Ms insurance Adjuster test
Same as fair market value and depreciated value
Actual Cash Value
Formula: Replacement Cost minus Depreciation
Actual Cash Value A'95 Civic that Bob bought for $23,000 was worth only $1700 at time of claim because of depreciation.
Formula: ACV = Replacement Cost -Accumulated Depreciation
Actual Cash Value (ACV)
Pays the depreciated value of the item right before the loss occurred Formula: ACV = Replacement Cost -Accumulated Depreciation
Actual Cash Value (ACV)
Encourages the insured to purchase an adequate amount of coverage , typically at least 80 % of a property 's value
Coinsurance
Richard's auto policy states his deductible is $250 dollars. What type of deductible does Richard have?
Fixed Deductible
Deductible specific, set amount
Fixed Deductible Example Tom 's Fixed Deductible : $ 500 Covered damages:$3,500 Tom's Insurer pays: $3,000 Tom pays : $ 500
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
Franchise Franchise Deductible: $1,000 Total damages: $1,200 Insurer pays: $1,200 insured pays : $ 0
Bil's insurance policy will pay for the entire loss, up to the limit, as long as the loss exceeds a set amount. What type of deductible does Bill have?
Franchise Deductible
Risk is
From an insurer's perspective, the risk item or property being insured.
How does subrogration work
How it works: when policyholder is indemnified for a loss, she may no longer collect payment for that loss anyone else. She has transferred this right to the insurer. Subrogation step-by-step 1. Ed damages Sue's property. 2. Sue is indemnified for the loss by her insurer. 3. Sue's insurer can now demand payment from Ed to recover the funds it paid to Sue. 4. Sue may NOT demand payment from Ed
What is Certificate of Insurance
Includes basic details of the insurance policy Constitutes proof of coverage Often required for drivers
Legal Hazard
Increased chance of loss because of legal action
Legal Hazard
Increased chance of loss due to legal action Laws that force insurers to provide coverage for risks they would not normally cover A legal system that favors those who file lawsuits for monetary gain
Declarations
Information that makes the policy unique to a specific insured.
Problems with Adverse Selection
Insufficient premiums for level of risk exposure Leads to higher premiums, which might cause people to cancel policies
Adequate Premiums
Insurer must be able to cover claims with premium income
Subrogation
The transfer of rights that allows the insurer to recover its after has indemnified a policyholder
Subrogation
The transfer of rights that allows the insurer to recover its losses after it has indemnified the policyholder
Claimant
Someone who has filed a claim
Insured states value of insured item up front, and after a loss, the policy pays the lessor of ACV or The Stated Amount
Stated Amount
Property value is stated by the insured when applying for insurance When loss policy pays up to the stated or ACV, whichever
Stated Amount (Stated Value)
Lower premiums Good choice if insured can't afford to insure an item for its full value
Stated Value
1. Sarah injures Beth in a car accident. 2. Beth's insurer Pays beth $25,000 for the damages. pays 3. By accepting the payment, Beth subrogates her right to collect $25,000 to the insurer. 4. The insurer sues Sarah for $25,000. What is this an example of
Subrogation
Sally cigarette butt into Neal's dumpster, starting a fire on Neal's property that costs him $10,000. Neal files a claim with his insurer. The insurer Neal and then pays demands $10,000 from Sally to pay for the loss she caused. What the insurer the right to collect payment from gives Sally?
Subrogation
What are the Limits to Subrogation
Subrogation only applies up to the amount that the insurer pays. The policyholder still has the right demand payment from the guilty party for any damages that exceed the indemnity Beth suffered a $25,000 loss, but her insurer only paid her $20,000, she would still be allowed to demand $5,000 from the guilty party.
A Morale Hazard:
Takes place when insured acts differently because of the comfort that insurance protection provides Is another form of behavioral hazard. Moral vs. Morale: Moral Hazards involve deliberate, immoral behavior Morale Hazards involve indifference and carelessness.
Peril
The actual cause of loss or damage Lightning Fire Flood Vandalism Insurance Policies can be: Named Peril lists each peril that is covered All Peril (Open Peril) covers all perils except those specifically excluded
Loss
The cause of damage or loss
Peril
The cause of damage or loss
when a home is insured for less than 80 % of its value
Underinsured
Broad Evidence Rule
Used in some states ACV does not simply come down to RC minus depreciation Takes into consideration any evidence available to determine value
Fraud
Using dishonesty to profit from an insurance policy
Assigns a set value to each insured item
Valued Policy ( Guaranteed Value )
When is Value is determined prior to the issuance of policy
Valued Policy (a.k.a Agreed Value or Guaranteed Value)
What policy Avoids the confusion of assessing appreciation or depreciation
Valued Policy (a.k.a Agreed Value or Guaranteed Value) Example Antique jukebox appraised $25,000 Valued Policy for jukebox: $25,000 Policy will pay $25,000 exactly if jukebox is destroyed or damaged ( minus deductible )
Adverse Selection
When someone decides to buy insurance because he knows he will probably have to file a claim, typically because of information about the risk that the insurer is unaware of or unable to discriminate against. Smokers may be more motivated to purchase health insurance than nom- smokers. Healthy young people usually buy minimal health insurance with low premiums, while high - risk people tend to choose more extensive coverage.
