Property Insurance and Related Concepts

Waiver and estoppel

A waiver occurs whenever a person or organization intentionally gives up an established right. For instance, insurance companies may have the right to raise premiums, reduce benefits, and deny or revoke policies if certain contractual conditions or provisions are violated. In some cases, companies may deliberately relinquish (waive) these rights, even when they can exercise them. Not all rights can be waived, including facts and certain requirements for insurance, such as an insurable interest.

Coinsurance condition and coinsurance penalty

According to the coinsurance condition, an insured will not be reimbursed to the policy's full limits unless he purchases a certain minimum amount of insurance. For example, if a property insurance policy has an 80% coinsurance condition, the insured must purchase a policy that covers at least 80% of the property's value. If the insured fails to meet the coinsurance condition, any loss he suffers must meet or exceed the amount he chose to insure. Otherwise, the insurance provider will only reimburse a percentage of the loss. Any unpaid loss is known as the coinsurance penalty, which is calculated as a proportion of the actual insured amount versus the required coinsurance amount. For some policies, coinsurance conditions are expressed as an actual dollar value rather than a percentage. These policies are known as agreed value or stated amount policies, and are used when the coinsurance penalty is difficult to predict

Liberalization condition, assignment condition, and no benefit to bailee condition

According to the liberalization condition, when insurance providers expand coverage on a policy or endorsement without increasing premium payments, the broadened coverage simultaneously applies to every comparable policy or endorsement. Because of this condition, insurers do not need to distribute new endorsements. Insureds are informed of the change at renewal time.

Application process for acquiring insurance and binders

Before insurance can be acquired, the person seeking insurance and the agent must complete an application and submit it to the insurance company. The application contains vital information about the client's risk level, and is the primary factor in the company's decision about whether or not to insure the client. Therefore, the agent must make sure that all information on the application is complete and accurate. If the agent neglects these duties, he may face lawsuits from both the agency and the client. After the application has been submitted, the agent may be empowered to issue a binder, which is a verbal or written agreement providing immediate insurance coverage to the client. Verbal binders must be transferred to a written document in a timely manner. Binders do not guarantee the application will be accepted, and can be cancelled via formal notice or when the new policy takes effect.

Concurrent causation

Concurrent causation describes a situation in which two perils occur either simultaneously or sequentially and create loss against the same policy. In the past, concurrent causation was a source of great confusion and ambiguity. If a named peril and an excluded peril occurred simultaneously and caused damage, the insured could demand indemnity under the named peril, while the insurance provider could deny indemnity under the excluded peril. Consider, for instance, a homeowner's policy that indemnifies against collapse but not earthquakes. Confusion arises if the collapse is the result of an earthquake. The homeowner is likely to seek damages under the collapse provision, and the insurance provider is likely to deny indemnity because the collapse was caused by an earthquake. As courts began ruling in favor of insureds, insurance companies were forced to use more precise wording, and newer policies began placing specific restrictions on named perils. For example, according to a newer policy, a collapse would only be covered if it were caused by a specific set of circumstances, such as fire or faulty building materials. In a newer policy, earthquakes would be explicitly excluded.

Insurance professionals other than agents

Consultants charge a fee in exchange for insurance advice, such as explaining which policies are the most beneficial

Authority held by insurance agents

Express authority includes any powers formally granted to the agent, such as the power to write specific insurance lines, countersign, issue policies, deliver policies, bind coverage, accept premiums, and settle claims. Because express authority is laid out in writing or verbally, the powers associated with this level are the most clearly defined. Implied authority includes any powers that have not been formally granted, but are necessary for the agent to fulfill his duties. An example is the agent's ability to recommend and describe coverage options for the client. Apparent authority is based on the assumptions of a "reasonable person" about the powers an agent should have. For instance, a reasonable person might assume that an agent represents the insurance company to the general public.

