Insurance Test (Property Basics)

EFFECTS OF HAVING A LARGER DEDUCTIBLE BENEFITS TO INSURED

AS THE DEDUCTIBLE INCREASES, THE PREMIUM DECREASES

EFFECTS OF HAVING A LARGER DEDUCTIBLE BENEITS TO INSURER

FEWER SMALL CLAIMS ARE SUBMITTED

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. EX: 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. EX: 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.

Scheduled Limit

Multiple items of property, one policy, different limits of coverage

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

the price a willing buyer would pay for property purchased from a willing seller

Frame

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

A liberalization clause serves which of the following purposes? A. Broadened coverage applies automatically to all policies without a premium charge B. At each annual renewal, the policy limit automatically increases in value C. The insurer has the right to recover from any party causing a loss D. The insured is given permission to bring suit against the insurer

A. broadened coverage applies automatically without a premium charge

Occurence

An accident includes continuous or repeated exposure to the same general harmful conditions. ex: water leaking from a pipe and not fixing it

Changes

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

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.

Each of the following is a typical property insurance policy exclusion, except: A. Neglect B. Ordinance of Law C. Flood D. Fire

D. Fire

Two Party Contract

Insured ( 1st party) + Insurer (2nd Party)

Blanket Limit

Multiple items of property, one policy, one limit of coverage

Specific Limit

One Item of property, one policy, one limit of coverage

Exclusions

Perils that are NOT covered by the policy re listed in the exclusions section. Other perils may be excluded in provisions stated elsewhere in the policy. Common property exclusions include: -Ordinance or Law -Earth movement -War 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.) Utility failure that originates off-premises Neglect of the insured to protect covered property from further loss Intentional loss Nuclear hazard, war, and military action Governmental action Fungus, wet rot, dry rot, and bacteria (e.g., mold)

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.

Actual Cash Value (ACV) Calculation

Replacement Cost- Depreciation = ACV

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.

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.

Indirect Loss/Consequential Loss

a loss that is not the direct result of a peril EX: additional living expenses or loss of rental income ** a indirect loss cannot occur until there has been a direct loss**

Cancellation

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

Actual Cash Value (ACV)

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

Direct Loss

A loss that causes direct damage to property without an intervening cause. -loss caused by an insured peril EX: Fire damage to an insured residence; water damage from a ruptured pipe

Nonrenewal

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

Primary Insurance

Any type of coverage that responds to a loss before all other coverage responds. (RESPONDS FIRST TO A LOSS, REGARDLESS OF ALL OTHER INSURANCE IN PLACE ON THE SAME RISK)

Bankruptcy Clause

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

Policy Period

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

Concealment or Fraud

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

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 Valuation

A property policy pays for losses to property based on the valuation method contained in the policy or chosen by the insured in an endorsement added to the policy.

Unoccupancy

A property that contains personal property but has not occupants

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.

Additional Coverages

Additional coverages are automatically included in property policies without an additional premium. The type of additional coverages depends upon the type of policy. Additional coverages are paid in addition to those stated in the insuring agreement and include debris removal, collapse, and fire department service charges.

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. (RESPONDS TO A LOSS AFTER PRIMARY INSURANCE RESPONDS) (EXCESS IS THE AMOUNT OF SOMETHING THAT IS MORE THAN NECESSARY, PERMITTED OR DESIRABLE)

Noncombustible

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

A person who takes possession of another's property in order to repair it is called? A. Assignee B. Bailor C. Bailee D. Subrogee

C. Bailee

The duties and obligations of the insured are found under what part of the insurance policy? A. Additional Coverages B. Insuring Agreement C. Conditions D. Declarations

C. Conditions

Which of the following is attached to the policy to alter or add to the policy provisions? A. Excess Insurance B. Binder C. Endorsement D. Definitions

C. Endorsements

Each of the following is a direct loss, EXCEPT: A. Fire damage B. Broken pipe water damage C. Loss of income D. Cracked Windshield

C. Loss of income

Q: What calculation is used to determine the actual cash value (ACV) of a loss? A. Replacement cost - market value = ACV B. Market value - depreciation = ACV C. Replacement cost - depreciation = ACV D. Market value - original purchase price = ACV

C. Replacement cost - depreciation = ACV

Standard Policy Structure

D:Declaration I: Insuring Agreement C: Conditions E: Exclusions Adding Additional Coverages

Specific Limit

Insures a single item of property for a single limit of insurance Ex: a fire policy insures one dwelling for $100,000

CONCURRENCY ( KNOW FOR TEST)

OCCURS WHEN 2 POLICIES ARE IN PLACCE ON THE SAME PROPERTY AND PROVIDE IDENTICAL COVERAGE; EACH ***POLICY WILL PAY ITS PRO RAT OF SHARE OF THE LOSS*** -EACH ONE WILL ONLY PAY THEIR PRO RAT OF SHARE

Loss Payable Clause

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

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.

restoration/nonreduction 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.