Obsolescence
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 Examples: Walls made of lath and plaster VCRs Portable CD players
Proximate Causee
When there is an unbroken chain of events between an occurrence and a loss, then that occurrence is the proximate cause of the loss.
Kevin has a homeowners policy with replacement cost valuation and a coverage limit of $90,000 for his personal property. Three years ago, Kevin purchased a sofa and love seat for $1,000 and $500 respectively. Both pieces of furniture depreciate at $100 year. A house fire damaged many of Kevin's belongings, including the sofa and love seat which now cost $1,200 and $700 to purchase today. Ignoring any deductibles, how much will Kevin's insurer give him for the damaged sofa and love seat?
$1,900
Roxanne's house is struck by lightning during a thunderstorm which results in $10,000 in covered damage to the structure and and $2,800 in covered damage to her personal property. Roxanne's homeowners policy has a fixed deductible of $1,200. How much can she expect to receive in her settlement from her insurer for this claim?
$11,600
James is walking down the street when Andrea, an uninsured motorist, strikes him with her car. James suffers $12,000 in injuries from the accident. He has personal injury protection of $10,000 from his own automobile insurance policy, which immediately pays him the full amount. By accepting $10,000 from his own insurance company, James has waived the right to sue Andrea for more than _______________ for personal injury
$2,000
Darren's SUV cost him $28,500 when he bought it new five years ago. The vehicle is currently worth $12,000. How much is the annual depreciation on Darren's SUV?
$3,300
Jerry is using an expensive video recorder near the family pool when he slips and falls in, destroying the camera. Jerry bought the camera three years ago for $4,000, and it depreciates at $500 per year. A new, similar camera costs $5,000 today. Assuming the loss is covered, if Jerry had a replacement cost policy, how much would Jerry's insurer indemnify Jerry for the destroyed camera?
$5,000
Loss
. Reduction in value . Expense caused by a covered peril . The amount an insurer pays to settle a claim
Investigation includes:
. finding the proximate cause of the loss. . examining all damages . noting all circumstances surrounding the loss . taking witness statements and reviewing police reports, . when necessary determining liability, when relevant to the claim . deciding whether the claim is valid or not.
Value of Betty's home: $100,000 Minimum coinsurance amount: $80,000 Betty's actual coverage: $40,000
1. Calculate coinsurance penalty $40,000 (actual coverage) =50% $80,000 (coinsurance requirement) 2. Apply penalty to partial losses The home suffers a partial loss of $10,000 Coinsurance penalty : 50 % . Insurer will only pay $ 5,000 ( 50 % of $ 10,000 )
There four essential (and two very common) sections of an insurance contract:
1. Declarations Page 2. Definitions 3.Insuring Agreement 4. Conditions 5. Exclusions 6. Endorsements
Loss
1. Reduction in value of an insured item 2. Financial loss due to an occurrence or accident 3. For insurers: the amount paid out in a claim settlement Loss # 1 : reduction in value of Dan 's car after accident Loss # 2 : medical bills for Dan 's injured wrist Loss # 3 : what the insurer has to pay Dan for his property damage and injury
Definable risk
1. The insurer can define the exact conditions under which the item is covered by the policy. Example - Jewelry is covered up to a specified limit if stolen. 2. The item itself is definable (it can be precisely described) Example A house, car, or diamond necklace can be defined. An entire riverbed cannot. 3. The item has precise value. Example A house or car does. A family photo does not.
4 methods of valuation:
1.Actual Cash Value (ACV) 2.Replacement Cost (RC) 3.Stated Amount 4.Agreed Value (Valued Policy)
An insurance contract has four essential parts:
1.Declarations Page 2.Insuring Agreement 3.Conditions. 4.Exclusions
There are six unique characteristics of insurance contracts:
1.Personal Contract 2.Contract of Adhesion 3. Utmost Good Faith Contract 4.Aleatory Contract 5. Unilateral Contract 6.Conditional Contract
Sue decides to get a valued insurance policy on her antique car. She and her insurance company agree to a value of $85,000. Three years later, the car is destroyed when a tree falls on it in a parking lot. The car depreciates at $2,000 a year, and its replacement cost is $100,000. Ignoring any deductible, how much can Sue expect her insurer to indemnify her?
85,000
Third Party Claim
A claim filed against an insurance policy by anyone other than the person on that policy Jake runs a red light and crashes into Kelly 's car . Kelly can file a third party claim with Jake's insurer to recover the damages that Jake caused to her and her car .