State regulation of insurance companies

Insurance companies are mainly regulated at the state level. Laws vary from state to state, but all states appoint a commissioner, also known as a director or superintendent, who oversees an insurance department responsible for regulating insurance activities. State insurance departments enforce laws and regulate the conduct of agents and companies, as well as the sale of various insurance types. When violations are reported, the department must conduct an investigation and levy penalties whenever necessary. Penalties include fines, the revocation or suspension of a company's license or its right to conduct business in a certain state, and even incarceration. The National Association of Insurance Commissioners, or NAIC, consists of commissioners from every state who meet periodically to coordinate activities, share knowledge, and make recommendations. There are no laws requiring states to implement NAIC recommendations, but most do

Property insurance and casualty insurance

Insurance providers are often classified according to the insurance line (or type) they write. One such line is property insurance, which covers damage to physical property and any income it produces. Another line is casualty insurance, which provides non-property coverage, such as liability, workers' compensation, crime, fidelity, and surety.

State insurance departments require that agents fulfill the following regulations:

Licensing - Agents can only sell insurance in states in which they are properly licensed to do so. In order to receive a license, agents must pass a state insurance exam. Maintain fiduciary relationships with clients - Agents are required to receive and handle premiums from clients. Avoid twisting - Twisting is an illegal activity in which agents mislead clients into canceling their current policies and purchasing new ones. This is done solely to benefit the agent. Avoid false advertising - Agents cannot misrepresent any part of the policy or the company's financial information. All information must be accurate. Avoid rebating - Rebating is the practice of offering money, gifts, kickbacks, or any other benefit to coerce clients into purchasing insurance. (Rebating is actually legal in California and Florida) Avoid unfair discrimination - Agents must offer the same rate to all clients in identical situations, and cannot take bribes.

There are three types of hazards:

Physical hazard - This applies to the usage, occupancy, and state of the actual property. Flammable construction material is a type of physical hazard. Moral hazard - This describes a person's inclination for dishonest or illegal behavior. For example, people may damage their own property or mislead the insurance company in the hopes of getting money. Morale hazard - This applies to losses resulting from the careless or irresponsible behavior of a person.

An Insurance Agent represents the insurance provider to their clients and potential customers, and has several duties:

Selling insurance - This generates commissions for the agent and revenue for the organization. Countersigning - This authenticates the contract. Agents must review and sign each new policy. Providing quotations - This informs potential clients of the premiums on a proposed contract. The agent is also responsible for acquiring information on clients, determining their needs, recommending coverage types, and assisting them in completing applications. Field underwriting - This involves determining the risk level of a particular business by using a set of established criteria. Service needs - This refers to any assistance the insured may require after the policy has been signed. Agents must help the insured with any policy changes, name changes, or claim filing. Agents should keep current records of these changes. They should reassess the sufficiency of the client's coverage on an annual basis

Admitted and nonadmitted companies and domestic, foreign, and alien companies

State insurance departments have certain responsibilities, such as determining whether or not insurance companies are conforming to state regulations. Conforming companies are known as admitted or authorized insurers, and are allowed to conduct business within the state. Nonconforming companies are known as nonadmitted or unauthorized insurers, and are only allowed to do business in very specific situations. Insurance departments also classify companies according to their state of incorporation. Under law, companies can only be incorporated in their home state, but can operate in any number of states or countries. Domestic companies are insurance providers that operate in their home states. Foreign companies are providers that operate in states other than their states of incorporation. If a company is operating in the U.S., but has been incorporated in another country, it is classified as an alien company.

Regulations that insurance providers must follow

State insurance departments impose financial regulations on insurance companies. According to these regulations, companies must maintain certain capital and surplus requirements, distribute yearly financial statements, and disclose a certain level of financial data, depending on whether they are classified as a domestic, foreign, or alien company. By monitoring these disclosures, the insurance department can assess the financial health of a company in order to identify problems as early as possible, maintain solvency, and protect insured persons in the event of insolvency. Several states have insurance guaranty associations, which pay claims when an insurance provider suffers insolvency. States will also inspect insurance providers on an intermittent basis, assist the provider if it falls into financial trouble, and manage liquidations if the provider goes under. Independent organizations, such as S&P and Moody's, often rank insurance companies according to their financial strength. These rankings are based on factors such as investment performance and claims experience.

