P&C Exam - Chapter 1 & 2

Claims Department

Assists the policyholder in the event of a loss

Restoration/Non-reduction of Limits

Specifies the sum and circumstances under which an insurer charges the insured, usually a business firm, to restore a policy to its initial face value or not reduce limits of coverage after the insurer has paid a claim either to the insured business or a third party on behalf of the business

Cancellation

Specifies the terms under which the policy can be cancelled by the insurer and the named insured.

Loss Settlement

Specifies which loss valuation method will apply to the property insured under the policy.

Contract of Adhesion

One party writes the contract, without input from the other party. One party (insurer) prepares the contract and presents it to the other party (applicant) on a "take-it-orleave-it" basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).

Unilateral Contract

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract.

Executives

Oversee the operation of the business.

Personal Contract

Owner cannot transfer or assign ownership of an insurance policy (property and casualty) to another person.

Non-Personal Contract

Owner may transfer or assign ownership of a life or health insurance policy to another person

Physical Hazard

A physical condition that increases the probability of loss; use, condition, or occupancy of property. Example: Flammable material stored near a furnace.

"A" Rating or Judgment Rating

- An individual rate that doesn't use loss history as a component and that is derived largely from the underwriter's evaluation and best judgment the risk poses to the insurer

Surplus Lines Insurance

- Finds coverage when insurance cannot be obtained from admitted insurers. a. May not be utilized solely to receive lower cost coverage than would be available from an admitted carrier. b. Each State regulates the procurement of Surplus Lines insurance in its State. c. Non-admitted business must be transacted through a Surplus Lines Brokers or Producers.

Attained Age

- Insured's age at any point in time at issuance, renewal or conversion.

Issue Age

- Insured's original age on the policy issue date

Fraud

- Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements: ■ False statement, made intentionally and that pertains to a material fact. ■ Disregard for the victim. ■ Victim believes the false statement. ■ Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement. ■ The victim's decision and/or action results in harm.

Assignment

- Policy owners may not assign or transfer their rights under an insurance contract without the written consent of the insurer.

Stock Insurance Company

1. Owned by stockholders or shareholders. 2. Directors and officers direct the company operations and are elected by stockholders. 3. Stockholders receive taxable corporate dividends as a return of profit when declared by the Directors. 4. Dividends are not guaranteed. 5. Traditionally stock insurers issue Non-Participating policies

Risk Retention Groups (RRG)

1. A group-owned insurer that primarily assumes and spreads the liability related risks of its members. 2. Licensed in at least one state and may insure members of the group in other states. 3. Owned by its policyholders. 4. Group must be made up of a large number of homogeneous or similar units. 5. Membership is limited to risks with similar liability exposures such as theme parks, go cart tracks, or water slides. 6. Must have sufficient liquid assets to meet loss obligations. 7. Each member assumes a portion of the risks ins

Fraternal Benefit Societies

1. Primarily social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members. 2. Membership typically consists of members of a given faith, lodge, order, or society. 3. They are usually organized on a non-profit basis.

Reciprocal Insurance Company

1. A group-owned insurer whose main activity is risk sharing. 2. Unincorporated, and is formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber. 3. Each subscriber assumes a part of the risk of all other subscribers. If premiums collected are insufficient to pay losses, an assessment of additional premium can be made. 4. The exchange of insurance is affected through an Attorney-In-Fact.

Producer's Responsibilities to the Insurer:

1) Fiduciary duty to the insurer in all respects, especially when handling premium funds. 2) Must keep premium funds in a trust account separate from other funds and forward to insurer promptly. 3) Must report any material facts that may affect underwriting. 4) Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer. 5) Duty to only recommend the purchase of suitable policies.

Producer's Responsibilities to Insurance Applicant or Insured:

1) Forward premiums to insurer on a timely basis. 2) Seek and gain knowledge of the applicant's insurance needs. 3) Review and evaluate the applicant's current insurance coverage, limits and risks. 4) Serve the best interests of the applicant or insured, although producers represent the insurer. 5) Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer.

Pure Risk

1) Situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur. 2) Pure risk can be insured. Examples include: a) The possibility of damage to property caused by a fire or other natural disaster. b) The possibility of financial loss as a result of death.

Residual Markets

1. A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers. 2. A Joint Underwriting Association or Joint Reinsurance Pool requires insurers writing specific coverage lines in a given state to assume the profits/losses accruing their share of the total voluntary market premiums written in that state. 3. Risk Sharing Plan - Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels. 4. Coverage is typically written as Workers' Compensation, personal auto liability or property insurance on real property.