What is the primary distinguishing characteristic of a contract of adhesion?
A contract of adhesion implies an unequal balance of power in the creation of the contract.
Claim
A demand for payment in accordance with the terms of an insurance policy (does not always result in indemnification)
The Law of Large Numbers
A large number of insured units reduces the possibility of variation from the expected number of claims. If there are more units involved, there will be much less variation from statistics, which means the rate of claims will be more predictable.
Law of Large Numbers
A large number of similar risks must be insured. Spreads the risk across more policies Helps the insurer predict losses more accurately "Similar risks" can mean: cars, houses, persons' lives, similar businesses, etc.
Lender Interest
A lender's financial stake in an insured item
Replacement Cost
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
Physical Hazard
A physical condition that increases the chance of a loss
The word "risk" has two meanings in the insurance industry
A risk can be: the potential for financial loss being exposed or open to damage. an insured item.
Valued Policy (a.k.a Agreed Value or Guaranteed Value)
A valuation method that assigns a set value to each insured item
Actual Cash Value
A valuation method that takes into account depreciation
Which of the following statements regarding actual cash value is FALSE? A) Actual cash value is always most beneficial to a policyholder. B) Actual cash value includes the depreciation on an item. C) A replacement cost valuation will generally be more than the ACV valuation. D) The actual cash value generally reflects the market value of an item.
A) Actual cash value is always most beneficial to a policyholder.
Adam is shopping for a car in automobile dealership. While visiting the showroom, he trips over a rug that has folded over and breaks in the fall. Which of the following is true? A) Adam may file a third party claim with the dealership's insurance company. B) The automobile dealership may file a first party claim with its own Insurance company. C) Adam may file a first party claim with the dealership's insurance company D) The automobile dealership may file a third party claim with its own insurance company.
A) Adam may file a third party claim with the dealership's insurance company.
Arlene's house suffered structural damage in an earthquake year, last but her policy does not cover earthquake damage, so Arlene never got it fixed. When a tornado rips through her neighborhood, it causes some roof damage totalling $2,000, and Arlene sees an opportunity in the situation. She files a claim for the roof damage, but also claims that the tornado caused the structural damage to her house that was actually caused by the earthquake last year. Which of the following statements is true? A) Arlene has just committed soft fraud B) Arlene has just created a morale hazard C) Arlene has just committed hard fraud D) Arlene has just created a physical hazard
A) Arlene has just committed soft fraud
Sam suffers $6,000 in injuries when Nicole runs a red light and crashes her uninsured car into Sam's. Sam's own insurance company, ABC Insurance, immediately pays him $5,000 for his injuries. Sam then ponders whether to file $6,000 lawsuit against Nicole. Why can't Sam sue Nicole for the full amount of his injuries? A) By accepting payment from ABC Insurance, Sam subrogated a portion of his rights against Nicole to ABC Insurance. B) Once ABC Insurance indemnifies Sam for $5,000, Sam is blocked from any further legal action. C) Nicole has already subrogated her rights to Sam's insurance company. D) Sam first needs to wait to see how much Nicole pays to ABC Insurance.
A) By accepting payment from ABC Insurance, Sam subrogated a portion of his rights against Nicole to ABC Insurance.
Which of the following statements about a moral hazard is FALSE? A) It is reckless behavior because of security offered by insurance B) It is a hazard caused by human behavior C) It is the result of an unconscious behavior. D) A moral hazard increases risk.
A) It is reckless behavior because of security offered by insurance
Which of the following statements applies to the concept of utmost good faith? A) The insured must divulge the exact nature and potential of the risks being transferred to the insurer. B) The insurer can choose to suspend the utmost good faith requirement in an insurance contract, but only if the insured agrees. C) Utmost good faith applies to the insured, but not the insurer. D) good faith is based upon the number of misrepresentations made in an application
A) The insured must divulge the exact nature and potential of the risks being transferred to the insurer.
A legally binding contract where the risk of financial loss is transferred in exchange for premiums called: A) an insurance policy. B) the principle of indemnity. C) a reserve. D) a claim
A) an insurance policy.
An offeree may legally reject a contract offer by any the following means, EXCEPT: A) asking for clarification or additional information. B) accepting the offer on one condition. C) proposing a new offer. D) explicitly rejecting the offer.
A) asking for clarification or additional information. ( does not constitute rejecting offer)
Indemnification may include all of the following except: A) payment for pain and suffering B) reimbursement for hotel costs. C) reimbursement for rental car costs. D) payment for repairs to property.
A) payment for pain and suffering
Endorsements
Add, reduce, or change the coverage of the policy in some way
Six Qualifications of Insurable Risk
Adequate Premiums Definable Risk Unexpected Losses Substantial Losses Exclusions Law of Large Numbers
Insured is paid the agreed amount, regardless of ACV.
Agreed Value
Declarations Page ("Dec Page"): makes contract specific to the policyholder.
