Unit 2: Property & Liability Insurance Concepts Flashcards
20-44 Personal Lines Agent Pre-Licensing Course
_______ is a condition that introduces or increases the likelihood of loss from a peril.
Hazard
______ from an insurance perspective means the change of financial loss
Risk
___ ___ is ONLY the change of a loss
Pure Risk
________ ____ is the change of loss and gain
Speculative Risk
is designed to offset the financial impact upon an insured of pure risk
Remember: Risk is the change of loss and insurance is designed to handle pure risks only
Insurance
is a statistical concept that suggest that the more exposure units we have to study the more likely that any projections we make are likely to equal what actually occurs.
Ex: If we were to toss a fair coin five times it is possible that we could toss heads all five times. However, if we were to toss that same coin 5,000 times it is very, very likely that we would toss approximately 2,500 heads and 2,500 tails.
law of large numbers
Policy a ____ is a written contract or agreement for or effecting insurance, or the certificate thereof, by whatever name called, and includes all clauses, riders, endorsements and papers
Policy
is a contract whereby one undertakes to indemnify another or pay or allow a specified amount or benefit upon a contingency.
insurance
An ____________ is a modification to the original policy which changes it in some way. It may add coverage, modify the policy in some way to confirm to a state requirement; or changes the insured’s coverage in some way
- Adding coverage: the insured adds towing & labor to her auto policy
- Modifying Coverage to Conform: FL Property policies statutorily add Catastrophic Ground Collapse coverage
- Changing Coverage: the insurered buys a new car and adds the new veh to his/her policy
Endorsment
Black’s Law Dictionary defines a ______ as an agreement between two or more parties creating obligations which are legally enforceable
Characteristics: Offer, Communication, Mutuality of Obligation, capacity, Oral/Written, Acceptance, Consideration, Competency, Legality
EX: “if a buyer places an order to buy goods at a certain price, and the seller responds by shipping the goods, the seller’s actions signal acceptance of the offer and the parties have a ________”
Contract
made by one party to others
promise one party makes in exchange for another party’s performance; ie an invitation to enter into a contract on certain terms.
EX: “The ____ is when the buyer places the order to buy the goods at a certain price.”
Offer
___________ of the acceptance in the prescribed manner and time frame
Communication
all parties must have an obligation to act
Mutuality of Obligation
all parties must have legal standing to engage in the agreement
is a person’s legal status to enter into contracts. There are several things that make a person legally able to do so, including age (18+), state of mind (mental health/drugs/alcohol)
Capacity
can be ________ or _________; however, some contracts require a written agreement.
contracts can be mediated in either manner
Oral or Written
___________: unequivocal acceptance of the offer
is an express act or indication that demonstrates an agreement to the terms of an offer in a manner required by the offer so that a binding contract is formed.
EX: “The seller shipping the goods is the _________ of the offer and the parties have a contract.”
Acceptance
something of value exchanged between the parties
Consideration
all parties must have the mental wherewithal to fairly engage in the agreement.
Competency
the agreement must have a legal intent
Legality
is when two parties have agreed upon something and are prepared to enter into a contract. In other words, both parties agree to the same thing.
Ex: “The buyer has placed a specific order to buy goods at a certain price. The seller understands what the buyer wants and how much the buyer is willing to pay AND the seller wishes to sell the exact products/services at that price. Each party understands the other completely and agrees to enter into the transaction with an exact mutually understood and agreed to purpose.”
Meeting of the Minds (mutual assent)
a promise that is prohibited because the performance, formation, or object of the agreement is against the law. –technically speaking, an ______ _______ is not a contract at all bc it cannot be enforced.
EX: prostitution
illegal contract
_____ is the “value” given to someone in return for something of “value” or a promise of something of value. A valid contract MUST include _________ for every party involved.
is the something for something (“kinda like you scratch my back I’ll scratch yours“) or what you might call the basic reason parties enters into contracts.
Consideration
___ is a written law passed by a legislature on the state or federal level.
______ set forth general propositions of law that courts apply to specific situations.
Statutes
binders temporary insurance polices, which can be made orally or written
binders
where payment is made directly to the insured or other named interests
Property Insurance
where payment is made on behalf of the insured to another
Liability Insurance
Insurance contracts are ______ ______ wherein property and liability insurance policies cover losses sustained by persons.
The focus is on the person or persons, NOT the insured property or insured operations.
Personal Contracts.
The insured person has to satisfy certain conditions in order for the insurer to perform, that is, pay any claim.
Conditional Contract
Parties have unequal bargaining power, such as the insured cannot negotiate the terms of the insurer.
Ambiguities found in the policy are usually found in favor of the
insured
Contracts of Adhesion
One party should be put back in the same financial condition
they were in before the loss. (Never profit from a loss)
Indemnity Contracts
Exceptions to the ____ __ ________:
- the Replacement Cost Endorsement
- Agreed Value
- Direct payments to claimants in liability claims
the rule of Indemnity
Insurance is a contract whereby one (the insurance company) undertakes to _______ another (the insured) or pay or allow a specified amount or a determinable benefit upon determinable contingencies (e.g. the payment to a third party due to the insured’s negligence).