Reinsurance Companies

1. An insurance company that assumes all or a portion of a risk from a primary or ceding insurance company. 2. Reinsurance transfers risk among insurance companies. 3. The insurer requesting reinsurance is the primary or ceding company. 4. The Insurer sharing in the risk is the reinsurance company. 5. Consumer inquiries must originate with the ceding company, which then obtains reinsurance.

Four Elements of a Legal Contract

1. Competent Parties a. All parties to a contract; Insurer and Insured must have legal capacity to enter into a contract. b. Those without legal capacity include: 1) Minors - The insurer may be held responsible for its obligations, however, in most cases a minor cannot enter into a contract. Exceptions do exist, such as for the purchase of auto insurance. 2) The mentally incompetent or incapacitated. 3) Persons under influence of drugs or alcohol. 2. Legal Purpose a. All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract. b. All parties to a contract must enter it in good faith. 3. Agreement - One party must make and communicate an offer to the other party and the second party must accept that offer. a. Offer - The offer for entering an insurance contract is the application submitted by the applicant. b. Acceptance - The acceptance of an insurance contract takes place when the insurance company agrees to issue insurance. A counteroffer by the insurance company is not acceptance until the applicant accepts the counteroffer. 4. Consideration a. Something of value is exchanged; the exchange of an act for a promise. b. The consideration made by the applicant is the premium payment. c. The consideration made by the insurer is its promise to pay for covered losses.

Financial Rating Services

1. Evaluate and rate the financial stability of insurance companies. 2. These companies assign rating codes to show financial strength or weakness of each company rated. 3. The ratings are available to the public. 4. Producers are responsible for placing business with insurers that are financially sound. 5. Examples of rating services include: A.M. Best Company, Standard &Poor's, Moody's Investment Services, Weiss Insurance Rating, and Fitch Ratings.

Fraud and False Statements (Fraudulent Insurance Act)

1. Fraud always involves a false statement and deceit; it can be either a criminal or civil crime. Federal laws prohibit the commission of fraud. 2. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Subsequently, each of the states enacted its own Fraudulent Insurance Act. 3. A fraudulent act involves a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement. 4. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers. 5. Insurance applications and claim forms must contain a disclosure about how false statements and fraud will be treated by the insurer. A sample warning is, "Any person who knowingly presents false or fraudulent information on an insurance application or claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison." 6. If a person engaged in the business of insurance whose activities affect interstate commerce willfully embezzles, misappropriates funds/property, knowingly and with the intent to deceive makes a false material statement or purposely overstates the security of an insurer, the following penalties apply: a. A fine of no more than $50,000, imprisonment for up to 10 years, or both. b. If the violation jeopardized the safety and soundness of an insurer and was a significant cause of the insurer being placed in conservation, rehabilitation, or liquidation by an appropriate court, imprisonment can be for up to 15 years. c. If the amount embezzled or misappropriated does not exceed $5,000, violators will be fined up to $50,000 or imprisoned for up to 1 year, or both. 7. If a person uses threats, force or attempts to impede/obstruct the administration of the law during any proceeding involving the business of insurance before any insurance regulatory official, he/she will be fined up to $50,000 or imprisoned up to 10 years, or both. 8. Any individual who has been convicted of a felony involving dishonesty or a breach of trust, who then willfully engages or permits an individual to engage in the business of insurance, and whose activities affect interstate commerce, will be fined up to $50,000 or imprisoned up to 5 years, or both.

Premium Assumptions

1. Must charge an adequate premium for the risk based on the same factors used in evaluating the risk. 2. Premium rates are considered inadequate when they do not cover projected losses and expenses. 3. Rates must not be excessive or unfairly discriminatory. 4. Rate - The dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance. 5. Premium - The total cost for the amount of insurance purchased. $50,000 of coverage = $5 rate x 50 (per $1,000 of insurance) for a $250 premium.

Underwriting Factors

1. Nature of the risk. 2. Hazards that are present. 3. Claims history. 4. Other factors that depend upon the type of risk being insured.

Lloyds of London

1. Not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk. 2. Lloyds provides a meeting place and clerical services for syndicate members who actually transact the business of insurance. 3. Members are individually liable for each risk they assume. 4. Coverage provided is underwritten by a syndicate manager such as an attorney-in-fact or individual proprietor

Mutual Insurance Company

1. Owned by policyholders (who may be referred to as members). 2. A Board of Trustees or Directors directs the company operations and is elected by policyholders. 3. Policyholders receive non-taxable dividends as a return of unused premium when declared by the directors. 4. Dividends are not guaranteed. 5. Traditionally, mutual insurers issue Participating policies

Loss Exposure

The condition of being at risk for a loss. Purely by existing, property and people are at risk for loss.