Always the first section; it establishes names of both parties (insured and insurer) policy number location & description of insured item value of insured item dates of the policy (beginning and end) amount and limit of coverage deductible premium
Indirect Loss
An economic loss that results from a direct loss Direct vs. Indirect Loss: Direct loss: physical damage Indirect added expenses or lost income because of physical damage Renting a hotel room until home is repaired Lost rental income if damages cause a tenant to move out
Occurrence
An event or circumstance that loss
Occurrence
An event, incident, or condition that causes damage Lightning striking a house and damaging the roof A car veering off the road and hitting tree The weight of ice tearing off rain gutters
Depreciation
An item's estimated loss of value due to wear, tear, and age Can usually be determined with: Standard Depreciation Schedules Estimating Software
Calculate Depreciation
Annual Depreciation: $10 ($100/10) Accumulated Depreciation: $30 ($10 x 3)
Hazard
Anything that increases exposure
Which of the following is an example of a moral hazard? A) The road that leads to Mike's house is steep and narrow. B) Ken lights a candle, sets it right next to the window draperies and leaves the house to go to work. C) Kim is jamming out to her music while driving to work and accidentally runs a red light. D) Nancy falls asleep with a lit cigarette in her hand
B) Ken lights a candle, sets it right next to the window draperies and leaves the house to go to work.
Which of the following statements apply to subrogation? Select all that apply. A) Subrogation transfers a portion of the rights of the insurer to the policyholder. B) Subrogation transfers portion of the rights of the policyholder to the insurer. C) Subrogation prevents injured persons from collecting twice on the same damages. D) A policyholder subrogates right the insurer up to the amount of indemnification E) The exact amount of subrogation will usually be determined by a court of law.
B) Subrogation transfers portion of the rights of the policyholder to the insurer. C) Subrogation prevents injured persons from collecting twice on the same damages. D) A policyholder subrogates right the insurer up to the amount of indemnification
Which of the following statements best describes Law of Large Numbers? A) The larger the number of insurance policies written, the more an insurer will pay out. B) The larger the number of units insured, the more accurately the insurer can predict the number of claims from that group. C) The larger the amount an insurance company can charge in premiums, the less likely a policyholder will file a claim. D) The larger the number of insurance policies written, the higher the profit for the insurer.
B) The larger the number of units insured, the more accurately the insurer can predict the number of claims from that group.
An insurance adjuster will do all of the following regarding a claim EXCEPT: A) decide whether the claim has any merit. B) protect the insurer from the claim C) determine if the claim falls under the coverage of the insurance policy D) investigate the claim
B) protect the insurer from the claim
Mark incurred $8,000 damage his car in an accident. He received $8,000 from his insurance and $4,000 from company the other driver. By receiving a profit from the loss, Mark could be in violation of: A) the principle of financial restoration. B) the princple of indemnity. C) the principle of financial status. D) principle of profit and loss .
B) the princple of indemnity.
Which of the following best describes insurance? A)Restoration to the previous financial condition, no more, no less B)An economic device used to protect against the risk of unforeseen and extraordinary financial loss C)Transfer of right to collect a debt from one entity to another D)A legally enforceable agreement between parties
B)An economic device used to protect against the risk of unforeseen and extraordinary financial loss
Utmost Good Faith
Both parties must act honestly and openly in order for the contract to be valid
Which of the following statements regarding actual cash value is FALSE? A) The actual cash value generally reflects the market value of an item. B) Actual cash value is always most beneficial to a policyholder. C) A replacement cost valuation will generally be more than the ACV valuation. D) Actual cash value includes the depreciation on an item.
C) A replacement cost valuation will generally be more than the ACV valuation.
Which of the following is NOT an insurable risk? A) A collection of jewelry B) An airplane C) A small town D) A forklift
C) A small town
From the point of view of insurer, which of the following is a risk? A) A thunderstorm B) A large tree growing next to a house C) An insured automobile D) A hurricane
C) An insured automobile
Which of the following refers to being restored to the financial condition you were in before a loss? A) Estoppel B) Subrogation C) Indemnification D) Restoration
C) Indemnification
Which of the following does NOT have an insurable interest in Big Ed's Steak House, a local restaurant? A) Ed , who owns 51 % of the restaurant B) ABC Bank, which holds the mortgage on Big Ed's Steak House. C) Jim, who regularly eats at Big Ed's Steak House because it's his favorite restaurant. D) Ed 's partner , who owns 49 % of the restaurant .
C) Jim, who regularly eats at Big Ed's Steak House because it's his favorite restaurant.
How can insurance companies afford to pay for an individual's catastrophic loss? A) The insurer puts each insured's premium payments into an interest- bearing account, which then used to pay for that insured's claims, if they occur B) The insurer will only pay up to the amount already collected from each insured C) The insurer collects premiums from all policyholders and pools them to pay the claims of the few. D)The insurer will deny claims if it doesn't have enough money in the bank
C) The insurer collects premiums from all policyholders and pools them to pay the claims of the few.
