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M1: Insurance terms and related concepts > Valuation, Deductibles, and Coinsurance > Flashcards

Valuation, Deductibles, and Coinsurance Flashcards

1
Q

Methods of valuation

A
  1. ) Actual Cash Value (ACV)
  2. ) Replacement Cost (RC)
  3. ) Agreed Value (Value Policy)
  4. ) Stated Amount
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2
Q

Actual Cash Value

A

-A valuation method that takes into account an item’s depreciation

  • Same as fair market value an depreciated value
  • AVC offers lower premiums for less coverage
  • Formula: Replacement Cost minus Depreciation

-Ex.: A 1995 Civic that Bob bought for $13,000 was worth only $1,700 at time of claim because of depreciation.

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3
Q

Replacement cost

A
  • A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation.
  • Can be determined through simple market research
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4
Q

Depreciation

A

-An item’s estimated loss of value due to wear, tear, and age.

  • Can usually be determined with:
    1. ) Standard Depreciation Schedules: (based on insurer’s policies)
    2. ) Estimating Software.

Types:

  1. ) Annual
  2. ) Accumulated
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5
Q

Valuation

A

Process of estimating what an item is worth

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6
Q

Replacement cost

A
  • A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation.
  • Can be determined through simple market research.
  • Ex.: Roberto’s hail-destroyed roof:
  • -Replacement Cost of $10,000
  • -First check of $6,000 ACV
  • -Roberto replaces roof for $7,000
  • -So, insurer sends second check for only $1,000.
  • -Total indemnity for Roberto: $7,000
  • -Insurer saves $3,000.
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7
Q

Broad evidence rule

A
  • Used in some states
  • ACV does not simply come down to RC minus depreciation
  • Takes into consideration any evidence available to determine value
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8
Q

Characteristics of Replacement Cost

A
  • No depreciation
  • Based on the replacement cost at the time of loss
  • Higher premiums
  • Ex.: Sally’s roof is 3 years old. It gets destroyed in a hailstorm, and it will cost Sally $12,000 to replace it. Even though the ACV of the roof was only $8,000, an RC policy would pay Sally $12,000 for the loss.
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9
Q

Reproduction Cost

A

Cost to produce an exact replica of damaged property in the same manner and materials in which it was originally produced.

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10
Q

RC and Principle of Indemnity

A
  • The insured cannot profit from a loss.

- The insurer often waits to pay the full amount until the insured submits proof of replacement.

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11
Q

Functional Replacement Cost

A
  • Pays to replace an outdated, obsolete item with a functionally equivalent item- not an identical item.
  • Level of coverage falls between RC and ACV
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12
Q

Obsolescence

A
  • When something is no longer used or wanted, despite being in good working order.
  • Usually a result of a newer, improved alternative.
  • Causes rapid depreciation

-Ex.: Walls made of lath and plaster; VCRs; Portable CD players.

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13
Q

Valued Policy (aka: agreed value or guaranteed value)

A
  • A valuation method that assigns a set value to each insured item.
  • Value is determined prior to the issuance of policy
  • Avoids the confusion of assessing appreciation or depreciation.

-Ex.: Antique jukebox appraised at: $25,000; Valued Policy for jukebox: $25,000; Policy will pay $25,000 exactly if jukebox is destroyed or damaged (minus deductible)

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14
Q

Stated Amount (aka Stated Value)

A
  • Property value is stated by the insured when applying for insurance.
  • When loss occurs, policy pays up to the stated amount or ACV, whichever is less.
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15
Q

Agreed value VS Stated value

A

Agreed value: Insured is paid the agreed amount, regardless of ACV.

Stated Value: lower premiums; good choice if insured can’t afford to insure an item for its full value.

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16
Q

Replacement Cost

A

Cost to replace and item at today’s market value.

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17
Q

Actual Cash Value

A

Replacement cost minus accumulated depreciation.

18
Q

Annual Depreciation

A

Replacement cost divided by item’s useful life.

19
Q

Accumulated depreciation

A

An item’s annual depreciation multiplied by its age.

20
Q

Valued policy

A

Assigns a set value to each insured item.

21
Q

Valuation

A

The process of estimating what an item is worth.

22
Q

Partial loss

A

When insured property is only partly damaged, and repair costs fall within the policy limit.

