policy as applied for, or
• reject the offer by declining coverage, or
• counteroffer by offering the applicant a sub-standard policy (with either a higher premium or reduced coverage)
In the case of a counteroffer it would be up to the applicant to accept or decline the counteroffer.
78
UNDER THE LEGAL CONTRACT, WHAT THE EXCHANGE OF CONSIDERATION GIVEN BY EACH PARTY?
Consideration essentially means something of value given by one party to the other.
With insurance contracts:
• the insurance company's promise to pay benefits as specified in the contract is its consideration
• the applicant's initial premium payment is his or her consideration
79
ALL PARTIES TO A CONTRACT MUST BE DEEMED LEGALLY COMPETENT, WHAT MAKES A PERSON LEGALLY COMPENTENT?
a person must be:
• mentally sound
• not under the influence of drugs or alcohol
• of legal age
An insurance company's competency is based on its being admitted by the state to conduct business and its agents being licensed by the state.
80
UNDER LEGAL CONTRACT, WHY IS LEGAL PURPOSE IMPORTANT?
IT MAKES THE CONTRACT LEGALLY ENFORCEABLE SINCE A CONTRACT MUST SERVE A LEGAL PURPOSE
81
IN THE INSURANCE WORLD, WHAT ARE THE 5 TYPES OF UNIQUE ATTRIBUTES IN THE INSURANCE CONTRACT?
* contracts of adhesion
* aleatory
* personal
* unilateral
* conditional
82
IN THE INSURANCE WORLD, HOW DO CONTRACTS OF ADHESION WORK? AND HOW IS IT DRAFTED? GIVE AN EXAMPLE
With an insurance contract, however, the insurer determines the contract’s terms. It is a take-it-or-leave-it proposition. This is an example of a contract of adhesion.
A contract of adhesion is one that is drafted by one party (the insurer) which the other party (the policyholder) must accept as-is.
An insurance contract is a contract of adhesion written by the insurer. Because applicants for insurance have no input in drafting the contract’s language, courts have ruled that ambiguities in the contract must be interpreted in the policyholder’s favor.
83
IN THE INSURANCE WORLD, WHAT IS AN ALEATORY CONTRACT? GIVE AN EXAMPLE
An aleatory contracts involves an exchange of potentially unequal values. In an insurance contract, a policyholder may receive a benefit that is entirely out of proportion to the consideration (premium) given.
EX: Insurance policies may provide huge benefit payments in proportion to the premiums received.
84
IN THE INSURANCE WORLD, WHAT IS A PERSONAL CONTACT? AND HOW MANY PARTIES ARE INVOLVED?
Property and casualty insurance policies are personal contracts between the insurer and the policyowner.
Because the agreement between these two parties is personal, a property and casualty insurance policy cannot be transferred to a third party without the insurer's consent.
85
IN A INSURANCE WORLD, WHAT IS AN UNILATERAL CONTRACT? GIVE AN EXAMPLE
Insurance contracts are unilateral. In a unilateral contract, only one party makes an enforceable promise. With an insurance policy, only the insurer makes a promise that can be enforced. It promises to pay benefits if an insured loss occurs.
86
IN THE INSURANCE WORLD, WHAT IS AN CONDITIONAL CONTRACT?
An insurance contract is conditional, which means the insurer’s promise to pay benefits is conditional on specified events occurring, including:
• making premium payments when due
• reporting losses promptly
• cooperating with the insurer in settling any loss
87
WHAT HAPPENS IF THERE ARE ANY AMBIGUITIES IN A CONTRACT OF ADHESION?
An insurance contract is a contract of adhesion. As previously mentioned, courts generally interpret any ambiguities in the contract in a way that favors the policyholder, not the insurer.
88
WHAT IS A POSSIBLE OUTCOME IF A POLICY IS CLEAR AND UNAMBIGUOUS?
If a court finds that the policyholder had reasonable expectations of coverage, it may require an insurer to provide the coverage even if the policy wording says something different.
89
WHAT ARE THE TWO TYPES OF INSURANCE CONTRACTS?
Insurance contracts may be either contracts of indemnity or valued contracts.
90
HOW ARE CLAIMS HANDLED UNDER A INDEMNITY CONTRACT?