Fair Credit Reporting Act (15 USC 1681-1681d)

1. Protects consumer privacy. a. Ensures data collected is confidential, accurate, relevant and used for a proper and specific purpose. b. Protects the public from overly intrusive information collection practices. 2. When an application is taken, it must inform the applicant a credit report (from consumer reporting agency) will be obtained. The purpose of this is to determine the financial and moral status of an applicant (for variety of purposes such as employment screening, insurance underwriting or loan approvals). 3. Applicant has the right to review the report. a. Applicant challenge - Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy. b. Inaccuracies - Agency must forward to applicant inaccurate information given out within previous 2 years c. Disallowed information - Report must not include lawsuits over 7 years old or bankruptcies over 10 years old. 4. Insurer obligations a. Insurer is not responsible for correcting inaccuracies on any reports. b. If an applicant is denied coverage because of inaccurate information they are entitled to certain rights.

The National Association of Insurance Commissioners (NAIC)

1. Provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. 2. The association promotes uniformity among states. Members may accept or reject recommendations. 3. Has no legal authority to enact or enforce insurance laws.

Underwriter

1. The underwriter's primary responsibility is the selection of risks to be insured. The underwriter also determines the classification, and premium rate if a risk is accepted by the insurer. 2. Underwriting protects the insurer against adverse selection and risks that are more likely than average to suffer losses. . Goal is to select risks that fall into the normal range of expected losses. 4. Field underwriter is the producer. 5. Line and staff underwriters are employed by the insurer.

Declarations

1. Who - Names the insurer and insured, including legal representatives in the event of the insured's death. 2. What - A description of the property being insured and other parties having insurable interests, such as a mortgagee. 3. Where - The location of insured property and the named insured's mailing address. 4. When - The effective and expiration dates of the policy. 5. How Much - The limits of liability insuring covered property and the annual premium for each type of coverage

Frame

A building that has a roof, floor, and supports of combustible material, usually wood, and combustible interior walls.

Short Rate Cancellation

A cancellation of insurance that incurs a financial penalty. Sometimes when the insured cancels the policy before its expiration date, a short-rate cancellation is issued. The insurer retains a portion of the unearned premium to cover costs.

Flat Cancellation

A cancellation of insurance that is retroactive to the effective date of the policy. No coverage is provided and the insurer must refund the policy premium paid by the insured.

Valued Contract

A contract that pays a stated amount in the event of a loss. (Most insurance policies are NOT valued contracts unless they are endorsed.)

Hold Harmless Agreement

A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.

Application

A document submitted by an applicant to an insurer that provides information needed for the insurer to underwrite a risk; becomes part of the insurance contract. Most applications require statements on the application to be true to the best knowledge and belief of the applicant.

Misrepresentations

A false statement contained in the application; usually does not void coverage or the policy. If material to the issuance of coverage, meaning the insurer would not have issued coverage had the misrepresentation not been made, coverage does not apply. In some cases, a material misrepresentation may void the policy.

Hostile Fire

A fire that burns outside its intended boundaries, or becomes uncontrollable. Examples of a hostile fire include a wildfire or a fire that damages a home when a spark from a fire in the fireplace ignites a piece of furniture

Friendly Fire

A fire that was intentionally set and stays within its intended boundaries (e.g., a fireplace) and results in smoke damage to the inside of a fireplace. Property insurance does not cover damage from a friendly fire.

Binder

A legal agreement issued by an insurance company or a producer that provides temporary proof of insurance until the insurer is able to issue an insurance policy. Binders are issued for specific time periods (maximum of 60 days) and automatically end when the policy is issued. Binders contain the name of the insurer, the amount and type of insurance, and the perils insured against.

Direct Loss

A loss that causes direct damage to property without an intervening cause.

Indirect Loss or Consequential Loss

A loss that is not the direct result of a peril.

Schedule Rating

A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk being rated.

Producer (Agent)

A person or agency appointed by an insurance company to represent it and to present policies on its behalf.

Bailee

A person or any organization to which property has been entrusted, usually for repairs, servicing or storage. Because bailees are legally responsible for property in their care, property insurance policies specifically exclude coverage for property in the care of a bailee.

Additional Insured

A person or organization not ordinarily protected by a policy but which, through the addition of an endorsement to the policy, is granted status as an insured. Under a property policy, an additional insured is often a co-owner of real property. Under a liability policy, an additional insured is often a party to an indemnification or hold harmless agreement.

Insured

A person or organization protected by an insurance contract.

Bailor

A person or organization that entrusts property to a bailee.

Endorsement

A policy form that alters or adds to the provisions of a property and casualty insurance contract

Endorsement

A policy form that alters or adds to the provisions of a property and casualty insurance contract.

