AD Banker Ch. 2 - Property Ins

Inherent Vice

A condition or defect that exists within the property itself that causes the property to spoil, break, become defective, or destroy itself.

Friendly Fire

A fire intentionally set that stays within its intended boundaries (e.g., a fireplace). Property insurance does not cover damage from a friendly fire.

Hostile Fire

A fire that produces a visible spark, flame, or glow, and which leaves the area in which it was intended.

Additional Insured

A person, firm, or organization, usually added to the policy by endorsement, granted the same coverage and protection as a named insured.

Arbitration

A process whereby a disputed claim is decided by a neutral third part.

Indirect Loss (also called Consequential Loss)

A second or financial loss occurring as the result of a direct loss (loss of rents, loss of business income).

Concurrent Causation

A situation where there are two causes resulting in a loss and one of the causes is excluded while the other cause is not excluded. Unless the policy specifies otherwise, the loss is covered. Some policies may use an "anti-concurrent causation" clause.

Accident

A sudden, unforeseen, unintended, and unplanned event.

Vacancy

A vacant property contains neither occupants nor personal property.

Endorsement

A written amendment attached to the policy by the insurer to broaden or restrict coverage, or to further define certain policy provisions. Once attached, the endorsement takes precedence over the original provisions of the policy.

Stated Amount

An agreed-upon amount that is paid in event of total loss, regardless of the actual cash value of the property (usually used for articles such as antiques, fine arts, paintings and classic automobiles).

Bailee

An individual or firm who has taken into its care, custody, and/or control the property of another for servicing, repair, or storage.

Bailor

An individual who retains the ownership of property that has been taken into the care, custody, and/or control of a bailee.

Unoccupancy

An unoccupied property contains personal property, but has no occupants.

Changes

Any changes to the policy must be made by the insurer's written endorsement.

Named Insured

Any person, firm, or organization specifically designated by name on the Declarations Page of the policy.

Coinsurance

Coinsurance is a provision contained in most policies insuring commercial property, used to encourage the insured to purchase and maintain insurance to value, and to establish the basis of payment in the event the insured fails to maintain a specified percentage of that value. The higher the coinsurance percentage the insured agrees to purchase, the lower the rate that the insured pays for the insurance. Coinsurance applies only in the event of a partial loss, as total losses typically are paid in accordance with the Valued Policy Law. The formula that is applied in the event of a partial loss multiplies the ratio of insurance carried to insurance required by the amount of loss to get the amount the insurer will pay. Example: The insured owns a commercial building whose current value is $1,000,000. The building is insured for $750,000 and the insured has agreed to 80% coinsurance. The building sustains a $100,000 fire loss. How much will the insurer pay of the $100,000 loss? $750,000 ÷ $800,000 = .9375 .9375 X $100,000 = $93,750 If the insured had maintained a policy carrying coverage of 80% or more ($800,000 or greater, the policy would have paid the loss in full. Because the policy covered only 75% of the building's value, the coverage is reduced by an amount equal to the ratio between the actual amount and the required amount, in this case 93.75%.

Open Perils (also called Special Form or All-Risk coverage)

Covers losses except those specifically excluded.

Named Perils

Covers only losses caused by perils that are specifically stated.

Direct Loss

Damage to property resulting from an insured peril, e.g., fire damage to an insured residence, or water damage to the residence resulting from a ruptured water pipe.

Reporting Form

Designed for firms whose stock fluctuates during policy period. Insured must report 100% of values. Late reporting or under-reporting results in a penalty.

Definitions

Explanation of specific terms used within a policy.

Valued Policy

Expresses on its face an agreement that the item insured will be valued at a specified sum.

Unearned premium

Gross unearned premium means the unearned portion of the full amount of premium, including the unearned portion of the agent or broker commission. Net unearned premium means the unearned portion of the premium not including the unearned commission. When a policy of personal lines insurance terminates for any reason or there is a reduction in coverage, the gross unearned premium must be remitted within 25 business days after the insurer receives notice of the event. If a policy other than personal lines insurance terminates or there is a reduction in coverage, the gross unearned premium must be remitted within 80 business days after the insurer receives notice or audit information if applicable. Any unearned premium that an insurer fails to remit within the required time limits will earn interest at 10% per year. Information in this section does not apply to ocean marine insurance.

Appraisal

If the insured and insurer cannot agree on the amount of a loss, either may demand an appraisal. The insured and the insurer each select an appraiser, who then jointly select an umpire. The appraisers will appraise the loss and either agree or submit their differences to the umpire. An agreement by any two of the three parties is binding, and each party must pay the cost of its own appraiser and share equally the cost of the umpire.

Occurrence

Includes continuous or repeated exposure to harmful conditions that results in property damage (an accident is a type of occurrence).

Peak Season Endorsement

Increases insurance for a specific period to cover increased values.

Standard Policy Structure

Insurance policies contain the following sections: Declarations, Insuring Agreement, Conditions, and Exclusions (DICE).