The purpose of the principle of indemnity is: A) to prevent an insurer from making a profit on a loss. B) transfer the risk of financial loss from one party to another. C) to prevent an insured from making a profit on a loss. D)to transfer the right to collect a debt from one party to another.
C) to prevent an insured from making a profit on a loss.
Exclusions
Causes of Loss or items of property that are not covered by the policy.
Financially protects the insurer Imposes a penalty on coverage for partial losses if the property is not fully insured - 80 % of its RC
Coinsurance Property value: $100,000 Coinsurance amount: $80,000 (100,000 x 80 % ) Underinsured : policy limit less than $ 80,000
if a property is underinsured, the 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.
Coinsurance Penalty
Josephine's gas station suffered severe damage when one of the fuel tanks caught fire and exploded. After completing his inspection, the adjuster determines that Josephine's claim is not covered because she did not have automatic shut-offs for the fuel tanks. If this safety measure was in fact required in order for coverage to apply, where might Josephine find it in the policy?
Conditions
Which of the following best defines "insurer"? A) A legally binding contract in which the insurance company agrees to pay for specified losses in exchange for premiums B) An individual or organization that pays premiums in exchange for protection C)Transfer of the risk of financial loss from party to another. D) A company, group, or government offering financial protection.
D) A company, group, or government offering financial protection.
What is the primary distinguishing characteristic of a contract of adhesion? A) A contract of adhesion takes precedence over a contract of utmost good faith. B) A contract of adhesion benefits only one party to the contract. C) The amounts exchanged over the course of the contract are unequal. D) A contract of adhesion implies an unequal balance of power in the creation of the contract.
D) A contract of adhesion implies an unequal balance of power in the creation of the contract.
Which of the following is most likely a third party claim? A) A woman files an insurance claim after she backs her car into a guardrail B) A man files a claim against his health insurer for a surgery to remove his appendix. C) A man files a homeowners claim when his house is struck by lightning. D) A woman files an insurance claim when she is injured by an employee at a local bar.
D) A woman files an insurance claim when she is injured by an employee at a local bar.
When record-breaking rainfall causes severe flooding in Janie's home town, Janie's rental property suffers extensive damage. Which of the following is an indirect loss? A) Janie must hire a contractor to reinforce a damaged retaining wall in the backyard of her rental unit. B) Janie must pay to have the wood floors replaced in her rental unit. C) Janie's tenant has to replace his sofa that damaged by the water D) Janie loses a month of rental income when her tenant must move out while repairs are made to the home
D) Janie loses a month of rental income when her tenant must move out while repairs are made to the home
Which of the following is true? A) When Kevin sold his truck to Bill, he lost his auto insurance coverage. B) Kevin's auto insurance policy now covers Bill, who bought Kevin's truck. C) Kevin's insurance policy protects his car from damage. D) Kevin's insurance policy covers him for losses to his new car, even though he sold his truck, which was previously covered under his policy,
D) Kevin's insurance policy covers him for losses to his new car, even though he sold his truck, which was previously covered under his policy,
Which of the following statements is NOT true about an insurance policy? A) The insurer holds the balance of power in the creation of an insurance policy. B) Ambiguities in contracts of adhesion often favor the insured. C) An insurance policy actually protects the policyholder's financial interests in the insured item, not the insured item itself. D) The concept of utmost good faith only applies to the insured.
D) The concept of utmost good faith only applies to the insured.
Which of the following best defines premium? A) A legal agreement providing temporary evidence of insurance until policy is issued B) A legally enforceable agreement between parties C) Transfer of risk of financial loss from one party to another D) The fee paid by the insured in exchange for an insurance policy
D) The fee paid by the insured in exchange for an insurance policy
Tom decides to purchase an insurance policy to protect his home. According to the definition of a personal contract which of the following most accurately describes what Tom's insurance actually protects? A) Tom 's entire family B) Tom house and the entire property C) The house itself D) Tom's financial interest in the home
D) Tom's financial interest in the home
When damages or losses fall under the terms insurance contract: A) the policyholder must wait a period of five days before filing third- claim. B) an adjuster files the third-party claim on behalf of the policyholder. C) the policyholder immediately subrogates his right to collect compensation from the negligent party D) the policyholder has an immediate right to claim payment according to the terms of the policy.
D) the policyholder has an immediate right to claim payment according to the terms of the policy.
Fraud
Deceiving an insurer to profit from an insurance policy Categorized as "hard" I1 "soft" Usually involves misrepresentation or concealment
In an insurance policy, where might one find the make and model of the covered vehicle?
Declarations
In which section of the policy might you find the following statement? "Property Address: 246 Rosemead Drive."