Specific insurance and blanket insurance

The declaration section describes the property being insured, and identifies whether the insurance is specific or blanket. Specific insurance establishes limits on the items being insured. Despite being designated as "specific," the policy does not have to list each item. However, every insured item must be part of the overall property. Consider, for instance, a homeowner's insurance policy. Even though the policy may not list any furniture or appliances, they are still covered. Blanket insurance can cover multiple properties at different locations. For example, a person who owns several buildings might purchase a blanket policy, thereby covering every building under the same policy. Endorsements are also part of the declaration section, and include any property covered by the policy. They are organized according to a form number. When agents and underwriters review endorsements, they should identify any restrictive endorsements (unexpected items) and any items that may have been accidentally omitted.

Policy coverages, additional coverages, named peril contracts, and open peril contracts

The following terms are included in the insuring agreements section of a property insurance policy: Policy coverages - These identify the different coverage types provided by the policy, as well as the property being insured. Additional coverages - These are items that may be covered under major limits, may have less liability coverage, or may be added if the applicant fulfills certain requirements. Additional coverages are also known as other coverages, extended coverages, or coverage extensions. Named peril contracts - These only protect against perils (such as fire, wind, flood, theft, etc.) that are specifically described within the insuring agreements section. Open peril contracts - These are also known as all risk contracts or special coverage contracts. They protect against all perils except those that are excluded by the insuring agreements section. This

Direct loss and indirect loss

The insuring agreements section specifies the type of loss (direct or indirect) covered by a property insurance policy. Direct loss is the result of physical damage, loss, or destruction to property, and can be caused by theft, fire, weather, and other similar perils. Indirect loss, also known as consequential loss, includes any financial hardships incurred as a byproduct of the direct loss. For instance, when a car is stolen, a person not only loses the value of his car, but may also incur additional expenses if he is forced to rent a car. The cost of automobile rental is an example of indirect loss. Another example would be the cost of renting a hotel room when a home is destroyed. Policies can extend their coverage to include indirect costs. In some instances, indirect coverage is a basic component of the policy. This

Mortgage and policy territory conditions, and vacancy and unoccupancy provisions

The mortgage condition (also known as the loss payable condition) explains the duties and rights of any mortgagee who holds an insurable interest in the property. The mortgagee's duties may include filing a loss on behalf of the insured or making premium payments if the insured is unable to do so. These duties protect the mortgagee's policy interests, which may continue even if the insurer rescinds the insured's coverage at some point. In some cases, the insurer may have the right to pay off the mortgage and assume the mortgagee's interests.

Policy period and nonrenewal

The policy period, also known as the policy term, is the time between a policy's effective date and its expiration date. Essentially, it is the length of time that insurance is provided. Most policy terms are six months, one year, or three years, provided they are not cancelled. According to most state laws, if a policy is not renewed, its coverage ends at 12:01 AM (one minute after midnight) on the expiration date. Therefore, to maintain continuous coverage, the effective date of the new policy should fall on the same day as the expiration date of the old policy.

Valuation and coinsurance condition

The valuation condition dictates that most losses will be reimbursed at actual cash value, unless the loss is $2,500 or less and the insured has met the coinsurance condition. In this case, the insurer reimburses the repair/replacement cost of the building without deducting depreciation. Valuation is also affected by the following factors: net selling price of its stock; cost of glass (valued at either replacement cost of glazing material if such material is required by law, or replacement cost of similar material if glazing material is not required by law); cost of blank media needed to replace lost or damaged valuable papers and records; cost of tenant improvements and betterments if they are paid for by the insured.

Federal regulation of insurance companies

Very little insurance regulation occurs at the federal level, but a few regulations and programs exist, such as the Fair Credit Reporting Act, the National Flood Insurance Program, and the Federal Emergency Management Agency (or FEMA). Federal regulations are especially concerned with fraud and false statements. Insurance personnel cannot deliberately misrepresent the value of property or securities in order to manipulate the actions of an insurance or regulatory agency.

Calculating the reimbursement value of a property insurance policy

When a loss occurs, the insurance provider calculates a reimbursement value using one of the following methods: Actual cash value (ACV) - This is the replacement cost of the insured item, minus any depreciation. If depreciation is not taken into account, the insured will actually gain money, thereby breaking the principle of indemnity. Repair cost - This is the amount necessary to repair any damage to the insured item. Replacement cost - This is the amount necessary to replace the item without accounting for depreciation. Full replacement costs are not usually awarded unless the insured meets certain criteria. Functional replacement cost - This is the amount necessary to repair or replace the item with materials that are less expensive but functionally the same. Market value - This is the current market worth of the item, which can increase and decrease over time. Typically, the option that represents the lowest value is the one that will be used.