Valued Policy

A policy that states the value of property as the amount shown on the Declarations page and will pay that full face value in the event of a total loss, regardless of the actual cash value.

Concurrent Causation

A principle holding that when two perils simultaneously cause a loss (i.e., they are both considered the proximate cause of loss), the insurer must pay the loss even if one of the perils is excluded by the policy

Unoccupancy

A property that contains personal property but has no occupants.

Pro Rata Cancellation

A proportionate cancellation of insurance that refunds premium to the insured based on the precise number of days coverage was in effect. The earned premium is the premium charged and retained by the insurer for the number of days coverage was in place; the unearned premium is the premium refunded to the insured for the number of days coverage was not in place

Vacancy

A provision in a property policy that eliminates or limits coverage for buildings that don't contain sufficient personal property to support intended occupancy or use.

Inherent Vice

A quality within property that causes it to damage or destroy itself. Examples include rust, rot and the fading of paint. Inherent vice is not covered by a property policy

Class Rating

A rate charged to a group of policyholders who have similar exposures and experience.

Experience Rating

A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate. Primarily used for commercial and specialty risks because of the number of unique variables involved.

Individual Rating -

A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate. Primarily used for commercial and specialty risks because of the number of unique variables involved.

Loss Cost Rating

A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit. a. The expense and profit components to develop the final rate must be added by individual insurers based upon their projections. b. Loss cost rating is used on risks for which the insurer may not have enough data to develop the rate, other than for expenses and profit.

Hazard

A specific condition that increases the probability, likelihood, or severity of a loss from a peril.

Open Competition

A state relies on competition between insurers to produce fair and adequate rates

Accident

A sudden, unforeseen, unintended, and unplanned event from which loss or damage results

Voidable Contract

A valid contract that for reasons satisfactory to a court, may be set aside by one of the parties. An example is an insurer may void or revoke coverage for misrepresentation or fraud.

Stated Value

A valuation method that states the value of a particular property on the declarations page, but provides for the insurer to pay the lesser of the stated value or ACV of the property following a loss

Parol Evidence Rule

A written contract may not be altered without the written consent of both parties.

Appraisal

Addresses disputes about the amount of a loss. If the insurance company and insured cannot agree on the amount of a loss, either party may request an appraisal. Each party selects its own appraiser and the appraisers select an umpire. Agreement by any two parties settles the loss. Each party pays the cost of its own appraiser and shares the costs of the umpire and the appraisal. Appraisal is a dispute resolution method and is not used to determine whether the policy provides coverage for a loss

Nonrenewal

Addresses the requirements of the insurer if it elects not to renew a policy.

Career Agency System

Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company.

Occurrence

An accident includes continuous or repeated exposure to the same general harmful conditions

Indemnity Contract

An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs.

Void Contract

An agreement without legal effect because it was made illegally or it was declared void by the courts because it doesn't contain all the elements of a legal contract.

Non-admitted (Unauthorized)

An insurer has either applied for authorization to do business in this state and was declined or they have not applied. They are not authorized to transact insurance in this state.

Admitted (Authorized)

An insurer is authorized by this State's Commissioner of Insurance to do business in this State. It has received a Certificate of Authority to do business in this State.

Alien Insurer

An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

Foreign Insurer

An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

Domestic Insurer

An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.

Managing Risk

Analyzing exposures that create risk and designing programs to minimize the possibility of a loss. S(haring), T(ransfer), A(voidance), R(eduction), R(etention)

Changes

Any changes to the policy must be made in writing by the insurer.

Insurable Events

Any event, past or present, that may cause loss or, damage or create legal liability on the part of an insured.

Excess Insurance

Any form of insurance coverage that provides protection against certain perils or causes of loss ONLY after loss or damage exceeds a stated amount or the limits stated in specific policies or self-insurance. Excess insurance may be written over primary, excess, or umbrella insurance.

Primary Insurance

Any type of coverage that responds to a loss before all other coverage responds.

Morale Hazard

Attitude that increases the probability of a loss. Example: Indifference or carelessness of leaving one's house or vehicle unlocked

Apparent

Authority created when the producer exceeds the authority expressed in the agency contract. It is authority the public (or a third-party) is falsely led to believe the agent has and the principal does nothing to counter the public impression that such authority exists. An example would be the producer's acceptance of premiums on a lapsed policy.

Implied

Authority that is not specifically stated in the contract, but is necessary, reasonable, and usual for the producer to perform stated duties. Since not all duties can be spelled out in the contract, incidental duties are assumed by the agent as appropriate to carry out the express authority granted by the principal. An example would be the use of the company logo on business cards or letterhead, implying the agent has authority to represent the principal when finding new clients in the process of soliciting and selling insurance. This also includes accepting applications and collecting premiums.