Indemnify
______ _____ is the actual, lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment.
_____ ______ MUST exist at the time of loss and the insured would suffer economic loss
Insurable Interest
______ ______ is the insured’s exposure to loss & economic interest
Insurable Interest
______ ______ are made up of 4 basic parts/sections: Declarations Page, Insuring Agreements, Exclusions, and Conditions
Contract Elements
describes the insurance company’s name and address, the named insured’s name and address, the subject(s) of insurance, policy period, coverages types, coverage limits, and the cost/premium for the policy.
Declarations Page
broadly define the coverages given under the policy.
Insuring Agreements
establishes property, situations, persons, or perils not covered by the policy. The FAIA Study Manual list the following three reasons for policy exclusions:
(1) duplication of coverage found in other policies; or
(2) uninsurable exposures; or
(3) specialized exposures requiring specialized underwriting and coverage more appropriately handled in another policy.
Exclusions
establish the “rights and duties” of the insurance company and the insured to each other.
Conditions
_______ __________ (this document) includes:
- Insurance Company Name
- Insured Name
- Insured Address
- Coverage Types
- Coverage Amounts
- Deductibles
- Premium
- Policy Number
- Inception Date of Coverage
- Expiration Date of Coverage
The Declarations
aka Declarations Page / Dec Page
states what is covered and is located at the very beginning of each policy
Ex: “We will provide the insurance described in this policy in return for the premium and compliance with all applicable provisions of this policy”.
Insuraing Agreement
qualifies and places limitations on the insurer’s responsibility to perform and/or pay – includes: - States the insurer’s limit of liability for payment - Policy Period - Concealment or Fraud - Liberalization Clause - Cancellation - Subrogation - Severability - Duties after a Loss - Suit Against Us - Bankruptcy of an Insured - Other Insurance
Conditions
Other Insurance states how the insurance policy will coordinate with any other “valid and collectible” insurance.
Other Insurance
broadens policy coverage if policy language has been broadened (60 days prior to or during policy) .
Liberalization Clause
assignment of recovery to insurance company after payment to insured and assumption of rights against responsible third party
Subrogation
Policy ______ sections state what is not covered by the insurance policy either reducing what is covered or eliminating it altogether.
EX: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.”
Exclusions
is the reduction and/or destruction in use, value, access, custody, or function of persons, property and/or intangible property rights.
Loss
physical characteristics which increase the probability or severity of loss.
Physical hazard
a conscious mental attitude which increase the probability or severity of loss.
Moral hazard
unconscious mental attitude which increase the probability or severity of loss.
Morale hazard
may be defined as a contingency that may cause a loss
EX: fire or windstorm
Peril
_____ is a condition that introduces or increases the likelihood of loss from a peril.
_____ may be classified as physical, moral, morale
Hazard
states that when there is an unbroken chain of events between an occurrence and damage that grows out of the occurrence, then the resulting damage is all part of the same occurrence.
(For example, fire is proximate cause of damage done by water used in extinguishing it.)
Proximate Cause
EX: While shopping one day Winston forgets that he is in a supermarket and starts eating one of the bananas in his cart. After he has eaten the banana, Winston carelessly tosses the peel on the floor of the supermarket. Edgar, Winston’s neighbor, just happens to be shopping at the same time; Edgar’s left foot strikes the peel and Edgar tumbles head over heels with his steaming hot triple caramel mocha frappe latte spilling all over Pastor Jones, Pastor Jones’ wife, and three choir boys. In this unfortunate event the ______ ______ of the incident would be Winston carelessly throwing the banana peel on the ground.
Proximate Cause
physical harm to tangible property
Direct Loss
______ ______ means economic loss which flows as a consequence of direct loss.
Indirect Loss
Fire Loss to Dwelling; home is uninhabitable and the insured is forced to live in a hotel for two weeks. Identify the Direct & Indirect Loss.
Direct Loss – Fire Loss to Dwelling
Indirect Loss – Two Week Hotel Rental
Automobile Collision rendering the vehicle in operable; repair shop takes three weeks to repair car and the insured has a Rental Vehicle for three weeks. Identify the Direct & Indirect Loss
Direct Loss – Collision Damage to Insured Vehicle
Indirect Loss – Loss of Use of the Car; Insured’s Three Week Car Rental
varies from policy to policy. Virtually all property insurance covering
real property provides for naming mortgagees and gives them special protection such as:
1) Advanced notice of cancellation
2) Protected even if insured is prevented from recovery
3) Allows mortgagee to continue payments in order to continue the
policy even if
Lender Interest
Joe Insured owns a $200,000 Home and has a $150,000 mortgage with Gold Coin Mortgage Company. Joe loses his job and in a panic believes he can’t make his mortgage payment any longer; Joe subsequently sets fire to the house and the house is a Total Loss. Which if any of the following are true regarding a claims payment by the insurance company?
Gold Coin Mortgage can collect up to their $150,000 of equity
Which of the following does NOT apply to the Mortgagee Clause:
- Mortgage Company has the right to cancel a policy
- Mortgage Company has the right to pay past due policy premiums
- Insurer required to give advance notice of cnacellation to Mortgage Company
- Coverage may be extended to Mortgagee even if the insured’s actions prevent recovery by the insured
- Mortgage Company has the right to cancel a policy
Answer: #1
_______ _______ Includes:
- Loss payments are payable to both the insured and the mortgagee up to the level of loss and in proportion to their level of economic interest in the property.
- A Mortgage company may have a right of recovery even if the insured has been denied.
- Has the right to pay (past due) premiums.
- The Mortgagee is entitled to prompt notice of all policy Non-Renewals and Cancellations.
Mortgage Clause
basic property insurance policies state that direct losses will be settled based on the ________ of the property at the time of the loss, but not more than the amount required to repair or replace (and subject, of course, to the dollar limit stated in the policy).
the current cost to replace the item minus depreciation.
Actual Cash Value (ACV)
is generally the purchase price in an open and fair market among equally knowledgeable buyers and sellers.
Market Value
Many property insurance policies provide _________ _____ Valuation where depreciation is not deducted and the insured receives payment to replace the item with its current cost.
Claims settled as cost brand new WITHOUT any deduction for depreciation.
Replacement Cost Valuation
In the event of damaged property being determined to be a “total loss” the residual value of the damaged property is referred to as _____ ____
Salvage Value
as a valuation method for paying a claim. When this valuation method is used the insured and insurer have agreed to the value of the underlying insured property utilizing bills of sale or appraisals at the time the insurance was purchased (i.e. jewelry coverage).
Agreed Value
Ginger has purchased a pearl necklace and has a bill of sale in the amount of $4,200. If she insures the necklace on an “____ ____ ____” she will submit the bill of sale to her insurance company at the time she applies for the insurance. If the necklace is stolen Ginger will receive $4,200 (the agreed value) less any deductible in the policy. There will be no need to determine the market value at the time of the loss nor any depreciation (depreciation does not normally apply to Jewelry the way it does to other classes of property as Jewelry normally appreciates over time).
Agreed Value Basis
This statute states, in part, that if there is a total loss by a covered peril to a building, structure, mobile home or manufactured housing unit, the insurer must pay the amount stated in the policy for which premium has been paid.
Florida’s Valued Policy Law
Florida’s Valued Policy Law (F.S.627.720) states: If there is a total loss by a covered peril to a structure, the insurer must pay _________
The amount stated in the policy
- encourages an insured to insure their property to its full replacement cost value.
- limit the insurer’s responsibility in a loss to the proportion of a loss which the limit of insurance bears to the value of the property at the time of loss times the coinsurance percentage.
Forumula: Loss X Limit of Insurance ÷ [Value of Property (X) Coinsurance Percentage] = Loss Settlement
Coinsurance
Loss X Limit of Insurance ÷ [Value of Property (X) Coinsurance Percentage] = Loss Settlement
NOTE: If the coverage amount is equal the agreed percentage of the property value, or more, the coinsurance clause does not have an impact on the claim payment to the insured.
Co-Insurance Formula .
Coverage limit is $30,000, 80% coinsurance, loss of $20,000
- If the value of the covered property 50,000 at the time of loss, the insurer’s loss payment resposibility us calculated.
$20,000 x $30,000 / [$50,000 x 80%= $40,000] = $15,000
TIP: Formula
Loss X Limit of Insurance ÷ [Value of Property (X) Coinsurance Percentage] = Loss Settlement
The insured owns a $1,000,000 home but only insures it for $600,000. The policy the insured bought has an 80% Coinsurance provision. Unfortunately the insured has suffered a $300,000 loss. Not including the policy deductible how much will the insured be paid? Why did the insured receive that percentage of his loss as a payout?
Step One: Amount of Loss $300,000
Step Two: Actual Amount of Insurance $600,000
Step Three: Building Value $1,000,000
Step Four: Coinsurance 80%
Computed as: $300,000 X [$600,000 ÷ ($1,000,000 X .8)] = $225,000 Loss Settlement (Claim Payout)
Answer: The insured will collect $100,000 of the $100,000 loss as the $400,000 of Dwelling coverage met the coinsurance requirement of 80% of the value of the dwelling at the time of the loss.
represent the amount of loss that is retained by the insured.
come in three types or styles: (1) straight deductibles; (2) percentage deductibles; and (3) franchise deductibles.
Deductibles
specify the deduction of a flat amount from a loss payment, regardless of the size of the loss.
Straight deductibles
specify the deduction of a percentage of the insured property or amount of loss Florida’s windstorm insurance is written with deductibles of 2%, 5% or 10% of the dwelling or building policy stated limits.
Percentage deductibles
specify that no payment shall be made until the loss equals or exceeds a prescribed amount, then the loss is paid in full.
Franchise deductibles
Timmie Tiger has a $500 Collision deductible on his auto policy. He lightly backed into a wall scratching the rear bumper cover resulting in $300 in damages. What amount will Timmie receive from his insurer?
$0 payout from the insurance company (Timmie’s deductible is greater than his damages)
