property and casulty
Proximate Cause
Proximate cause is an act or event considered a natural and reasonably foreseeable cause of the damage or event that occurs and damages property or injures a plaintiff. The negligence must have been the proximate cause of the damage if the injured party is to collect for the damage. This means that there must have been an unbroken chain of events beginning with the negligence and leading to the injury or damage. (The negligence must have been the cause without which the accident would not have happened, also referred to as direct liability.)
Basic Types of Construction
An important element in the underwriting and rating of property insurance is the type of construction of the building to be insured. A building constructed with materials that are less prone to fire damage would be more favorably rated than a building more prone to fire damage.
Defenses Against Negligence
An individual's negligent behavior does not necessarily mean that a person will be held legally liable. There are certain defenses that may be interposed by the negligent party in order to defeat a claim.
Statute of Limitations
By law, some states have set a time limit in which an injured party may bring legal action against another party for certain types of injuries.
Rates may
be developed by property values (e.g. property or fire insurance), revenues receipts (e.g. casualty or liability insurance) or payroll (e.g. workers compensation insurance).
Additional insureds are
individuals or businesses that are not named as insureds on the declaration page, but are protected by the policy, usually in regard to a specific interest. Additional insureds usually are added to the policy by an endorsement.
In property and casualty insurance
insurable interest must exist at the time of the loss.
• Jointed-masonry - Buildings constructed with masonry or fire-resistive walls and combustible floors and roof. • Frame - Buildings constructed of combustible materials
or with noncombustible or slow-burning walls and combustible floors and roof. Frame usually receives the least favorable rating.
Direct loss also includes
other damage where the insured peril was the proximate cause of loss. For example, an insured building catches fire. When the fire department applies water to put out the fire, the wall and floor coverings suffer water damage. Although water damage is not an insured peril, the damage is paid under the peril of fire because fire was the proximate cause.
Rates may be developed by
property values (e.g. property or fire insurance), revenues receipts (e.g. casualty or liability insurance) or payroll (e.g. workers compensation insurance).
The term class rating (or manual rating)
refers to the practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics (e.g., a class rate might apply to all types of dwellings of a given kind of construction in a specific city, or all drivers of a given gender and age driving in the same geographic area.).
In some areas of risks
the characteristics of the units to be insured vary so widely that is deemed desirable to depart from the class approach and calculate rates on the basis that attempts to measure more precisely the loss-producing characteristics of the individual.
Named insured means
the individual(s) whose name appears on the policy's declaration.
In experience rating
the insured's own past loss experience enters into the determination of the final premium. Experience rating is superimposed on a class-rating system and adjusts the insured's premium either up or down, depending on the extent to which his experience has deviated from the average experience of the class.
For example
the policyowner wants to insure a 1,000 square foot building. The insurer has established a rate of $1.00 per square foot. The required premium will then be $1,000 ($1.00 x 1,000 sq. ft).
Rates For example
the policyowner wants to insure a 1,000 square foot building. The insurer has established a rate of $1.00 per square foot. The required premium will then be $1,000 ($1.00 x 1,000 sq. ft).
In schedule rating
the rates are developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure. Schedule rating is used less frequently today because of the introduction of ISO's class-rating program for many types of commercial building that had been previously schedule rated, leaving only the very largest and most complex risks to be schedule rated.
Elements of a Negligent Act
Most people behave in a manner that is reasonable and prudent - with exceptions for minors and incompetent individuals. Failure to behave in this manner constitutes negligence, and if this negligence leads to injury to another or damage to property belonging to another, the negligent party may be held legally liable for the damage. Normally, the burden of proof is on the injured party to prove that the other party was negligent. However, there are also certain doctrines that impose liability by statute or that shift the burden of proof from the injured party to the defendant.
Loss Ratio Formula
(Incurred losses + Loss adjusting expense) ÷ Earned premium = Loss ratio
The term class rating
(or manual rating) refers to the practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics (e.g., a class rate might apply to all types of dwellings of a given kind of construction in a specific city, or all drivers of a given gender and age driving in the same geographic area.).
Physical
- A condition of the subject of insurance that creates or increases the chance of loss, such as structural defects, occupancy, poor housekeeping or location.
Moral
- A dishonest predisposition on the part of an insured that increases the chance of loss. This could include an applicant who has been previously convicted of arson, falsifying an insurance claim, etc.
Morale
- Applicants who demonstrate a careless attitude that could increase the chance of loss that would be greater than would otherwise be the case.