Under an indemnity contract, when a covered loss occurs, the benefit payable is related to the amount of the loss. The benefit cannot exceed the lesser of:
• the value of the loss or
• the maximum benefit limit specified in the policy
*While most property and casualty insurance policies are contracts of indemnity, some use the agreed value approach, which is a form of valued contract. Valued coverage policies are typically used when it is hard to determine an item’s value, so the insurer and the insured agree on a value when insuring the item and before a loss occurs. The insurer promises to pay the dollar amount specified in the policy when covered property (e.g., a valuable work of art) is stolen or destroyed.
91
HOW ARE CLAIMS HANDLED IN A VALUED CONTRACTS? GIVE AN EXAMPLE OF A VALUED CONTRACT
Life insurance policies are valued contracts. The insurer agrees to pay a specified sum of money upon the death of the insured person. If a life insurance contract is issued for $1 million in coverage, that amount will be paid when the insured dies. The “value” of the insured is irrelevant.
92
HOW DOES UTMOST GOOD FAITH WORK IN THE INSURANCE INDUSTRY?
Insurance can only work when both parties to the contract are completely honest with each other and disclose all relevant facts. That's why insurance contracts are considered contracts of uberrimae fidae or utmost good faith. Failure to disclose critical information usually gives the other party the right to void the contract.
With insurance:
• The applicant is expected to answer every question fully and honestly when submitting an application or filing a claim.
• The insurer is expected to disclose all relevant information about the policy being applied for.
93
IN THE INSURANCE CONTRACT WORLD, WHAT IS A REPRESENTATION?
A representation is a statement made at the time the contract was formed. This statement persuades a party to enter into the contract. However, a representation does not become a part of the contract. That is, it is not guaranteed by the maker to be true. It is believed to be true to the best of the maker's knowledge.
94
IN THE INSURANCE CONTRACT WORLD, WHAT IS MISREPRESENTATION?
A misrepresentation is a false statement of a material fact. A material fact is information that would affect an insurer's underwriting or claim settlement decision. For example, an auto insurance applicant might say he has a clean driving record when, in fact, he has had three speeding tickets within the past two years. If discovered by the insurer at any time, a misrepresentation is grounds to void the contract.
95
IN THE INSURANCE CONTRACT WORLD, WHAT IS CONCEALMENT?
Concealment is the deliberate withholding of material facts. If the concealed facts would have changed the insurer's decision to offer the insurance policy, then the insurer has grounds to void the insurance contract if the failure to disclose information was intentional.
96
ACCORDING TO THE INSURANCE WORLD, WHAT IS FRAUD? GIVE AN EXAMPLE
Fraud is the deliberate act to deceive with the intent to gain something of value. Fraud is often an act of concealment or misrepresentation. An insurer may void a contract if, for example, an applicant has committed fraud in procuring the policy or a policyholder provides false or misleading information in connection with a loss.
97
IN THE INSURANCE WORLD, WHAT IS A WARRANTY? GIVE AN EXAMPLE
A warranty is stronger than a representation. A warranty guarantees that something is true and will remain true. For example, a jewelry store owner might warrant that a burglar alarm system will always be in operation. The insurer may deny paying a claim if the alarm system is not in operating condition when a burglary takes place.
98
IN THE INSURANCE WORLD, HOW DOES WAIVER AND ESTOPPEL AFFECT THE INSURERS RIGHT AND WHAT DOES WAIVER AND ESTOPPEL MEAN? GIVE AN EXAMPLE
An insurer’s right to enforce a policy provision can be affected by its past actions, under the legal principles of waiver and estoppel.
A waiver occurs when a party to a contract gives up a right that it knows it holds, either through its actions or failure to enforce the right.
Estoppel means that a party that waives its right to enforce a certain contract provision cannot subsequently enforce that right.
Example
Property and casualty insurance contracts give insurers the right to cancel a policy if the premium is not paid by its renewal date. An insurer that routinely accepts late premium payments from a policyholder effectively waives that right with that policyholder.
By waiving its right to cancel the policy for nonpayment of premiums by the renewal date, the insurer is estopped from exercising that right in the future if the policyholder pays a late premium.