Pair or set condition

When a policy insures property that consists of two components, it often includes a pair or set condition as part of the loss settlement. Damage to one component will adversely affect the value of the other component. Therefore, according to the pair or set condition, if one component is damaged or destroyed, the insurance provider is not required to reimburse the value of the entire set. However, the insurer must consider how the damaged part affects the value of the set as a whole and adjust the reimbursement amount appropriately. Consider, for example, an antique desk and chair set worth $1,500 collectively, but only $500 if either part is lost. If the chair is destroyed, the insurance provider should pay out $1,000, which reimburses the loss in value.

According to the no benefit to bailee condition

a bailee (a person or group with temporary possession of another person's property) cannot collect a settlement from the insured's policy, even if the bailee is holding the insured's property when damage occurs.

According to the policy territory condition (also known as the policy period condition),

a loss is not covered unless it occurs within the policy's territory, which usually consists of the U.S., Puerto Rico, and Canada.

The reinsurance department

acquires insurance for the insurance provider. This process is known as reinsurance, and it protects the provider against losses resulting from unfavorable underwriting results.

Salvage condition and abandonment condition The salvage condition

allows companies to purchase and take ownership of damaged property, and is one method of lowering claims expenses. If the policy includes a salvage condition, a company can pay an amount equaling the property's replacement cost, assume possession of the damaged property from the insured, and then resell it for the highest possible amount. If the insured wishes to stop the insurer from exercising this right, he must either reject the settlement offer or negotiate a lower one. Insurance companies are not required to salvage damaged property. They will only do so if they can make a profit, or if the cost of repair exceeds the value of the property. Salvaging is normally profitable when the loss is only partial or the damaged parts have scrap value.

Appraisal condition and arbitration condition The appraisal condition

allows the insured and the insurer to resolve disputes over indemnification value. When neither side can agree on a reimbursement amount following a loss, each side can hire an independent appraiser using their own money. If the appraisers cannot agree on a value, they choose an umpire, essentially a third appraiser, to serve as an objective authority. A final indemnification value is reached when two of the three appraisers agree on an amount. The insured and the insurer split the cost of the umpire.

Other insurance condition and concurrent and nonconcurrent insurance The other insurance condition

applies when there are multiple insurance policies covering the same property. It prevents the insured from receiving an excessive payout in the event of a loss, and explains how losses are reimbursed. One type of reimbursement is the primary and excess method, which is used when there are two different insurers. The first insurer, known as the primary insurer, pays out a certain portion of the loss. The second insurer, known as the excess insurer, agrees to pay any loss amount that exceeds the primary insurance amount. In the pro rata liability method, each policy covers a percentage of the loss as determined by its insurance limit. For instance, one insurer may pay 60%, while the other may pay 40%. When multiple policies cover the same property, they can be classified as either concurrent, meaning they protect against the same perils, or nonconcurrent, meaning they do not protect against the same perils. Nonconcurrent insurance poses several problems, and should be avoided in most cases.

Unoccupancy provisions

apply when people are absent. These provisions allow the insurer to limit coverage, and are necessary because vacant or unoccupied property poses a greater risk.

Vacancy provisions

apply when the insured area contains neither people nor property

Brokers

are employed by the party seeking insurance. They represent the insured, and may speak with several different insurance companies in order to find the best offer. Brokers cannot bind or legally represent an insurance provider

Agency Relationships

are present wherever a principal (such as an insurance company) has empowered agents to act on its behalf. Insurance companies generally grant their agents the power to write contracts and receive payments. Because agents represent principals, any information presented to an insurance agent is simultaneously presented to the insurance company To better their reputation and increase their desirability, many agents earn professional accreditations and designations, such as accredited advisor in insurance (AAI), charteredproperty casualty underwriter (CPCU), and associate in person insurance (API). These designations are offered by the Insurance Institute of America and the American Institute for Chartered Property Casualty Underwriters. Many states mandate that agents undergo continuous education to improve their skills and keep up with the latest knowledge, trends, and developments.