23
Q

Total loss

A

When insured property is damaged so badly that it is not worth repairing.

Types:

  1. ) Actual total loss
  2. ) Constructive total loss
24
Q

Actual total loss

A

When property is completely destroyed and unrepairable.

25
Q

Constructive total loss

A

When the cost of repairing damaged property is higher than the property’s current value.

  • Sometimes used when repairs would cost more than the policy limit.
  • The insurer may keep the damaged property or deduct its salvage value from the claim.
26
Q

Deductible

A

The amount the policyholder must pay out of pocket before the insurer will pay for losses.

  • Lets the policyholder decide how much risk he is willing to take.
  • Found on the declarations page of the policy.
  • 3 types:
    1. ) Fixed
    2. ) Percentage
    3. ) Franchise
27
Q

Liability coverage

A

Never has a deductible, except for very rare exceptions.

28
Q

Fixed deductible

A

A specific, set amount.

Ex.: Tom’s fixed deductible: $500; Covered damages: $3,500; Tom’s insurer pays: $3,000; Tom pays: $500.

29
Q

Percentage deductible

A

The insured pays a percentage of the insured risk’s value. (Some policies combine fixe and percentage deductibles.)

Ex.: Karen insures her home for $500,000; Percentage deductible: 3%, or $15,000; Covered damages: $25,000; Karen pays the first $15,000; Insurer pays the balance of $10,000.

30
Q

Franchise deductible

A

Policy kicks in only after the loss exceeds a predetermined amount.

  • If losses are below the deductible, the insurer pays nothing.
  • If losses are above the deductible, the insurer pays 100% of the damage.

Ex.: Franchise deductible: $1,000; Total damages: $1,200; Insurer pays: $1,200; Insured pays: $0.

31
Q

Coinsurance

A

Encourages the insured to purchase an adequate amount of coverage, typically at least 80% of a property’s value.

  • Financially protects the insurer.
  • Imposes a penalty on coverage for partial losses if the property is not fully insured- 80% of its RC.

Ex.: Property value: $100,000; Coinsurance amount: $80,000 (100,000 x 80%; Underinsured: policy limit less than $80,000.

32
Q

Underinsured

A

When a home is insured for less than 80% of its value.

33
Q

Coinsurance penalty

A

If a property is underinsured, the insurer will only cover a percentage of partial losses.

  • If multiple partial losses occur, the low premiums are not enough for the insurer to cover all the damages.
  • The insurer decides if a coinsurance penalty should be applied.

Loss settlement provision is an alternative to this that serves the same purpose.

34
Q

Coinsurance penalty

A

If a property is underinsured, the insurer will only cover a percentage of partial losses.

  • If multiple partial losses occur, the low premiums are not enough for the insurer to cover all the damages.
  • The insurer decides if a coinsurance penalty should be applied.

Loss settlement provision is an alternative to this that serves the same purpose.

Formula example: Had divided by Should= a percentage and then multiplied by Loss to equal total indemnification.

35
Q

Coinsurance or deductible first?

A

Deductible first, to have a higher pay out for the insured (ambiguity always favors the insured); Unless stated otherwise!

Ex.:
-Coinsurance requirement: $150,000
-Betty's policy limit: $120,000
-Deductible: $2,000
-Coinsurance formula: $120,000/$150,000=0.8
-So covered policy will pay 80% of a claim
-Covered loss: $10,000
-----------------------------------
-Deductible first: 
$10,000-$2,000=$8,000
$8,000x0.8=$6,400
-Coinsurance first:
$10,000x0.8=$8,000
$8,000-$2,000=6,000.
36
Q

Deductible

A

Predetermined amount of money that a policyholder must pay before the insurance company will pay the remaining costs.

37
Q

Fixed deductible

A

A set amount

38
Q

Percentage deductible

A

A percentage of the property’s value

39
Q

Franchise deductible

A

Insurer pays 100% of damages if losses exceed a certain set amount.

40
Q

Coinsurance

A

Imposes a penalty if the homeowner does not insure home for at least 80% of its worth.

41
Q

Coinsurance penalty equation

A

Had divided by Should multiplied by the partial loss

M1: Insurance terms and related concepts (12 decks)

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