Loss settlement

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

True or False? During arbitration a neutral third party decides the outcome of a claim

TRUE

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.

Declarations

This page describes basic information about the policy, including: Who: names the insurer and insured, including legal representatives in the event of the insured's death What: a description of the property being insured and other parties having insurable interests, such as a mortgage Where: the location of insured property and the named insured's mailing address When: The effective and expiration dates of the policy How much: The limits of liability insuring covered property and the annual premium for each type of coverage

Named Peril Policy

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. (ONLY PROVIDES COVERAGE FOR THE PERILS LISTED OR NAMED IN THE POLICY. IF THE PERIL IS NOT NAMED IN THE POLICY THEN NO COVERAGE APPLIES FOR THE DAMAGE CAUSED BY THAT PERIL esx. fire, wind, hail)

Open Peril (Special Form, All-Risk)

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. (THE POLICY PROVIDES COVERAGE FOR ALL PERILS THAT ARE NOT SPECIFICALLY EXCLUDED IN THE POLICY ex: Earthquake, flood)

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: -Prevents the insured from collecting twice for the same loss -Helps the insurer control expenses and premiums -Ultimately holds the responsible third party accountable for the loss

Conditions

this section states the obligations of the parties to the contract, as well as any other conditions of coverage.

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. (insurer refunds after keeping funds to cover cost)

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

No Benefit to Bailee

Specifies that no coverage applies if loss payment benefits a bailee.

Theft

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

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. A LOSS HERE MAY NOT BE FULLY COVERED

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.

Insuring Agreement

The insuring agreement states the insurance company's promise to pay the insured. This promise is usually broad and the other sections of the policy restrict or limit the scope of coverage provided by the policy. Property insurance policies state in the insuring agreement what perils are covered.

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.

Duties in the event of a loss

The obligations of the insured that must be met following a loss before the insurer will settle the loss

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. (policy is cancelled on effective date, coverage was never in place)

Hostile Fire

A fire that burns outside its intended boundaries, or becomes uncontrollable. EX: 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. INCLUDES: -type of policy -amount of insurance -major perils that are insured against

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. EX: DRY CLEANERS; AUTO REPAIR SHOPS

Bailor

A person or organization that entrusts (assigns the responsibility) property to a bailee

Endorsement (KNOW FOR TEST)

A policy form that alters or adds to the provisions of a property and casualty insurance contract. -BROADENS OR RESTRICTS COVERAGE OF A POLICY WHEN ADDED

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 (KNOW FOR TEST)

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.

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 (insurer refunds premium proportionately)

Inherent Vice

A quality within property that causes it to damage or destroy itself (spoil, rot, or become defective) Examples include rust, rot and the fading of paint. Inherent vice is not covered by a property policy. *property insurance DOES NOT COVER

Accident

A sudden, unforeseen, unintended, and unplanned event from which loss or damage results. EX: the explosion of a steam boiler

Nonrenewal

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

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.

Q: If the insured does not agree with the insurer's decision regarding a claim, what process helps decide the outcome? A. Arbitration B. Consequential Hearing C. Insurance company conference D. Inspection

A. Arbitration

_____________ is the method of loss valuation that values damaged property at the cost to replace with property of like kind and quality, at current prices, and without deduction for depreciation. A. Replacement Value B. Market Value C. Functional Replacement Cost D. Actual cash value

A. Replacement Value

Which of the following BEST describes a scheduled limit of insurance on a property policy? A. Insures multiple items of property on a single policy B. Insures a single item of property at a blanket limit C. Insures a single item of property on a single policy for a specific limit D. Insures multiple items of property on multiple policies

A. insures multiple items of property on a single policy

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.

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: It must pay any premium due under the policy on demand if the insured fails to do so It must notify the insurer of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware 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.

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.

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: 1. Giving prompt written notice to the insurer, including a complete description of how, when, and where the loss or damage occurred 2. Notify the police if a theft occurred 3. Cooperating with the insurer in the investigation and settlement of the loss 4. Protecting property from further damage 5. Preparing an inventory of the damaged property 6. Allowing the insurer to inspect any damaged property and examine books and records 7. Submitting proof of loss to the insurer, including: -the time and cause of the loss -any other insurance that may cover the loss -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.

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.

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%.

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.

Right of Salvage

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

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