Hazards

are situations that increase the likelihood of loss. For instance, the presence of flammable construction material in a building increases the chance of fire damage. Therefore, the flammable construction material represents a hazard.

Peril and hazard Perils

are the actual events that create loss, such as adverse weather, natural disasters, theft, industrial accidents, and fires. A peril is different from a risk in that a risk is the likelihood that a particular loss will occur.

The coinsurance penalty is calculated

as a proportion of the actual insured amount versus the required coinsurance amount. It is applied when someone purchases a policy and fails to meet the coinsurance condition.

An insurance provider can be further classified

as either mono-line, meaning it handles only one line of insurance, or multi-line, meaning it handles multiple lines. Lines can also be categorized as personal or commercial. Personal lines include property and casualty policies intended for persons and families. Commercial lines protect businesses. By analyzing statistical data on each line and gathering premium information, companies can determine the most profitable and least profitable insurance types.

The marketing department

directs the marketing strategy of the company. It creates advertisements, and often works collaboratively with an advertising department.

Additionally, insurance personnel cannot intentionally commit the following act

embezzlement, abstraction, misappropriation, or purloining of insurance funds, premiums, or property. Anyone found guilty of violating federal insurance regulations may incur punishments ranging from heavy fines to up to 10 years in prison.

The legal department

ensures that the company is following all applicable laws and regulations. It interprets these laws, and handles any legal issues or court cases that arise in connection with the company. The legal department is also responsible for establishing the payout for policies.

The abandonment condition

forbids the insured from abandoning his property and then demanding full reimbursement from the insurance company. Only the insurer can determine if the property should be repaired, replaced, or salvaged.

The audit department

handles policies for which premiums are not established until after the policy term has commenced. The audit department sets these premiums by examining the company's payroll, receipts, number of employees, and the accounting records of the insured.

Solicitors

have many of the same duties that agents have. They can represent the company, sell insurance, and receive premiums. However, they do not issue or countersign policies. Solicitors may work for agents.

Producers

include all sellers of insurance, which includes agents and all of the professionals described above

Express Authority

includes any powers formally granted to the agent, such as the power to write specific insurance lines, countersign, issue policies, deliver policies, bind coverage, accept premiums, and settle claims. Because express authority is laid out in writing or verbally, the powers associated with this level are the most clearly defined.

Implied Authority

includes any powers that have not been formally granted, but are necessary for the agent to fulfill his duties. An example is the agent's ability to recommend and describe coverage options for the client.

The investment department

invests company funds with the goal of not only earning enough money to pay claims and future obligations, but also generating a high rate of return for the company. Part of the investment must be easily liquefiable.

Proximate cause

is a natural and continuous action that results in damage or loss. An action cannot be considered a proximate cause unless: It occurs as a chain or sequence unbroken by independent factors. The loss would not have occurred if the action had been absent. Assume, for instance, that a fire causes structural damage to a department store and the owner fails to exercise proper care in making repairs. The damage then leads to structural collapse that injures a shopper, who then sues the store and receives a settlement. The fire would be considered a proximate cause because it set off an unbroken chain of events that led to a loss (the settlement). Next, assume a thunderstorm occurs shortly after the structural damage. Water seeps into the store, which damages some of the merchandise. The fire is not the proximate cause of the damaged merchandise because the sequence of events was interrupted by an intervening cause (the thunderstorm) whose occurrence was not caused by the fire.

Apparent Authority

is based on the assumptions of a "reasonable person" about the powers an agent should have. For instance, a reasonable person might assume that an agent represents the insurance company to the general public.

The actuarial and statistical department

is filled with actuaries who establish separate rates for each insurance type by analyzing computer data and statistics gathered from other insurance providers.

The claims department

is responsible for indemnifying (paying) insured parties after a loss occurs. This department includes claims adjusters, also known as representatives, who inspect the damage and determine if the loss is covered by the policy. They may even distribute payments. Depending on the company's size, claims adjusters can be employees or contract workers.