Common Policy Provisions
1. Insureds - Named, First Named, Additional
There are four primary elements considered in establishing negligence
1. Legal duty 2. Standard of care 3. Proximate cause 4. Actual loss or damage
Hazards
A hazard is a condition or situation that creates or increases the probability of or extent of a probable loss from a peril. From an underwriting standpoint, insurers are concerned with 3 types of hazards:
Causes of Loss (Perils)
A peril is a specific cause of loss. Perils insured against in standard property policies include fire, wind, hail, and explosions.
Stated Amount
A stated amount is an amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the event of a covered loss. This scheduled amount is the maximum amount the insurer will pay in the event of a loss.
Damages
A tort may result in two forms of injury to another: bodily injury and property damage. In the case of property damage, the extent of the loss is usually simple to determine; it is measured by the actual monetary loss the injured party suffered, which is measured by the value of the property damaged or destroyed and the loss of use of that asset.
Absolute Liability
Absolute liability is imposed on defendants engaged in hazardous activities, such as harboring wild animals, using explosives, etc. The injured party does not need to prove negligence.
Current Replacement Cost - Depreciation =
Actual Cash Value
Additional/Supplementary Coverage
Additional (or supplementary) coverage is a provision in an insurance policy that provides an additional amount of coverage for specific loss expense, at no additional premium. Examples: claim-related expenses, reasonable expenses incurred by an insured to protect damaged property from further loss, and defense expense.
Agreed Value
Agreed value is a property policy with a provision agreed upon by the insurer and insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is written and suspends any coinsurance or other contribution clauses in the policy.
Insuring Agreement or Clause
An insuring agreement is the section of an insurance policy containing the insurer's promise to pay. Among other things, the insuring agreement lists the parties to the contract, effective and renewal dates, the description of coverage provided, and perils.
Functional Replacement Cost
Another loss valuation method allows the insurer, at the time of a loss, to adjust the loss on the basis of functional replacement cost, which is the cost to replace damaged property with less expensive and more modern construction or equipment. A building with lath and plaster walls may be replaced with drywall that is just as functional, but at a lower cost to repair.
Loss Valuation
At the time a property insurance policy is written, the insured has several options as to how a loss to the insured property will be valued at the time of a loss. Loss valuation is a factor in determining the premium charged and the amount of insurance required.
Comparative Negligence
Because of the harshness of contributory negligence, the majority of states have adopted a somewhat more lenient doctrine, that of comparative negligence. Here, contributory negligence will not necessarily defeat the claim, but will be used to mitigate the damages payable to the other party. Under this statutory defense, awards for damages are reduced by the percentage of negligence of each party.
Components
Components are factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profits.
Conditions
Conditions is the section of an insurance policy that indicates the general rules or procedures that the insurer and insured agree to follow under the terms of the policy.
Declarations
Declarations is the section of an insurance policy containing the basic underwriting information, such as the insured's name, address, amount of coverage and premiums, and a description of insured locations. It also contains any supplemental representations by the insured. This is usually the first page of the policy.
Endorsements
Endorsements are printed addendums to a contract that are used to change the policy's original terms, conditions, or coverages. Endorsements may be included at the time the policy is issued or added during the policy term. Endorsements must be in writing, attached to the policy and signed by an executive officer of the insurer to have any effect on the contract. Endorsement may be used to add or delete coverage, or may be used to correct items such as the insured name, address, etc.
B. Policy Structure
Every property or casualty policy is comprised of the following major components: • Declarations; • Definitions; • Insuring Agreement; • Additional Coverage; • Conditions; • Exclusions; and • Endorsements.
Rates
In simple terms, an insurance rate is the amount charged for a particular amount of coverage. It is the actuarially concluded unit of cost that is applied against the rating basis from which a policy premium is developed, or the charge per unit of exposure.
Consequential or Indirect Loss
Indirect losses, also known as consequential losses, are losses considered a result of direct loss. Such losses usually result from the time it takes to repair or replace damaged property. The most prevalent type of indirect loss for individual homeowners is the extra living expense that may be incurred by the insured while the home is being repaired. For commercial risks, the primary type of indirect or consequential loss is the loss of profits a business may suffer because of having to close down until the business is repaired.
Legal Duty
It must be shown that the defendant had a legal duty to act or not to act.
There are 5 basic individual rate-making approaches
Judgment rating 2. Schedule rating 3. Experience rating 4. Retrospective rating 5.Merit rating
Five basic individual rate -making approaches
Judgment rating, Schedule rating, Experience rating, Retrospective rating, Merit rating
Loss Costs
Loss costs is a rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and are based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time. The expense and profit components to develop the final rate must be added by the insurance company.