Declarations
Found on the declarations page of a policy
Deductible
Lets the policyholder decide how much risk he is willing to take
Deductible
The amount the policyholder must pay out of pocket before the insurer will pay for losses
Deductible
Three types: 1.Fixed 2.Percentage 3. Franchise
Deductible
Moral Hazard
Deliberate, reckless behavior because of insurance coverage
Hard fraud
Deliberately planning or faking loss
an item's loss of value due to wear, tear, age, or obsolescence
Depreciation:
Insurable interest
Direct financial interest in protecting a unit
Insurable Interest
Direct financial interest in protecting something or someone
Indirect Loss
Economic loss resulting from a direct loss
Charlotte's son just turned 16 and got his driver's license. She wants him to be covered, so she adds him to her auto insurance policy. Where would this addition be found in Charlotte's policy?
Endorsements
Mark wants to add "towing and labor costs" coverage to his auto insurance policy. Under which part policy would he add this coverage?
Endorsements
Types of Physical Hazard:
Environmental: potholes in the road Material: asbestos in an old house Operational: poorly maintained engine Occupational: working in a coal mine
Insuring Agreement
Essence of the contract. Summarizes what the insurer will cover and how.
Soft "opportunistic" fraud
Exaggerating a claim inflate the indemnity
Definitions
Explains exactly what specific words mean in the context of the policy
Hazard vs. Exposure:
Exposure is the possibility of loss Hazards are things that increase that possibility More Hazards -Higher Exposure
Evaluating Exposure
Exposure is: expressed in dollars or units. determining factor in issuing a policy and setting a premiunm Example Sue lives near a cliff. The underwriter will research the area to determine her exposure to mudslides, landslides, etc. The premium and coverage will be based on this research.
True or false You can insure a house you do not own or have financial interest in.
False
Claims-filing facts:
Filing a claim does not grant immediate indemnification When insured parties file a claim, it means they believe they are owed payment by an insurer Policyholders file claims by calling their insurer.
Types of Insurance Claim
First Party Third Party
Two types of Claim:
First Party Claim Third Party Claim
Adequate Premiums
Insurer must be able to cover claims with premium income . Potential losses cannot be too much for the insurer to pay . Insurer must be able to cover claims and expenses . If premiums must be set too high, the risk is not insurable
Limits on lender interest provisions:
Lender may only collect financial interest in a property. Lender may never change cancel insurance policy.
Conditions
Lists requirements that the insured must meet for coverage to apply
Matt offers to lend Shawn his truck so he can pick up some stones for his landscaping project. Matt tells Shawn, "Don't worty my truck is insured." What is Matt really saying?
Matt's financial interest in the truck is protected, should a covered loss occur.
Bob recently had a fire totally destroy his auto servicing garage. When an adjuster comes to investigate the fire, he asks whether Bob had stored any large containers of fuel in the garage. Bob did store two large containers of fuel in the but he knows that, if the insurance finds garage, company out, they will not indemnify him and he will be financially ruined. Bob tells the adjuster "no." Which of the following most accurately describes Bob's statement to the adjuster?
Misrepresentation
Hazards increase risk for the insurer. Various types of hazards:
Moral Morale Physical Legal Lmmp
Characteristics of Replacement Cost
No depreciation Based on the replacement cost at the time of loss Higher premiums Sally's roof is three 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 .
Adhesion
One party sets the terms of the contract the other may simply agree or not agree.
Unilateral
Only the insurer makes a promise to act , the insured can void contract at any time.
Functional Replacement Cost
Pays to replace an outdated, obsolete item with a functionally equivalent item - not an identical item Level of falls between RC and ACV coverage
Deductible The insured pays a percentage of the insured risk's value
Percentage Some policies combine fixed and percentage deductibles Example Karen insures her home for $500,000 Percentage Deductible : 3 % , or $ 15,000 ECovered damages: $25,000 Karen pays the first $15,000; Insurer pays the balance $10,000.
Rhonda 's homeowners policy states her deductible is 2 % of the value of her home. What type of deductible does Rhonda have?
Percentage Deductible
Physical Hazard
Physical conditions that make losses more likely
Direct Loss
Physical harm to tangible property
Direct Loss
Physical harm to tangible property . Structural damage to house Kitchen walls and cabinets burned by fire Flooring damaged by water used to put out
Stated Amount (Stated Value)
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
Lender Interest Provisions
Protect lender interest by allowing the lender certain rights in the policy
A risk carries possibility of gain is called a
Pure risk
Calculate Actual Cash Value ( ACV )
Replacement Cost $100 Depreciation($30) ACV $70
Pays to replace damaged item at current market prices No depreciation
Replacement Cost (RC)
What is the formula for actual cash value?
Replacement cost minus annual depreciation
Insurable Risk
Risk: an item, person, or organization that has been insured Not everything is insurable. Six qualifications determine what can be insured.