Express

Authority that is written into the producer's agency contract. It details specific activity regarding the producer's ability to transact business on behalf of the principal. An example would be the producer's authority to solicit, negotiate, and sell insurance contracts on behalf of the principal. The agent may also have the express authority to bind coverage

Breach of Trust

Based on fiduciary relationship of parties and the wrongful acts violating the relationship.

Merchant Marine Act of 1920 (the Jones Act)

Because Workers' Compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.

Contract of Utmost Good Faith

Both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made

Conditional Contract

Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy's terms and conditions.

Masonry Noncombustible

Buildings with exterior walls of masonry (not less than 4 inches thick) or made of fire-resistive construction with a rating of not less than one hour and noncombustible floors and roofs.

Joisted Masonry

Buildings with exterior walls of masonry or fire-resistive construction rated for not less than one hour and with combustible floors and roofs

Exclusive or Captive Agency System

Deals with the insured through an exclusive or captive agent. a. Agent represents solely one company or group of companies having common ownership. b. Insurer retains ownership rights to the business written by the agent. c. The agent is an employee or a commissioned independent contractor. d. Insurer may or may not provide office and agency support services.

Dishonesty

Deceit, misrepresentation, untruthfulness, falsification.

Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)

Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier's right to set its own rates. Motor carriers and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.

Moral Hazard

Dishonest tendencies that increase the probability of a loss; certain characteristics and behaviors of people. Example: An insured burns down his/her own house to collect the insurance payout.

Terrorism Risk Insurance Act (TRIA)

Enacted in direct response to the terrorist attacks New York City and Washington, D.C. on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks.

Penalties

Fines and possible prison time

Actuarial Department

Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates.

Consent Withdrawal

If conditions of consent are not continually met, the consent may be withdrawn.

Reciprocity

If consent is granted by any state, other states must allow the applicant to work in their states as well.

Financial Anti-Terrorism Act (USA Patriot Act)

Imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act).

Insurers

Manufacture and sell insurance coverage by way of insurance policies or contracts.

Insurance Agencies

Independent organizations that recruit, contract with, and support sales agents and producers.

Prior Approval

Insurers cannot use rates until approved by the Department of Insurance, or until a specific time period has expired after the filing

Specific Limit

Insures a single item of property for a single limit of insurance. For example, a fire policy insures one dwelling for $100,000.

Scheduled Limit

Insures one or more items of property on a single policy and the amount of insurance applying to each item is shown on a schedule. For example, one farm policy insures a home for $100,000 and a barn for $200,000.

Blanket Limit

Insures property located at more than one location OR more than one type of property at the same location OR both. For example, the $1 million blanket limit applies to two separate buildings at two separate locations, as well as the business personal property contained in each building.

Law of Large Numbers

Large number of homogeneous units or groups with the same perils. 1) Law of Large Numbers - As the number of units in a group increases, the more likely it is to predict a particular outcome. 2) Auto insurance losses are the easiest type of insurance loss to predict precisely because the number of units insured is so great. b. The chance of loss must be calculable. A statistical expectation of loss is used by insurers to calculate premiums. c. The loss must be measurable (definite and verifiable in terms of amount, cause, place and time). d. The premiums must be affordable. e. From the perspective of the insured, the loss must be accidental in nature. f. Catastrophic perils are not covered; examples include war, nuclear hazard and illegal operations.

Insurance Agents or Producers

Licensed individuals representing an insurance company when transacting insurance.

Exclusions

Perils that are NOT covered by the policy are listed in the exclusions section. Other perils may be excluded in provisions stated elsewhere in the policy. Common property exclusions include: 1. Ordinance or Law 2. Earth movement 3. War 4. Water Perils that are NOT covered by the policy are listed in the exclusions section. Other perils may be excluded in provisions stated elsewhere in the policy (i.e., water damage, flood, sewer backup, etc.). 5. Utility failure that originates off-premises 6. Neglect of the insured to protect covered property from further loss 7. Intentional loss 8. Nuclear hazard, war, and military action 9. Governmental action 10. Fungus, wet rot, dry rot, and bacteria (e.g., mold)

Contract Law

Pertains to the formation and enforcement of contracts.

Estoppel

Prevents the denial of a fact, if the fact was admitted to be true previously.

Arbitration

Process whereby a disputed claim is decided by a neutral third party. The disputing parties choose the impartial third party and agree in advance to accept the final decision of the arbitrator, who makes a decision after a hearing where both parties offer evidence.

File and Use

Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed.

Loss

Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.