(Incurred losses + Loss adjusting expense) ÷ Earned premium =
Loss ratio
Loss Ratio
Loss ratio refers to a formula used by insurance companies to compare premium income to losses, including claims paid and claim-related expenses. The formula is as follows:
Market Value
Market value is a seldom-used method of valuing a loss based upon the amount a willing buyer would pay to a willing seller for the property prior to the loss. This method takes into consideration the value of land and location, rather than just the cost of rebuilding the structure itself.
merit rating
Merit rating is most commonly used in personal auto insurance. In this method of rating, the insured's premium is based not on the actual loss record, but on other factors that indicate the probability that loss will occur. An example would be a bad driving record that does not include any at-fault accidents.
Negligence
Negligence is the failure to use the care that a reasonable, prudent person would have taken under the same or similar circumstances.
Replacement Cost
Replacement cost is defined as the cost to replace damaged property with like kind and quality at today's price, without any deduction for depreciation. This method of loss valuation is contrary to the basic concept of indemnity because following a loss it may provide the insured with a settlement in excess of the property's actual cash value.
Strict Liability
Strict liability is commonly applied in product liability cases. A person or business that manufactures or sells a product makes an implied warranty that the product is safe. The business is then liable for defective products, regardless of fault or negligence. If the product causes injury and the claimant can prove the defect, the defendant will be held strictly liable for the damage.
Actual Cash Value
The actual cash value (ACV) method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence. Usually, actual cash value is calculated as follows:
class and individual
The approach to setting rates is very similar in most instances, but it is possible to distinguish between two different types of rates
class and individual
The approach to setting rates is very similar in most instances, but it is possible to distinguish between two different types of rates:
Standard of Care
The defendant must have used a standard of care that breached that legal duty.
Definitions
The definitions component of an insurance policy clarifies terms used in the policy. Typically, words that are printed in bold, italics, or quotations have a definition as to their meaning in that contract.
Insurable Interest
The insured must have an insurable interest in the person or property covered by an insurance policy. In property insurance, this means the insured would incur a financial loss if the insured property was damaged. As a result, an insurable interest may be created by the ownership, custody or control of a property. For example, mortgagees and leaseholders may have an insurable interest in their respective properties.
Exclusions
The exclusions section of an insurance policy details the perils that are not insured against and what persons are not insured. Exclusions restrict some of the broad terms used in the insuring agreement. This section can exclude people (except a spouse), property, and perils.
Insurable Interest
The insured must have an insurable interest in the person or property covered by an insurance policy. In property insurance, this means the insured would incur a financial loss if the insured property was damaged. As a result, an insurable interest may be created by the ownership, custody or control of a property. For example, mortgagees and leaseholders may have an insurable interest in their respective properties. In property and casualty insurance, insurable interest must exist at the time of the loss.
Intervening Cause
The intervening cause doctrine bars or reduces recovery to an injured person if an intervening cause interrupted the chain of events and sets in motion a new chain of events. For example, a person clears their sidewalk of snow and ice following a storm, but in a short while, it begins to snow again. Before the person has an opportunity to clean the walk again, a person walks by, slips, and is injured.
Actual Loss or Damage
The mere fact that carelessness existed is not sufficient cause for legal liability. Actual injury or damage must have been suffered by the party seeking recovery.
Policy Period
The policy period is the time period, stated on the declarations page, during which the policy provides coverage.
Direct Loss
The two types of property losses that an individual or business are exposed to are direct and indirect.
Function
The underwriter's function refers to the operations of an insurance company where an employee, called an underwriter, is responsible for evaluating applications submitted to the insurer and determining whether a policy should be issued, and if so, the terms, conditions and rates for that policy.
Vicarious Liability
The vicarious liability doctrine comes from the old English law "respondeat superior," in which the master was liable for the acts of their servants. The purpose of this doctrine is to transfer the liability for one person to another person who would probably have a greater ability to pay. In some jurisdictions, parents may be held vicariously liable for negligent acts of the children and employers liable for the acts of their employees.
Assumption of Risk
This defense of an action for recovery for injuries attests that if a person recognizes and understands that there is danger involved in an activity and voluntarily chooses to encounter it, the assumption of risk may bar recovery for injury caused by negligence. Courts have held that in seeking admission to a baseball game, a spectator must be considered to have chosen to undergo the risk of being struck by a foul ball. Another common example is the guest passenger in an automobile. In many jurisdictions, a guest is considered to have assumed the risk of injury while riding in an auto. Even if the car is driven in a grossly negligent manner, the guest may be considered to have assumed risk of injury if the guest fails to protest the dangerous driving.
