Unit 4 - Basics of Property Insurance

Question 1

What are two types of property?

Answer 1

1. Real property - buildings
2. Personal property - movable contents

Question 2

What are two types of property coverage?

Answer 2

1. Specific or Scheduled - detailed list of covered items
2. Blanket - all items covered (incl personal property); no detailed list but a single limit of coverage

Question 3

What is the policy limit and where is it found?

Answer 3

• Policy limit is found on the declarations page.
• Known as the limit of coverage or limit of liability or limit of insurance.

Question 4

What is the difference between a named vs open / special peril?

Answer 4

• 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.

Question 5

List the three levels of property insurance coverage

Answer 5

1. Basic
2. Broad
3. Special

Question 6

What perils are included with basic property insurance coverage?

Answer 6

• Fire - must be hostile; intentional loss (arson) is not covered
• Lighting - natural electricity
• Internal explosion - any explosion inside a covered location

Question 7

What are the nine Extended Coverage perils listed in property insurance policies?

Answer 7

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

Question 8

What are broad perils in property insurance policy?

Answer 8

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.

Question 9

What are some broad coverage exclusions in a property insurance policy?

Answer 9

• 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

Question 10

List the excluded perils for a Special Perils / Open coverage in a property insurance policy.

Answer 10

Special Perils covers everything unless specifically excluded. Common exclusions:

1. Flooding
2. Earthquake
3. Intentional damage caused by insured
4. Losses due to enforcement of building codes
5. Damage caused by a power interruption occuring off premises
6. Government seizures

Question 11

Explain the difference between a direct loss vs. indirect (consequential) loss.

Answer 11

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

Question 12

List the 6 classes of construction when evaluating building risk for a property insurance policy.

Answer 12

1. Class 1 - Frame
2. 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)
3. Class 3 - Non combustible (exterior walls, floors and roof are made from non combustible materials like metal, asbestos or gypsum)
4. Class 4 - Masonry non combustible (exterior walls - masonry, roof /floor from non combustible materials)
5. Class 5 - Modified fire resistive - exterior walls, floors, roof constructed of masonry with fire resistent materisl with a rating of 2 hours or less.
6. Class 6 - Fire resistive - exterior walls, floors, roof constructed of masonry with fire resistent materisl with a rating of 2 hours or more.

Question 13

What is Loss Valuation or Claims Settlement?

Answer 13

• 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

Question 14

What is Actual Cash Value (ACV)?

Answer 14

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.

Question 15

What is Actual Cash Value (ACV)?

Answer 15

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.

Question 16

What is replacement cost?

Answer 16

Replacement Cost is the cost to replace, based on today - not what you paid for the item originally.

Question 17

What is functional replacement cost?

Answer 17

cost of acquiring another item of property that will perform the same function with equal efficiency

Question 18

What is market value?

Answer 18

• 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

Question 19

What is agreed amount in a property insurance policy?

Answer 19

• 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.

Question 20

What is the stated amount (value)?

Answer 20

• 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

Question 21

What is a pair or set condition?

Answer 21

• 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.

Question 22

List the methods of calculating value in determining a loss.

Answer 22

1. Replacement cost - current replacement cost, no depreciation
2. Functional replacement - replace with modern construction
3. Market value - selling price; seldom used
4. Agreed Amount - value of loss is determined before the policy is issued
5. Stated amount - insured up to this stated amount
6. Pair and set - value of the pair/set before the loss minus value of what remains

Question 23

What is the appraisal condition in a property insurance contract?

Answer 23

• 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

Question 24

What is arbitration?

Answer 24

• disagreement over other areas of the loss (not including the amount of loss).
• typically used before litigation

Question 25

What is coinsurance clause?

Answer 25

• 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

Question 26

What does “vacant” mean?

Answer 26

• entirely empty - no people or contents
• insured are penalized after 60 days of vacancy

Question 27

What does “unoccupied” mean?

Answer 27

• contents remain, but no people
• no loss of coverage

Question 28

What is the standard mortgage clause?

Answer 28

• 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
• 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

Question 29

What is a loss payable clause?

Answer 29

• 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