Marketing/Sales Department

Responsible for advertising and selling.

Underwriting Department

Responsible for the selection of risks (persons and property to insure) and rating that determines actual policy premium.

Speculative Risk

Situations where there is a chance for loss, gain, or neither loss nor gain to occur. An example of speculative risk is gambling. Speculative risk cannot be insured.

Mandatory Rates

Some states require that mandatory rates be used for certain lines of insurance.

Loss Payment

Specifies how the insurer will make payment for loss and any applicable time frames that must be honored when submitting proof of loss and other claim documents.

Loss Payable Clause

Specifies how the policy protects the interests of a loss payee. A loss payee has insurable interest in personal property.

Mortgage Clause

Specifies how the policy protects the mortgagee's financial interest. (A mortgagee has insurable interest in real property.) Payment is made to mortgagees only up to its insurable interest in covered property and in order of precedence. The mortgagee must comply with requirements if the insured's claim is denied and the mortgagee wishes to collect under the policy: a. It must pay any premium due under the policy on demand if the insured fails to do so. b. It must notify the insurer of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware. c. It must submit a proof of loss to the insurer if the insured fails to do so. Under cancellation requirements, the insurer must provide the mortgage holder (mortgagee) with advance written notice (typically 10 days) before cancelling or nonrenewing coverage, giving the mortgagee the opportunity to pay the premiums.

Bankruptcy

Specifies that bankruptcy or insolvency of the insured does not relieve the insurer of any of its duties or obligations under the policy.

Concealment or Fraud

Specifies that coverage may not apply if an insured makes a material concealment, misrepresentation, or fraud in the application pertaining to the claim.

Policy Period

Specifies that coverage only applies to losses occurring when the policy is in force

Liberalization Clause

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

Death

Specifies that in the event of the named insured's death, the insurer will extend coverage to the legal representative of the deceased with respect to the premises and property covered under the policy at the time of the named insured's death.

No Benefit to Bailee

Specifies that no coverage applies if loss payment benefits a bailee

Legal Action Against Us

Specifies that no one may bring suit against the insurer until all terms and conditions of the policy have been complied with.

Assignment

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

Abandonment of Property

Specifies that the insurer is not obligated to accept any property abandoned by an insured.

Duties in the Event of Loss

Specifies the obligations of the insured in the event of a loss. With respect to any loss, these obligations include: a. Giving prompt written notice to the insurer, including a complete description of how, when, and where the loss or damage occurred. b. Notifying the police if a theft occurred. c. Cooperating with the insurer in the investigation and settlement of the loss. d. Protecting property from further damage. e. Preparing an inventory of the damaged property. f. Allowing the insurer to inspect any damaged property and examine books and records. g. Submitting proof of loss to the insurer, including: 1) The time and cause of loss. 2) Any other insurance that may cover the loss. 3) Any appropriate receipts, evidence, or affidavits to support the loss

Recovered Property

Specifies the procedure to be followed when lost or stolen property is recovered after the insurer has made payment under the policy. Each party shall notify the other of any recovery and, under most property policies, the insured has the right of keeping the claim payment or returning the claim payment and retaining right to the property after adjustments have been made for any damage.

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.

Warranties

Statements in the application or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached (past, present or future), coverage (and sometimes the contract) is voided.

Representations

Statements made by the applicant on the application that are believed to be true to the best of the knowledge and belief of the applicant; may be withdrawn prior to policy issuance.

Subrogation

States the insured must transfer to the insurance company its right of recovery against any party causing a loss after it accepts payment from the insurer for a loss. Subrogation allows the insurer to recover from the party that caused a loss any amounts paid to an insured. It also: a. Prevents the insured from collecting twice for the same loss. b. Helps the insurer control expenses and premiums. c. Ultimately holds the responsible third party accountable for the loss.

Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)

The Financial Privacy rule requires "financial institutions," which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. 3. The privacy notice must explain: a. The information collected about the consumer. b. Where that information is shared. c. How that information is used. d. How that information is protected.

First Named Insured

The First Named Insured is the person or organization whose name appears first on the Declarations. The First Named Insured is granted rights and responsibilities by the policy that are not granted to other insureds. In commercial lines, many policies spell out those duties and responsibilities.

Insurability

The ability of an applicant to meet an insurer's underwriting requirements.

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

Agreed Value

The insurance company and insured agree to a specific value of a particular property before the policy is issued. If a total loss occurs, the insurer will pay the Agreed Value.

Theft

The broadest of the crime coverages, theft includes any act of stealing.

Noncombustible

The buildings and its walls, floors, and structural framework are constructed of noncombustible materials.

Peril

The cause of a loss.