Contributory Negligence
Under contributory negligence, the injured party must be completely free of fault in order to collect. Any negligence on the part of the injured party which contributed to the injury, however slight, will normally defeat the claim. A variation of contributory negligence is known as "the last clear chance rule." It may be used as a defense by a negligent party who can show the injured party had the last clear chance to avoid the loss, but did not.
Underwriting
Underwriting is the process of reviewing applications for insurance and the information on the application. In other words, it is a risk selection process.
In property and casualty insurance
an insured is anyone who is covered under the policy, whether named or not. An example of an insured would include an unnamed spouse or any resident relative that is a member of the named insured's household.
indirect losses
are related to the direct loss, and insurance coverage to protect against these indirect losses often is added to property insurance policies.
Special damages
are specific out-of-pocket expenses for medical, miscellaneous expenses, and loss of wages.
General damages
compensate the injured person for pain and suffering, mental anguish, disfigurement, and other similar types of losses. Determination of the amount of general damages, is highly subjective and can amount to whatever a judge or jury feels is "right.")
Property insurance only covers
direct losses.
Direct losses mean
direct, physical damage to buildings and/or personal property.
Specific insurance
is a property insurance policy that covers a specific kind or unit of property for a specific amount of insurance.
Retrospective rating
is a self-rating plan under which the actual losses during the policy period determine the final premium, subject to a minimum and maximum premium. (A deposit premium is required at the inception of the policy. That premium then is adjusted at the end of the policy term based on the actual loss experience.)
Blanket insurance
is a single property insurance policy that provides coverage for multiple classes of property at one location, or provides coverage for one or more classes of property at multiple locations. All properties insured are written for one total amount of insurance and no single insured item is assigned a specific amount of insurance, although different amounts may be shown for buildings in general, equipment in general and other items.
Open peril
is a term used in property insurance to describe the breadth of coverage provided under an insurance policy form that insures against any risk of loss that is not specifically excluded. (This term replaced the use of the term "all risks.")
Named peril
is a term used in property insurance to describe the breadth of coverage provided under an insurance policy form that lists specific covered perils. No coverage is provided for unlisted perils.
The advantage of the class-rating system
is that it permits the insurer to apply a single rate to a large number of insureds, simplifying the process of determining their premiums. In establishing the classes to which class rates apply, the rate maker must compromise between a large class, which will include a greater number of exposures and thereby increase the credibility of predictions, and one sufficiently narrow to permit homogeneity.
First named insured
is the individual whose name appears first on the policy's declaration. In commercial insurance policies, the first named insured has control of the policy and is the only insured who may cancel the policy or request changes to the policy, and also is the one responsible for paying premiums and reporting losses.
Class rating
is the most common approach in use by the insurance industry and is used in life insurance and most property and casualty fields.
Judgment rating
is used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class. This technique is used in Ocean Marine insurance, although it is also used in other lines where permitted by state's rate laws. (A risk that has been judgment rated may also be referred to as "A" rated.)
In the case of bodily injury
it is more difficult to determine the loss monetarily. Bodily injury, may lead to claims by the injured party not only for medical expenses and lost wages, but also for disfigurement, pain and suffering, mental anguish, and loss of consortium.
The following are examples of exclusions from a property policy: earth movement and water damage. • Property policy excludes earth movement caused by earthquake
mudflow, or a volcanic eruption. • Water damage exclusions are flood and subsurface water, water that backs up through sewers and drains or overflows from a sump pump, or water below ground that seeps through basement walls.
The two classes of compensatory damages
that may be awarded are special and general damages.
punitive damage
which is a form of punishment for extreme outrageous behavior, gross negligence or willful intent.
The following are the basic classes of construction used for underwriting
• Fire-resistive - Buildings constructed with masonry and/or other materials with a fire resistance rating of 2 hours or more. Fire-resistive usually receives the most favorable rating. • Modified fire-resistive - Buildings constructed with masonry and/or other materials with a fire resistance rating between 1 hour and 2 hours. • Masonry noncombustible - Buildings constructed with masonry or fire-resistive walls and noncombustible or slow-burning floors and roof. • Noncombustible - Buildings constructed of noncombustible materials (materials that will not ignite and burn when subjected to fire).
Following are examples of conditions
• Inspections may be made as needed by the insurer. The insurance company reserves the right to inspect or examine the insured's location or books to determine the exact exposure for underwriting and rating purposes. • Changes to the policy must be made by the insurer and be in writing. • The liberalization clause ensures that if the insurer introduces an improved free coverage, the insured will get the benefit of the new coverage immediately and will not have to wait for policy renewal. • Return of premium dictates the method that will be used to calculate the return premium when the policy is cancelled before the expiration date.