Policy limits of liability insurance A policy limit

is the maximum amount an insurance policy will pay for any one loss, and is listed in the declarations section. Policy limits can be applied using a variety of methods: Per occurrence - The loss occurs in a particular place over a period of time. This method will cover losses caused by repeated exposure to a harmful condition over a long period of time. Per accident - The loss occurs in a much more specific place over a set period of time. This method is not used to cover losses caused by repeated and lengthy exposure to harmful conditions. Per person - There is a maximum reimbursement limit for any single person for a particular injury. After a loss has been reimbursed, the full policy limit is restored and available for the next loss. However, the policy may also have an aggregate limit, which places a limit on the amount a policy can pay out per year. This limit is restored on an annual basis.

Merit rating

is the third method of calculating premiums, and is used when a risk has unusual or unique characteristics. In the merit rating method, an underwriter or agent determines a manual rating for the policy, and then adjusts it based on the unusual qualities of the risk. Common types of merit rating include experience rating, schedule rating, and retrospective rating. Experience rating examines the loss experience of the insured. In most cases, loss experience is the three year difference between the premiums collected from the insured and the amount the insured has received in claims. If the insured's loss experience is worse than the average loss experience, the premium will be higher than the manual rate. If the insured's loss experience is better than the average loss experience, the premium will be lower than the manual rate. Schedule rating assesses a system of debits and credits according to the insured's characteristics. Retrospective rating considers any losses over the policy period.

The arbitration condition

is used to resolve several different kinds of disputes, not just those arising over indemnification value. Disputes may involve third party liability or two separate

Rate-making

is when an insurance provider sets their own rates and presents them to the state. Rate-making is necessary in non-mandatory states, and rates are based on comprehensive operational, premium, financial, and loss statistics. Loss costs are the most important determinant of an insurance rate because they indicate the amount necessary to cover the company's expected losses. Insurance companies often seek membership in service bureaus, such as the Insurance Service Office (ISO) or the National Council on Compensation Insurance (NCCI). Service bureaus assist in gathering loss statistics and other relevant information. Service bureaus collect and analyze statistics from every membership company, and store them with their state insurance department. Companies can deviate from these rates within a certain range. When companies submit their rates to the state, they must identify where they obtained their loss data and any other determining factors, by either listing their service bureau or explaining that they collect their data independently.

The accounting department

issues the appropriate compensation (commissions, salaries, or a combination of the two) to agents, credits premiums to the correct accounts, and keeps up reserve accounts.

Nonrenewal

options are normally given at the end of the policy period. Policy coverage is discontinued if the insured or the insurance provider chooses not to renew the policy after its expiration date. In most cases, insured individuals can exercise their nonrenewal options without having to fulfill any requirements. Insurance companies, however, may require a valid reason to decline renewal, and may need to provide notification

Estoppel

protects innocent parties against damages resulting from coverage misrepresentation. In effect, if an insurance provider indicates (either deliberately or inadvertently) that a particular coverage is present, the provider cannot deny that coverage, even when it is not part of the policy.

The agency department

recruits, trains, selects, and directs agents. It is also responsible for tracking agent sales and matching agents with their most appropriate market

Coinsurance condition

reduces the reimbursement amount if the insured has not met the coinsurance condition

Insurance company departments Policy issue and administration

reviews new applications after they have been approved by the underwriting department, and creates a policy form for the applicant. Policy analysts, also known as screeners, verify the accuracy and completeness of information included in the policy. Raters calculate the premium amount at which the policy should be assessed.

The loss control department

sometimes called the engineering department, helps insured individuals reduce risk and avoid loss by recommending preventative measures

The assignment condition

states that policies cannot be transferred to new holders unless the original holder provides written consent or dies. If the insured dies, his legal representative assumes all rights and duties under the policy through a process known as transfer of rights or duties under this policy

Excess or surplus lines agents sell surplus lines of insurance

which cover unique or high-risk situations. Very old homes, professional athletes looking to insure their bodies, tuition refunds, and medical malpractice are some examples of things that might be covered by surplus lines of insurance. These agents can handle surplus lines even in states where such insurance is not authorized.

Miscellaneous support departments,

which include general administration, assistance, training, management information systems, and maintenance, assist other departments in their operations