Actual Cash Value (ACV)

The cost to repair or replace property at its replacement value, minus depreciation

Functional Replacement Value

The cost to replace property with other property that performs the same function with similar efficiency, although the replacement property is not identical to the property being replaced. This valuation method is typically used with older property (such as a Victorian home) for which the replacement value exceeds the insured's ability or willingness to purchase coverage

Replacement Value

The cost to replace property with property of like kind and quality, at current pricing, without a deduction for depreciation. Many property policies providing loss valuation at replacement value require covered property to be insured to a certain percentage of its replacement value, such as 80% or 90%.

Effective Date

The date when insurance coverage begins.

Lapse Date

The date when insurance coverage ends; if not cancelled prior, policy will terminate by end of grace period if premium is not paid.

Fire Resistive

The entire building and roof are constructed of reinforced concrete and steel. Must have at least a 2-hour fire resistive rating.

Market Value

The price a willing buyer would pay for property purchased from a willing seller.

Manual Rating

The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member.

Aleatory Contract

The exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. The insurer's payment in the event of a loss may be much greater, or much less (e.g., $0 in the event a loss doesn't occur), than the insured's premium payment.

Non-Concurrency/ Non-Concurrent Policies

The existence of two or more policies covering the same exposures that don't have the same policy periods. Non-concurrency may create a coverage gap when underlying liability policies and an umbrella policy are non-concurrent because if an underlying liability policy exhausts its aggregate, it may violate the umbrella's underlying limits requirement

Concurrency/ Concurrent Policies

The existence of two or more policies covering the same exposures, having the same policy periods, and the same coverage triggers. For example, if an auto policy and an umbrella policy are written with the same policy dates, they are considered to be concurrent.

Insurable Interest and Limit of Liability

The insurer will not be responsible for payment of loss in an amount greater than the financial interest of an insured.

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud. 1. The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. a. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.

Mysterious Disappearance

The loss of property when the cause of loss is not known. This is NOT theft, burglary, or robbery.

Modified Fire Resistive

The materials used in the walls, floors, and roof of a structure must have a fire resistive rating of at least 1 hour, but less than 2 hours.

Loss Reserves

The net premiums plus interest reflects possible future contract obligations. An accounting measurement of an insurer's future obligation to its policyholders. a. Case Reserve Method - A loss reserve established for each claim, when reported. b. Average Value Method - A loss reserve established based on average settlements of particular claim types. c. Loss Ratio Method - A loss reserve formula based upon the expected losses for a particular class or line. d. Tabular Method - A loss reserve based upon the estimated length of an insured's or claimant's life or expected disability.

Proximate Cause

The primary cause of loss. If only one peril caused the loss, the proximate cause is the first event in the unbroken chain of events that resulted in loss. If more than two perils caused or contributed to the loss, the proximate cause is the peril having the most significant impact in generating the loss or damage.

Standardized Policy Structure

The parts of a policy include: D Declarations I Insuring Agreement C Conditions E Exclusions

Applicant

The party submitting an application for insurance.

Insured

The person or entity that buys insurance for protection from loss of life, health, property or liability

Named Insured

The person or organization designated on the Declarations page of the policy. If property is being insured, the named insured should be the owner of the property. If vehicles are being insured, the named insured should be the party or entity to which the vehicle is titled and registered. The named insured receives the broadest coverage of all persons or organizations protected by a policy.

Underwriting

The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage.

Right of Salvage

The right of the insurer to take possession of damaged property after paying for its loss. The salvage belongs to the insurer.

Deductible

The specified amount of each loss that the insured must bear. In property insurance (and with a per claim, or per occurrence, deductible), the insurer subtracts the deductible from the amount of loss when making payment. By accepting a larger deductible, the insured's premium may be reduced. An insurer may require a larger deductible as an underwriting tool to limit small claims.

Burglary

The taking of property from inside the premises or a locked safe or vault by a person who commits forcible entry into, or exit from, the property of another while trespassing.

Robbery

The taking of property from the care and custody of a person who has been caused or threatened with bodily harm.

Non-renewal

The termination of a policy at the expiration of its term. The policy does not renew and no coverage is provided after the expiration date

Cancellation

The termination of an insurance policy before its expiration date. Once cancelled, a policy provides no coverage. A policy may be cancelled by the insured or insurer.

Retrospective Rating

The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to minimums and maximums. Deposit Premium is the required initial premium paid into the policy that is subject to adjustment. A premium audit will be used to determine the actual premium based on the risk exposures

Merit Rating

The use of rates that rewards a policyholder that takes measures to decrease the probability of loss by the implementation of safety programs, loss control programs, etc.