Abandonment of Property

Insurer will not accept any property abandoned by insured.

Blanket Coverage

Insures more than one property on one policy for a single amount of insurance that applies to all properties covered under the policy. The amount of insurance must equal at least 90% of the value of all of the properties insured (commonly used to insure business personal property or contents at multiple locations with no specific limit per location).

Scheduled Coverage

Insures more than one property on one policy with a specific amount of insurance on each property.

Specific Coverage

Insures one property on one policy for one specific amount of insurance.

Excess Insurance

Property coverage above the primary amount of insurance. Excess insurance does not pay until any primary insurance has been exhausted.

Primary Insurance

Property coverage that provides benefits up to the limits of a policy.

Scope of Coverage

Property policies are of two types in terms of the perils covered: Named Perils Open Perils (also called Special Form or All-Risk coverage)

Mortgage Clause

Specifies and protects the mortgagee's (lender's) financial interests in property insured by the policy. The mortgagee must perform certain duties to protect its interests, which include: Paying any premium due under the policy on demand if the insured fails to do so Notifying the insurer of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware Submitting a signed, sworn statement of loss within 60 days after receiving notice from the insurer of the insured's failure to do so.

Liberalization Clause

Specifies that if the insurer broadens coverage with no increase in premium, the same coverage will apply to all existing policies without the need for an endorsement.

Assignment

Specifies that the insured may not transfer rights of ownership without the insurer's written consent.

Concealment or Fraud

Specifies that the policy may be voided if there is material concealment, misrepresentation, or fraud on the part of the insured.

Your Duties in the Event of Loss

Specifies the obligations of the insured in the event of a loss. These obligations include: Giving prompt notice of the loss to the insurer Notifying the police if a law has been broken Cooperating with the insurer in the investigation of the loss Forwarding any demands regarding the loss to the insurer Protecting property from further loss and separating damaged and undamaged property Preparing an inventory of the damaged property Submitting proof of loss to the insurer, including: The time and cause of loss Any other insurance that may cover the loss Any appropriate receipts, evidence, or affidavits to support the loss

Other Insurance

Specifies the process to be followed when more than one policy covers the same loss. Each policy pays no more than its share of the loss.

Policy Period and Territory

Specifies the time period and location of risks the coverage applies to.

Loss Settlement

Specifies the valuation method(s) used to pay losses.

Binder

Temporary contracts of insurance. Specifies perils covered, amount of coverage, effective date of coverage, and the name of the insurer providing the coverage. The binder does not state the premium amount. In California it is in force up to 90 days, or until the policy is issued. Extensions beyond 90 days may be granted by the Commissioner. Binders may not be applied to life or disability insurance or to coverages of $1,000,000 or more.

Additional Coverages

The Additional and Supplementary Coverage is beyond, and supplements, the coverages set forth as basic Coverages. They are for incidental expenses that often accompany the losses insured against. Additional coverages are automatically included in property policies without an additional premium. The type of additional coverages depends upon the type of policy. Additional coverages are paid in addition to those stated in the insuring agreement and include debris removal, collapse, and fire department service charges.

Declarations

The Declarations section contains basic information about the policy including: Who - Names the insurer and insured, including legal representatives in the event of the insured's death. What - A description of the property being insured, the risks being insured against, and the insured's interest in the property if he/she is not the absolute owner. Where - The address or legal description of the property being insured. Note: The property address will be found only on the Declarations Page. It is not in California's standard fire policy. When - The effective and expiration dates of the policy. How Much - The limits of insurance coverage, the deductible, and the premium. If the premium is to be determined at the contract's termination, there must be a statement of the basis and rates upon which the final premium will be determined and paid.

Salvage Value

The amount for which property can be sold at the end of its useful life. In property insurance, the salvage value is the scrap value of damaged property.

Pro Rata Cancellation

The cancellation of a policy for which a refund is made of the unearned premium calculated in proportion to the time the policy was in force. Generally applies to cancellations initiated by the insurer.

Short Rate Cancellation

The cancellation of a policy for which the premium refund is calculated according to a short rate table whereby the insurer retains a portion of the unearned premium as a penalty. Generally applies to cancellations initiated by the insured.

Flat Cancellation

The cancellation of a policy on the date the policy becomes effective.

Extended Replacement Cost

The company will cover the cost of rebuilding up to a stated percentage over the amount for which it is insured, usually 20% to 30% above the face value of the policy.

Conditions

The conditions section specifies the obligations that the insured and insurer agree to follow.

Cancellation

The following provisions apply: The insured may cancel the policy at any time by giving written notice to the insurer. The insurer may cancel the policy for nonpayment of premium by giving 10 days written notice. If the policy has been in effect for 60 or more days, the insurer may cancel the policy for nonpayment of premium by giving 10 days written notice, and 30 days written notice for the following specific reasons: Conviction of a crime for an act that increases any hazard insured against Grossly negligent acts or omissions Nonpayment of the earthquake surcharge on a policy issued by the California Earthquake Authority Material misrepresentation by the insured Substantial change in property, making it uninsurable

Proximate Cause

The immediate or actual cause of loss under an insurance policy.

Suit Against Us

The insured may not bring suit against the insurer until the insured has complied with all of the terms of the policy.

Nonrenewal

The insurer may elect to nonrenew the policy by giving to the named insured written notice stating a clear and specific reason. No insurer may fail to renew a policy based solely on: The age of the insured The grounds that a claim is pending under the policy The fact that the applicant or insured person is, has been, or may be, a victim of domestic violence

Insurable Interest and Limit of Liability

The insurer will not be responsible for an amount that is greater than the financial interest of an insured person.

Subrogation (Substitution)

The legal process by which an insurer seeks recovery of the amount paid to the insured from a third party responsible for having caused the loss. Subrogation transfers insured's right of recovery to the insurer that has paid a claim, and also: Prevents the insured from collecting twice for the same loss Helps the insurer maintain lower insurance rates Ultimately holds the responsible third party accountable for the loss

Insured

The party to an insurance contract whom the insurer agrees to indemnify for losses. Includes the insured's spouse, resident relatives of either, and others under age 21 that are in their care, custody, and control.

First Named Insured

The person, firm, or organization whose name appears in the first position of the Declarations Page of a policy when several names are listed. In Commercial Lines insurance, the First Named Insured has certain rights and duties that do not apply to any other named insureds.

Actual Cash Value (ACV)

The policy pays for the cost to repair or replace the damaged property at the time of loss, minus depreciation.

Replacement Cost

The policy pays the full cost to replace or repair the damaged property at the time of the loss without an adjustment for depreciation. The coverage amount at the time of the loss must be at least equal to 80% of the cost of replacement for the entire loss to be paid.

Exclusions

The portion of the policy that specifies the causes of loss (perils), or property not covered. A few typical property exclusions are: Earth movement Flood War Wear and tear Insect and vermin Inherent vice Neglect of the insured to protect the property by any reasonable means at and after time of loss Microbial Matter/Fungus - This means loss due to fungi, bacterial, or viral matter that reproduces through the release of spores or the splitting of cells or other means, including but not limited to, mold, mildew, mycotoxins, and viruses

Earned premium

The premium is fully earned only when the policy expires. No policy may have a clause stating the premium is considered fully earned if there is a claim during the policy period.

Right of Salvage

The right of the insurer to take possession of damaged property after the loss to the property has been paid. The salvaged property then belongs to the insurer.

Deductible

The specified amount of each loss that the insured must bear. By accepting a larger deductible, the premium may be reduced, and also the number of small claims.

Nonrenewal

The termination of a policy by the insurer upon the expiration date.

Cancellation

The termination of an insurance policy before its expiration date.

Loss Payable Clause

The time frame within which the insurer must pay a loss to the insured after the insurer has received the insured's proof of loss and reached an agreement with the insured.

Open Policy

The value of the insured property is not agreed upon in advance, but is left to be determined in case of loss.

Valued Policy Law

This law requires that an insurer will pay the full (face) amount of insurance in the event of a total loss.

Microbial Matter/Fungus

This means loss due to fungi, bacterial, or viral matter that reproduces through the release of spores or the splitting of cells or other means, including but not limited to, mold, mildew, mycotoxins, and viruses

Insuring Agreement

This section affirms that the insurer will indemnify the insured for covered losses. It is the insurer's promise of protection to the insured. A description of the covered causes of loss (perils) are also stated in this section.

Non-Concurrency/ Non-Concurrent Policies

Two or more policies cover the same property against damage or destruction, but the limits of coverage, kinds of property, perils covered, and dates of coverage are not the same. In such cases, the insured may not be fully covered.

Concurrency/Concurrent Policies

Two or more policies provide identical coverage for the same risk. Each policy pays that proportion of a loss that its limits bear to the total of all policies. This is an important feature for primary and excess coverage policies.

Return of Premium

Unless the insurance contract provides otherwise, a person insured is entitled to a return of his/her premium if the policy is canceled, rejected, surrendered, or rescinded, as follows: The whole premium, if the insurer has not been exposed to any risk of loss The unearned premium where the insurance is made for a definite period of time and the insured surrenders his/her policy If coverage is canceled, rejected, or surrendered by the insurer, coverage will terminate 10 days after written notice is mailed to the named insured.

California Standard Form Fire Policy

has 158 lines, which is a major difference between the two forms. The California Form also insures against losses caused by fire, lightning, and removal from premises endangered by the perils insured against.

Standard Fire Policy (of New York)

is the foundation for almost all Property Insurance Policies issued today. This policy is written based on "165 lines", which is standardized by law to describe coverages. States that use the Standard Fire Policy enforce the requirement that insurers cannot write a fire policy that is more restrictive than the 165 lines.

Gross unearned premium

means the unearned portion of the full amount of premium, including the unearned portion of the agent or broker commission.

Net unearned premium

means the unearned portion of the premium not including the unearned commission.