Morale Hazard
Risky behavior because of the comfort of insurance protection
Example of Replacement Cost
Roberto's hail-destroyed roof: Replacement Cost (RC) 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
The Claims Process:
The claimant contacts the insurer files a claim The insurer acknowledges the claim and requests all items necessary to prove the loss. The adjuster investigates the claim and determines whether it is valid. If valid, the adjuster evaluates the claim. The insurer accepts or rejects the claim.
Aleatory
The execution of the contract depends on an unknown future event.
Stanley lives in a rough neighborhood with a high crime rate. When he inherits a very valuable original painting by Picasso, he tries to buy an insurance policy on the painting, but has trouble finding an insurance company that will sell him policy. Why might this be?
The exposure to loss is too great, based on where Stanley lives
Exposure
The extent to which a person, item, organization is open to damage or loss Insurers consider a risk's exposure when deciding whether or not to insure it Examples Gulf coast - high exposure to hurricanes California high exposure to earthquakes High crime area - high exposure to theft
RC & the Principle of Indemnity
The insured cannot profit from a loss The insurer often waits to pay the amount until the insured submits proof of replacement.
Personal
The insured person is protected from losses, not the covered property
Conditional
The insurer must only honor the contract if the insured meets certain conditions.
Lender interest
The lender's financial stake in an insured item
Substantial Losses must
The loss must cause substantial economic hardship If your shirt is ruined while you're barbecuing, you can easily buy a new one. This is not a substantial loss. If a guest accidentally backs his car into your porch you ca n't easily afford a new porch. This is a substantial
Proximate Cause
The original occurrence in an unbroken chain of that results in a loss
What best describes the insurance concept of "exposure"?
The possibility of damage or loss
Exposure
The possibility or likelihood of damage or loss
A power surge sparks a small electrical fire in an office building. The electrical fire triggers the automatic sprinkler system. The water from the sprinklers soak the carpets and short-out all the computers, causing thousands of dollars itn damage. What is the proximate cause of the loss?
The power surge
Valuation
The process of estimating what an item is worth
Adam has a treacherous drive to work every day. Not only does he have to drive down the pothole-strewn access road to the highway, but he also must traverse several icy bridges on the way to work. Why does the insurance call these hazards "physical hazards"?
The roads present a physical condition that increases the chance of loss.
Tom decides to purchase an insurance policy to protect his home. According to the definition of a personal contract, which of the following most accurately describes what Tom's insurance actually protects?
Tom's financial interest in the home
. If claim is denied, the insurer must explicitly state its reasons for denial. True or false
True
ACV offers lower premiums for less coverage. True or False
True
Flood insurance is not available in because flooding has become expected.
True
If claim is accepted, the insurer must pay promptly after notifying that the claim will be paid. True or false
True
In order to be insurable, a risk must be definable and have a quantifiable value. A small town would be too hard to define and quantify.
True
Insurance Adjuster: represents the insurer; responsible for evaluating the circumstances of a claim. True or False
True
True or False Only parties with insurable interest insure property or person.
True
You can only insure someone's life if that person's death would cause you economic hardship. True or False
True
Jane's shed burns to the ground during tornado, when the winds break a wall of the shed, knocking over a lantern inside. What is the proximate cause of the loss?
Wind
Direct Loss vs. Indirect Loss
a fire destroys a bakery's fleet of delivery trucks: . the physical destruction of the trucks is a direct loss the cost of renting new trucks in order to keep business going is an indirect loss.
Fred has decided to store his fuel tanks inside his garage where he builds automobiles. To the insurer, the fuel tanks would be considered:
a hazard.
Harold wants to buy an insurance policy for his home in Atlanta. The insurance company writes him a policy. To the insurance Harold's home is considered: company,
a risk.
After receiving a claim, an insurer must:
acknowledge receipt of the claim. begin investigating all pertinent facts and issues surrounding the claim.
Endorsements are additions to the policy that can:
add or reduce insurance coverage. change policy provisions. change the premium price after the policy period ends. Synonyms: Rider Addendum Attachment
Bill purchased a policy from ABC Insurance. Several months later, he filed a claim which was denied. While reviewing his policy, he found several ambiguities in the policy and decided challenge the insurer's decision. When the dispute went to trial, the court ruled in Bill's favor. This is because insurance policies are
aleatory contracts
Lender interest provisions:
allow the lender to be listed as a payee on the policy. ensure that the lender is notified if the policy is canceled, reduced, or expires. provide compensation for the lender in the event of an act or an omission by insured party permit the lender to pay policy premiums to maintain coverage if the insured fails to do so
Driving home after a 14-hour shift, Sam falls asleep at the wheel and plows into Sandra's home, causing extensive damage to the East wall and roof. As a result, Sandra and her family must move into a hotel until the repairs are completed. The cost of staying in a hotel is:
an indirect loss.
An "occurrence" is defined as:
an unexpected event that causes loss.
Jim applies for homeowners policy with his agent, who gives him immediate temporary coverage. However, after checking Jim's background information, the agent discovers that Jim has been convicted of arson, so she declines his application. What type of coverage did Jim have before the agent declined his application?
binder
First Party Claim
by the policyholder against his or her own insurance policy Must be paid by policyholder's own insurer You insure your home with ABC Insurance against hail. A hailstorm damages your Your claim on ABC for the damage is a first party claim.
The original occurrence
causes damage that then damage. is the proximate cause of all resulting losses. A car crash starts a fire, and the fire department causes water damage while putting out the flames The car crash is the proximate cause of the structural damage , fire and smoke damage and water damage.
One solution to adverse selection
charging higher-risk individuals higher premiums
Hazard
condition increasing the likelihood or severity of a loss Example Storing dangerous materials in a building A record of drunk driving Smoking
If the claim is valid, the Adjuster evaluates it, which includes:
considering policy limits and deductibles calculating lender interest determining the value of the loss applying all financial provisions of the policy.
Hard fraud:
deliberately causing or faking losses
Soft fraud:
exaggerating a claim
Joe's driveway has a very steep grade with several sharp turns, and it gets very muddy during rains. To an insurance company, Joe's driveway might be considered:
hazard.
Proximate cause can determine which losses are covered by an insurance policy. Damages covered:
if caused by a covered peril. if their proximate cause was a covered peril.
Exclusions
insurer must exclude coverage for large-scale disasters and catastrophic events. Insurers have to charge adequate premiums. Some losses would require such large premiums that it is impossible to insure them. Wars and terrorism Nuclear and missile attacks Earthquakes Floods
Pure Risk:
is a risk with no chance of gain. can only result in either loss or no loss. can be insured
A Definitions section contains:
is not technically essential, but common in policies defines terms used to write policy including: "collision," "decay," "like kind and quality." includes important language for adjusters to know
Speculative Risk:
is undertaken with no certainty of either gain or loss. is made knowingly, by conscious choice. cannot be insured.
Exclusions section contains
list what the policy does not cover. Common Exclusions (in nearly all property policies): earthquakes flooding war nuclear hazards intentional acts
Sarah is driving carelessly through the streets of Tallahassee when she hits a puddle and loses control of her car. She crashes into a telephone pole and the car is completely wrecked. To her insurer, Sarah's car is considered a:
loss.
Third Party claim:
made by anyone other than the policyholder
First Party claim:
made by the policyholder on her policyholder
John owes lot on his car than it is worth. He figures he would be better off if he burned the car and collected an insurance settlement. He has someone set fire to his garage to destroy the car. John's behavior would be considered
moral hazard.
Lewis owns a computer store, and he spends many hours a day on the sales floor demonstrating his products to customers. He often gets very animated when showing the electronics and, although he does not intend for anything bad to happen, he doesn't worry too much about handling them carefully, since he knows that his insurance policy will cover any damages. This behavior would be called a:
morale hazard.
Lucy has insurance on an expensive necklace she likes to wear to work day. After work, she takes it off and leaves it in her cars cupholder so she can put it back on in the morning on her way to work. Lucy's behavior would be considered a:
morale hazard. (It was risky to leave in car)
A risk is insurable if:
policy premiums will cover both claims and expenses the insurer can define the exact conditions under which the item is covered by the policy; if the item itself is definable; and if the item, person, or organization has clearly defined value the loss is unforeseeable, unexpected, and reasonably unpreventable. the loss causes substantial economic hardship. the insurer can exclude coverage for significant disasters and catastrophic a large number of similar types of risk are insured.
Lender Interest does what
protects a lender who loans money to a buyer. allows insurers to compensate a lender if property, in which the lender has a financial interest, is damaged
Annual Depreciation:
replacement cost divided by the item's useful life
When an applicant for a homeowners insurance policy lists the address, size, and description of his home, he is providing:
representations.
A Moral Hazard:
results from the policyholder's deliberate decision. involves reckless behavior because of the financial security offered by insurance. is a type of "behavioral hazard."
Adjustment:
the final disposition of a claim
In the Conditions section:
the insurer specifies any limits or qualifications the policyholder must meet. For example Requiring security guard for a jewelry store How to file proof of loss How to protect the property after a loss
Accumulated Depreciation:
the item's Annual Depreciation multiplied by its age
Valuation:
the process of estimating what an item is worth
Unexpected Losses must be
unforeseeable unexpected reasonably unpreventable completely random in nature.
An insurance applicant revealing his convictions for drunk driving to an insurer is an example of:
utmost good faith.
In order to qualify for an insurance policy, Lydia's Fine Jewels must agree to have a security guard on the premises 24/7. This is called
warranty
The Insuring Agreement summarizes:
what is covered. which causes of loss are covered. any services provided. any exclusions to coverage the maximum limit of policy coverage in dollars.