Concealment

The willful hiding or obscuring of material facts pertinent to the issuance of insurance (or a claim). Concealment results in denial of coverage and may void the policy.

Federal Insurance Office (FIO)

This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. - Not a regulator or supervisor. Insurance is primarily regulated by the individual States.

Named Perils

This type of property coverage only provides insurance for the causes of loss, or perils, listed. If a peril is not "named" in the policy, no coverage applies for loss or damage caused by that peril. Typical "named perils" are fire and theft. Named perils may contain coverage for up to 16 named perils; coverage for additional perils may be added by endorsement.

Open Perils

This type of property coverage provides insurance for all causes of loss that are not specifically excluded under the policy. Typical exclusions in an "open perils" policy are flood and earthquake.

Self-Insurer

To self-insure means to assume the financial risk one's self. This is generally an option only for large companies who may even reinsure for risks above certain maximum limits

Tort Law

Torts are civil wrongs; they're not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party.

Waiver

Voluntary surrender of a known right, claim or privilege

Reasonable Expectations Doctrine

What a reasonable and prudent policy owner would expect; the reasonable expectations of policyowners are honored by the Courts although the strict terms of the policy may not support these expectations.

Definitions

Words, terms, and phrases that are clearly described and used in an insurance policy for the purpose of clarifying the intent of the insurer and to avoid coverage disputes with respect to the extent of coverage provided by the policy. Most policies contain a definitions section in the policy and emphasize policy definitions by enclosing them within quotes or highlighting them with bold text

Risk

a. A condition where the chance, likelihood, probability or potential for a loss exists. b. Uncertainty concerning a loss.

The Insurance Contract

a. A legal contract purchased to indemnify the insured against a loss, damage or liability arising from an unexpected event. b. The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small. c. A contract designed to transfer risk from the insured to the insurer.

Broker

a. A licensed individual who negotiates insurance contracts with insurers, on behalf of the applicant. b. Represents the applicant or insured's interests, not the insurer, and thus does not have legal authority to bind the insurer. c. A broker's license is not applicable in all states.

Law of Agency

a. A relationship between two or more parties where one party (the agent or producer) acts on behalf of the other party, known as the principal or insurer. b. The agent or producer binds the actions and words of the principal.

Insurable Interest

a. All Policies 1) Insurable interest must exist in every enforceable insurance contract. Depending upon the contract, it must exist at the time of application or at the time of loss. 2) Requires the potential for an insured to suffer financial or economic hardship in the event of a loss. b. Life & Health policies 1) Insurable interest must exist at the time of application, but not at time of loss. 2) Coverage is determined based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured. 3) The amount of insurance that may be purchased varies based on the type of coverage. In some cases, no coverage limit apply. c. Property 1) Insurable interest must exist at the time of the loss. 2) Property ownership (or mortgage or lien) is evidence of insurable interest. d. Casualty 1) Insurable interest must exist at the time of the loss. 2) Insurable interest usually results from property or contract rights and potential legal liability.

Independent Agency

a. An agent or agency that enters into agency agreements with more than one insurer. It may represent an unlimited number of insurers. b. Agency retains ownership of the business written. c. An independent contractor that is paid a commission and covers the cost of agency operations.

Adverse Selection

a. An imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace. For example, only those living in earthquake-prone areas seek to buy earthquake insurance. b. High-risk exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do.

Personal Producing General Agent

a. Does not recruit career agents. b. Sells insurance for carriers it is contracted with and maintains its own office and staff.

Principle of Indemnity

a. Insured is restored to the same financial or economic condition that existed prior to the loss. b. Insured should not profit from an insurance transaction.

Financial Ratios

a. Loss Ratio - Determined by dividing Paid Losses + Loss Reserves by Total Earned Premiums. b. Expense Ratio - Determined by dividing an insurer's Total Operating Expenses by Written Premiums. c. Combined Ratio - Sum of the loss ratio and expense ratio.

Mass Marketing

a. Mass marketing is used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP). b. Insurer reduces marketing and underwriting expenses.

Direct Writing System

a. Producer or Agent is an employee of the insurer. b. Insurer owns the accounts. c. The agent may be paid a salary, salary plus bonus, or commission

Direct Mail or Direct Response Company

a. Sells insurance policies directly to the public with licensed employees or contractors. b. A marketing system utilizing direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines.

Management

a. The determination of what types of protection are required to meet an insured's needs. b. A survey of the insured's operations, health, assets and exposures that could give rise to losses. c. Assessment of potential loss frequency and severity. d. Physical inspections, applications or medical exams used for underwriting help to manage a risk.

Types of Reinsurance:

a. Treaty Agreements - Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically. b. Facultative Agreements - Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks.