Unit 4 - Basics of Property Insurance Flashcards
What are two types of property?
- Real property - buildings
- Personal property - movable contents
What are two types of property coverage?
- Specific or Scheduled - detailed list of covered items
- Blanket - all items covered (incl personal property); no detailed list but a single limit of coverage
What is the policy limit and where is it found?
- Policy limit is found on the declarations page.
- Known as the limit of coverage or limit of liability or limit of insurance.
What is the difference between a named vs open / special peril?
- Named peril - only covers perils listed in the declarations page (eg. lightining, fire, windstorm)
- Open or Special Peril policy - covers all perils / risks of direct physical loss unless specifically excluded. This type of policy is called all risk, special or comprehensive coverage.
List the three levels of property insurance coverage
- Basic
- Broad
- Special
What perils are included with basic property insurance coverage?
- Fire - must be hostile; intentional loss (arson) is not covered
- Lighting - natural electricity
- Internal explosion - any explosion inside a covered location
What are the nine Extended Coverage perils listed in property insurance policies?
Remember WCSHAVVER and V&MM
- Wind - exterior damage, damage to interior only if damage to exterior first
- Civil commotion - damage from mob
- Smoke - not from a fireplace
- Hail - balls of ice
- Aircraft - loss caused by physical contact with part or all of aircraft
- Volcanic eruption
- Vehicles - damage from vehicle contacting property
- Explosion - damage from explosion away from covered location
- Riot - damage from mob riot
- Vandalism and malicious mischief (V&MM) - damage from willful and malicious actions. involves a crime. can only be written with extended coverage
What are broad perils in property insurance policy?
Remember BIG AFFECT:
- All of basic perils PLUS:
- B - Burglary damage
- I - Ice, sleet, and snow (weight of)
- G - Glass breakage
- A - Accidental discharge of water
- F - Freezing water
- F - Falling objects
- E - Electrical current
- C - Collapse
- T - Tearing asunder - sudden tearing apart of hot water heater, fire sprinkler, air conditioning, etc.
What are some broad coverage exclusions in a property insurance policy?
- Weight of ice, snow or falling objects on awings, fences, patios, swimming pools, docks and retaining walls.
- Accidental discharge of water from continuous leaking
- Flooding of nearby river or lake
- Burglary if property vacant > 60 days
List the excluded perils for a Special Perils / Open coverage in a property insurance policy.
Special Perils covers everything unless specifically excluded. Common exclusions:
- Flooding
- Earthquake
- Intentional damage caused by insured
- Losses due to enforcement of building codes
- Damage caused by a power interruption occuring off premises
- Government seizures
Explain the difference between a direct loss vs. indirect (consequential) loss.
Direct loss = immediate damage to property from a peril
Indirect loss = loss over time as a result of direct loss
Examples:
- loss of income when building burns
- cost of rental car while car being repaired from damage
- additional living expenses while home is being repaired
List the 6 classes of construction when evaluating building risk for a property insurance policy.
- Class 1 - Frame
- Class 2 - Joisted masonry (outside support walls made of noncombustible masonry (like concrete, brick, hollow concrete, block, stone tile) and roof and floor are made from conbustible materials (wood)
- Class 3 - Non combustible (exterior walls, floors and roof are made from non combustible materials like metal, asbestos or gypsum)
- Class 4 - Masonry non combustible (exterior walls - masonry, roof /floor from non combustible materials)
- Class 5 - Modified fire resistive - exterior walls, floors, roof constructed of masonry with fire resistent materisl with a rating of 2 hours or less.
- Class 6 - Fire resistive - exterior walls, floors, roof constructed of masonry with fire resistent materisl with a rating of 2 hours or more.
What is Loss Valuation or Claims Settlement?
- How the insurance company determines the appropriate amount of loss to be paid.
- Deductibles reduce any amount after loss has been valued.
- Insureds collect the lesser of:
- insurable interest;
- policy limits
- actual cash value
- cost to repair
- replacement cost
What is Actual Cash Value (ACV)?
The current cost to replace an asset that is damaged or destroyed, with an identical asset minus accumulated depreciation and obsolescence.
ACV = Replacement Cost - Depreciation
Replacement Cost is the cost to replace, based on today - not what you paid for the item originally.
What is Actual Cash Value (ACV)?
The current cost to replace an asset that is damaged or destroyed, with an identical asset minus accumulated depreciation and obsolescence.
ACV = Replacement Cost - Depreciation
Replacement Cost is the cost to replace, based on today - not what you paid for the item originally.
What is replacement cost?
Replacement Cost is the cost to replace, based on today - not what you paid for the item originally.
What is functional replacement cost?
cost of acquiring another item of property that will perform the same function with equal efficiency
What is market value?
- price one would pay based on free market conditions, adjusting for supply and demand.
- generally will use if market value is significantly below replacement cost
What is agreed amount in a property insurance policy?
- For property that is difficult to value after a loss has occured.
- Insurer and Insured will agree on a value (e.g. antique furniture) before policy is issued.
- Reset every year.
What is the stated amount (value)?
- Allows the insured to determine the value of the property.
- insurance company will issue policy for that amount.
- upon a loss, insurer will pay the lower of stated amount or actual cash value
What is a pair or set condition?
- loss settlement condition that appears in many property contracts.
- if a pair or set is lost or damaged, loss will be valued as a fair proportion of the total value of the set, giving consideration to the importance of the damaged article to the set.
List the methods of calculating value in determining a loss.
- Replacement cost - current replacement cost, no depreciation
- Functional replacement - replace with modern construction
- Market value - selling price; seldom used
- Agreed Amount - value of loss is determined before the policy is issued
- Stated amount - insured up to this stated amount
- Pair and set - value of the pair/set before the loss minus value of what remains
What is the appraisal condition in a property insurance contract?
- disagreement on the value of the loss.
- provides either party may demand an appraisal of a loss.
- each party gets an appraisal and an umpire will cast the deciding vote.
- need two of three votes
What is arbitration?
- disagreement over other areas of the loss (not including the amount of loss).
- typically used before litigation
What is coinsurance clause?
- require insured to carry a minimum amount of insurance (called insurance to value) typically 80% of replacement cost
- limits the payout if insured does not carry adequate insurance (how much insurance did you carry / how much insurance should you have carried) * Loss amount = claim payment - deductible
- meant to encourage to purchase full or nearly full coverage and review their policy periodically to verify they have adequate coverage
What does “vacant” mean?
- entirely empty - no people or contents
- insured are penalized after 60 days of vacancy
What does “unoccupied” mean?
- contents remain, but no people
- no loss of coverage
What is the standard mortgage clause?
- specifies the rights and duties of the mortgagee (bank with underlying loan for real property) under the policy
- mortgagees may be named in the declarations, if they have insurable interest
- mortgagee’s rights and duties include:
- filing proof of loss if insured does not;
- paying the premium if the insured does not
- mortgagee’s rights and duties include:
- lender gets notice if policy is cancelled
- lender protected from negligent or dishonest acts by insured
- only entitled to receive payment up to loan amount
What is a loss payable clause?
- like a standard mortgage clause, only with lenders of personal property
- lender’s rights and duties include:
- filing proof of loss if insured does not;
- paying the premium if the insured does not
- lender gets notice if policy is cancelled
- lender protected from negligent or dishonest acts by insured
- only entitled to receive payment up to loan amount