99
WHAT IS RESCISSION? GIVE AN EXAMPLE OF WHEN THESE WOULD APPLY
Rescission is the act of declaring that an insurance policy was never in effect. An insurance company that rescinds a policy states that it provides no coverage for a claim.
Rescission usually occurs when the applicant for Directors and Officers liability coverage knew of a potential claim and intentionally concealed it from the insurer, or when the application for coverage or an important document attached to it contains information that is materially false, so that if the insurer knew the truth, the insurer would not agree to insure the risk.
100
IN THE INSURANCE WORLD, WHAT DOES COMMISSIONER REFER TO?
COMMISSIONER REFERS TO THE COMMISSIONER OF INSURANCE
101
IN THE INSURANCE WORLD, WHAT DOES THE WORD DEPARTMENT OR TDI REFER TO?
• Department or TDI refers the Texas Department of Insurance.
102
IN THE INSURANCE WORLD, WHAT DOES AUTHORIZATION MEAN?
• Authorization means a permit, license, certificate of authority, certificate of registration, or other authorization issued or existing under the commissioner's authority or the Texas Insurance Code.
103
WHAT IS TDI OR TEXAS DEPARTMENT OF INSURANCE RESPONSIBLE FOR? GIVE SOME DUTIES
The Texas Department of Insurance (TDI) regulates the state’s insurance industry. TDI is responsible for enforcing insurance laws passed by the legislature and for developing rules and regulations to aid in that enforcement.
TDI is responsible for
• issuing certificates of authority to insurers wishing to market insurance products in Texas (it is illegal for an insurer to transact insurance business in Texas without a certificate of authority);
• overseeing the marketing practices and solvency of the insurers that are authorized to do business in the state of Texas;
• establishing product standards, including required and prohibited provisions in insurance contracts;
• licensing producers to sell insurance products;
• conducting investigations to determine whether there have been violations of insurance law;
• making reasonable rules and regulations necessary to implement Texas insurance laws;
• taking legal action to enforce the law, including issuing cease and desist orders and imposing penalties on violators;
• administering the state's workers compensation system; and
• protecting consumers and ensuring fair competition in the insurance industry.
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WHAT IS THE RELATIONSHIP BETWEEN TDI AND THE COMMISSIONER?
TDI is headed by the Commissioner of Insurance, who is the department’s chief executive and administrative officer. The Commissioner is appointed by the governor and serves a two-year term.
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WHAT ARE THE POWER AND DUTIES OF THE COMMISSIONER?
As the head of the state’s Insurance Department, the Commissioner is responsible for enforcing and administering all laws pertaining to insurance in the state of Texas, as well as other laws that grant jurisdiction to the TDI or apply to the TDI or to the commissioner. The Commissioner derives authority from the Insurance Code and other state insurance laws and from Title 5 of the Labor Code and other Texas workers compensation laws.
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WHO IS RESPONSIBLE FOR ENSURING INSURANCE COMPANIES HAVE THE FUNDS TO PAY CLAIMS AND EXPENSES?
TDI examines the financial condition of companies licensed in Texas and requires insurers to maintain specified levels of surplus. TDI also publishes company profiles that show a company´s complaint record and other useful information, including enforcement actions taken against the company and company history.
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Why is section "Ins. 404.051 to .053" (Insurer Impairment prohibited) important?
Once an insurer issued a license and becomes admitted. This section requires that insurers maintain minimum amounts of working capital on a going- An insurer cannot keep its promise to pay for a covered loss because of its bankrupt condition can be devastating to an insurance consumer. To ensure that insurance companies have the funds to pay claims and expenses, TDI examines the financial condition of companies licensed in Texas and requires insurers to maintain specified levels of surplus. TDI also publishes company profiles that show a company´s complaint record and other useful information, including enforcement actions taken against the company and company history.
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What does section "(INS. 481.001 to .009) Insurers deposit with Comptroller" state?
An insurer may voluntarily deposit funds with TDI as a condition to transacting business in Texas if it is required to do so in its home state. TDI will hold these funds for the protection of the insurer’s policyholders and creditors. When the Commissioner is assured that there is no longer a need to hold the deposited funds, they may be returned to their owner.
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What is a reinsurance reserve mean?
A reinsurance reserve is a fund providing for the return of unearned premiums on policies that are canceled.
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What is the definition of "Unearned Premium?
Unearned premium is that portion of the policy premium that has not yet been "earned" by the company because the policy still has some time to run before expiration.
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what does section "Insurer’s Reserve Computed [Ins. 491.051, .052]" state?
TDI will compute the reinsurance reserve necessary for all risks that an authorized insurer is covering in the state. A reinsurance reserve is a fund providing for the return of unearned premiums on policies that are canceled. Unearned premium is that portion of the policy premium that has not yet been "earned" by the company because the policy still has some time to run before expiration. A property or casualty insurer must carry all unearned premiums as a liability in its financial statement since, if the policy should be canceled, the insurer would have to pay back a certain part of the original premium.
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Who is responsible for enforcing and administering all laws pertaining to insurance in the state of texas, as well as other laws that grant jurisdiction to the TDI or apply to the TDI or to the commissioner?
the commissioner
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HOW ARE COMPLAINTS RECEIVED?
Any written communication to an insurer, not solicited by the insurer, expressing a grievance relating to an unfair claims settlement practice is considered a complaint
If a written complaint is filed with TDI, the department will notify each complaining party of the status of the complaint at least once per quarter unless giving the notification would jeopardize an undercover investigation. The department will keep records of every complaint it receives.
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Who has the authority to adopt rules necessary to implement the Texas insurance code and to meet the minimum requirements of federal law, including regulations?
The commissioner
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On who does the responsibility for handling any funds from penalties, fees, or other sources held for the benefit of the state, including the duty to use electronic means to transfer any funds over $500,000 fall on?
The commissioner
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What is a Market Conduct exam?
A market conduct exam is an investigation by insurance regulators to determine if an insurer has followed state laws relating to marketing, advertising, sales, underwriting, rating, and claims handling practices.
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Who is in charge of performing market conduct exams?
state regulators
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what does the market conduct exam focus on? and is this information public?
The examination focuses on general business patterns or practices of an insurer, not just specific errors. Afterwards, the department of insurance prepares a report that is made available to the public
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What happens the state regulator found that an insurer has committed improper market conduct?
An insurer that is found to have committed improper market conduct may be subject to sanctions.
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If a state regulator finds that an insurance company has committed improper market conduct, who is responsible for conducting investigations to determine whether insurance law has been violated?
The commissioner, The insurance code authorizes the TDI to address reasonable inquiries to insurance companies or other authorized insurance representatives
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How often are insurers principal office visited by a representative of the TDI?
At least once every five years
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How do TDI examiners have access to insurer books?
The insurance code requires that the insurance carrier give the examiner given free access to all books and papers of the carrier or the carrier’s agents that relate to the carrier’s business activities
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What happens if a insurer does not permit an examination by a rep. of the TDI?
A carrier or agent that does not permit an examination or require the requested information is subject to disciplinary action.
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Who else have access have to the detail of an examination?
The commissioner may subsequently use information discovered during this examination in connection with legal or regulatory proceedings. However, the information obtained during the examination is confidential and is not to be publicly disclosed unless it is used as evidence in a hearing.
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If the insurance commissioner need to revoke or modify the certificate of authority to a carriers that fails to meet legal requirements under which the certificate is granted. How much of a notice is a insurer entitled to? and what other piece of information must be include in the form?
At least 10 days’ advance notice of this revocation or modification, the commissioner must notify the carrier of its intentions and state a specific reason for the action.
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What are some reasons TDI may deny a license to insurers?
The department may also deny a license to individuals or discipline existing licensees who have done any of the following:
• Willfully violated a state insurance law
• Intentionally made a material misstatement on the license application
• Attempted to obtain, or actually obtained, a license by fraud or misrepresentation
• Misappropriated, converted, or illegally withheld money belonging to an insurer, an insured, or a claimant
• Engaged in other fraudulent or dishonest acts or practices
• Materially misrepresented the terms and conditions of an insurance policy
• Encouraged a policyholder to surrender or replace an existing policy by inaccurately comparing its terms or conditions
• Been convicted of a felony
• Offered a rebate or kickback to an insured
• Sought or obtained an insurance license primarily for the purpose of insuring himself, a member of his family, or a business associate rather than insuring the general public.
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What are the adjuster licensing requirements?
Licensing requirements for adjusters vary by state. Some states have few requirements, while others require the completion of prelicensing classes or passing a state licensing exam. Many states that require licensing also require a specified number of continuing education (CE) credits in order to renew the license.
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Why are CE important for adjusters?
CE is important for adjusters because new state laws and court decisions frequently affect how claims are handled or who is covered under various insurance policies.
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Who is considered an adjuster in TX?
In Texas, any person who adjusts insurance claims for an insurance company is considered an adjuster. The adjuster may be an individual, operating as an independent contractor, or an employee
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If you adjust insurance claims and work for "adjustment bureau, association, insurance agent, independent contractor, insurance company, managing general agent (MGA)" in TX what are you consider to be?
An TX adjuster
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Are you consider an adjuster if you supervise a claim?
In TX, Anyone supervising claims handling is also considered an adjuster
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What are the 5 types of contracts?
* contracts of adhesion
* aleatory
* personal
* unilateral
* conditional
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What is a Contracts of adhesion?
A contract of adhesion is one that is drafted by one party (the insurer) which the other party (the policyholder) must accept as-is.
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What is an Aleatory contract?
Aleatory contracts involve an exchange of potentially unequal values.
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What is Personal contract?
An agreement between these two parties is personal, a property and casualty insurance policy cannot be transferred to a third party without the insurer's consent.
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What is a Unilateral contract?
. In a unilateral contract, only one party makes an enforceable promise.
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what is a conditional contract?
An insurance contract is conditional, which means the insurer’s promise to pay benefits is conditional on specified events occurring
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After an cease and desist order had been enforced against an insurer or safe?
A person my appeal an order within 20 days of its issuance
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After an insurer receives an notice of a claim, how long do insurers after to send an acknowledgement of loss? and does an surplus line insurer have the same requirement?
Within 15 days- for an eligible surplus lines insurer has 30 business days to respond to a claim.
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How long do an insurer after the insurer receives the documents necessary to secure final proof of loss have to notify a claimant in writing whether the claim is accepted or rejected? and it is different if an insurer suspects arson?
15 business days, & If suspect of arson is involved 30 days
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What happens if an insurer cannot accept or reject the claim within the required time period, it may notify the claimant why it needs additional time?
The insurer must accept or reject the claim within 45 days after receiving the necessary proof of loss.
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What should an insurer give to an insured if they reject an claim?
The insurer’s notice must state why it was rejected. Written notice should be given to the insured in a timely manner, possibly preceded by oral notification.
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How long do an insurer have to notify an insured about an offer and how many day if a claim is settle?
10 days for an offer in writing, 30 days for confirmation of settlement in writing.
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After an claim has been settled, how do an insurer have to pay the claim? and how long for surplus lines insurer?
5 business days and for 20 business days for surplus lines
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What happens if a insurer fails to pay a claim within the required time period (or 60 days if no time period applies)?
An insurer is required to pay the claimant interest and reasonable attorney’s fees, in addition to paying the amount of the claim. However, this does not apply to cases where arbitration or litigation shows that the claim is invalid and should not be paid.
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How long will a claim be extended in the event of a weather related catastrophe or other major natural disaster?
15 days
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What is Misrepresentation? and what role does it play in the unfair claim settlement practices?
Misrepresentation is a statement regarding any terms of a policy, its benefits, or its dividends that are untrue, deceptive, or misleading.
The unfair claim settlement practices act prohibits adjusters from misrepresenting material facts or policy provisions that relate to the coverage at issue in a claim like statements "The check is in the mail or the claim is being reviewed by senior management and any other statement that is not true.
*Nothing can be gained by an insurer concealing or misrepresenting information about the policy. Claims staff should be warned that violation of this regulation will be grounds for discipline.
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Who are Insurance claim adjusters?
Insurance claims adjusters are the people who investigate, evaluate, negotiate, and settle claims made under an insurance policy. Claims adjusting involves the verification that a loss is covered by an insurance policy and the fair and prompt determination of the amount the insurer must pay the insured or to a third-party claimant.
