Ch 5: insurance policies

claims-made coverage

A coverage form that provides coverage for bodily injury or property damage that is claimed during the policy period.

All of the following information is provided on the declarations page of a Personal Auto Policy (PAP), EXCEPT: A. A description of the insured autos B. A schedule of coverages C. The name of the insurer providing the coverage D. A schedule of policy conditions

A schedule of policy conditions

self-contained policies

A single document that contains all the agreements between the insured and the insurer and that forms a complete insurance policy

Self-contained policies

Address complete coverage needs.

four essentials of a contract that makes it valid

Agreement, Capacity to contract, Consideration, legal purpose

Q:. Angela is having a dispute with her insurance company regarding a claim and the definition of an insured loss. The definition is subject to two reasonable interpretations, one that favors Angela and one that favors the insurer. A court of law is likely to find in favor of

Angela, because an insurance contract is a contract of adhesion. Insurance policies are considered contracts of adhesion. If wording is ambiguous, a court will generally find for the insured.

All commercial package policies begin with two components, namely, common policy conditions and common

Declarations. - All commercial package policies begin with two components, namely, common policy conditions and common declarations. Adding the necessary forms to make up an individual coverage part that meets the insured's specific needs completes the policy.

Which one of the following categories of insurance policy provisions outlines what is covered and where and when coverage applies?

Declarations. The declarations outlines what is covered and where and when coverage applies.

In a policy's insuring agreement, the insurer promises to pay to the insured, to pay on behalf of the insured and to

Defend the insured.

The definitions section of the policy

Helps clarify real or perceived ambiguity.

A broad statement of an insurer's promises to the insured may be found in a policy's

Insuring agreements.

Standard forms

May result in different insurers issuing identical policies.

A liability policy generally gives the broadest protection to the

Named Insured

Basheer sold his car to Carl. For an additional sum, he also transferred his auto policy to Carl, to go with the car. Is Carl now entitled to the benefits promised by Basheer's policy?

No, because Basheer's policy is not transferable.

An injury arising from an intentional tort such as libel, slander, or invasion of privacy is called

Personal injury.

The declarations page of a Personal Auto Policy (PAP) shows

Shows the name of the insured and the insured's mailing address.

Most claims-made policies contain a retroactive date, which is

The date on or after which injury or damage must occur in order to be covered.

Out-of-court settlements are attractive to claimants because such settlements

Typically resolve cases more quickly than going to court.

A payment by a liability insurer to the insured for travel expenses incurred at the insurer's request would be categorized as A. A defense cost. B. Part of the overall damages. C. A supplementary payment. D. An expediting payment.

supplementary payment

Some liability policies place defense costs within the overall policy limit. If such a policy has a limit of $100,000 and the insured has a covered claim involving damage of $85,000 and defense costs of $25,000, what is the total amount that the insurer would pay for damages and defense costs? A. $25,000 B. $85,000 C. $100,000 D. $110,000

$100,000 Correct. The total amount that the insurer would pay for damages and defense costs is $100,000.

characteristics of insurance policies

*contract of indemnity, *contract of utmost good faith, *contract involving fortuitous events and the exchange of unequal amounts, *contract of adhesion, *conditional contract, *nontransferable contract

An insurer has decided to take an extremely narrow interpretation of a property insurance policy provision to limit the number of loss payments it will need to make. It realizes that its interpretation is probably wrong, but it knows that individual insured's loss amounts will be small, such that most insureds will not take the trouble to file lawsuits against it. The insurer may be violating the principle that an insurance policy is

A contract of utmost good faith.

The liability coverage agreement of the business auto policy states each of the following duties of the insurer, EXCEPT: A. A duty to pay damages B. A duty to provide other services to the insured C. A duty to comply with laws and regulations D. A duty to defend the insured

A duty to comply with laws and regulations

Misrepresentation defintion

A misrepresentation is a false statement of a material fact on which the insurer relies; it need not be intentional. Concealment, in contrast, is the intentional failure to disclose a material fact.

Ling has noticed that her neighbor has recovered money for two homeowners property claims and an auto damage claim he has filed in recent years. Ling has been paying insurance premiums for many years and has never suffered a loss or made a claim. She feels that her insurance contracts over the years have been worthless to her. What Ling does not understand is that she has been paying premiums in exchange for

A promise of protection. Insurance contracts involve an exchange of money for the promise of protection upon the occurrence of uncertain, or fortuitous, events.

contract of utmost good faith

An insurance policy is a contract of utmost good faith and both parties to it, the insurer and the insured, are expected to be ethical in their dealings with each other.

Modular policies

An insurance policy that consists of several different documents, none of which by itself forms a complete policy

Ching is a commercial claim representative who has been assigned a large fire loss. Ching suspects that the insured may not have been completely honest in describing the property before the policy was issued such that coverage for the claim may be denied. In which document might Ching find the representations of the insured regarding the property's description?

Application- The application preserves the insured's representations regarding the loss exposure.

Manufacturing Company experienced a loss on its premises when expensive equipment was destroyed by fire. A provision in its insurance contract maintains that the insurer has a right to enter the premises in the event of a reported loss to inspect the damaged property. Manufacturing Company has refused to grant entry to the insurer's claim representative. Consequently, the insurer is considering whether it can deny coverage for the claim. Which one of the following best explains why Manufacturing Company's insurer may be able to deny coverage under the principle that an insurance policy is a conditional contract? A. The insured has no power to alter the written requirement to allow inspection. B. The insurer may not be able to validate a covered loss and the actual value of the loss without inspection. C. The insured must fulfill its duty to allow an inspection before a claim is paid. D. The insurer may not be able to satisfy itself that the fire was not caused by arson without an inspection.

C. The insured must fulfill its duty to allow an inspection before a claim is paid. An insurance policy is a conditional contract because parties only have to perform under certain conditions. One of these conditions is that the insured must allow an inspection before a claim is paid.

Q: An insurer will make a loss payment if an insured loss occurs and if the insured performs certain duties. This illustrates that an insurance policy is a

Conditional Contract

Q: An insurer will make a loss payment if an insured loss occurs and if the insured performs certain duties. This illustrates that an insurance policy is a

Conditional contract

Q: Insurance policies are written in such a way that the parties have to perform only under certain conditions, because an insurance contract is a

Conditional contract.

Because the insurance company usually determines policy wording and the insured has little choice but to "take it or leave it," an insurance contract is a

Contract of adhesion

Q: Because insurance contracts impose an obligation of complete honesty on the parties, an insurance contract is called a

Contract of utmost good faith.

One reason professional liability insurance is often provided separately from general liability insurance is that

Coverage for these types of claims is better handled by other liability insurance policies.

Which one of the following is a true statement regarding professional liability on an HO-3—Special Form (HO-3)? A. Coverage is excluded to eliminate exposures that require specialized coverages. B. Coverage is excluded because most insureds do not need it. C. Coverage is excluded to eliminate any duplicate coverage. D. Coverage is excluded to keep premiums reasonable.

Coverage is excluded to eliminate exposures that require specialized coverages.

occurrence basis coverage

Coverage that is triggered by the actual happening of bodily injury or property damage during the policy period.

An insured under a personal auto policy with liability limits of $100,000/$300,000/$25,000 is responsible for an auto accident that resulted in $90,000 in damages for bodily injury. The costs incurred by the insurer to defend the insured were $20,000. Which one of the following amounts did the insurer pay as a result of the accident? A. $20,000 Incorrect. The insurer paid $110,000. B. $90,000 C. $100,000 D. $110,000

D. $110,000

What triggers coverage under a liability policy that provides occurrence basis coverage? A. A covered occurrence B. A claim submitted after the retroactive date C. A claim within policy limits D. Injury or damage that occurs during the policy period

D. Injury or damage that occurs during the policy period triggers coverage under a liability policy that provides occurrence basis coverage.

Larry and his friend John were driving in Larry's sports utility vehicle. A vehicle ran a red light at an intersection and struck them. Larry's vehicle was at a complete stop. The driver of the other vehicle was intoxicated, and clearly at fault in the accident. The drunken driver's automobile insurance had canceled for nonpayment when the accident occurred.Larry and John were taken to the hospital. They incurred the following losses as result of the accident: Larry: $20,000 in medical bills $4,000 in lost wages $20,000 in pain and suffering John: $10,000 in medical bills $2,000 in lost wages $20,000 in pain and suffering Larry has liability limits of $100/$300/$50 and a $100,000 uninsured motorists coverage limit on his Personal Auto Policy (PAP) covering his sports utility vehicle. Which one of the following amounts will Larry's insurer pay as a result of this accident? A. $24,000 B. $36,000 C. $44,000 D. $76,000

D. Larry's insurer will pay $76,000; both Larry and John would have coverage for all of their damages subject to policy limits.

Insurers are unwilling to provide professional liability insurance under the CGL because

Different underwriting and claim handling skills are required.

Law Firm asked Insurance Company to provide both a commercial liability policy and a professional liability policy to meet its coverage needs. Insurance Company believes that there could be some types of losses that would be covered under both policies, a situation it wishes to avoid. What type of policy provisions could Insurance Company use to address this problem?

Exclusions

Q: An insurance policy is considered a contract of adhesion when it is drafted by the

Insurer

All of the following explain the importance of a policy limit, EXCEPT:

It tells the insurer whether to value an item at replacement cost or actual cash value.

Bob and Diane Rothwell's rural home is insured with an HO-3 policy. During spring clean up, the Rothwells hired a college student to help clean up and burn the brush that had accumulated over the prior season. As the brush pile was burning, an unexpected wind carried the fire across the Rothwells' pasture. Bob and Diane, their 15-year-old son Jeff, Diane's father who was visiting, the college student, and a neighbor all worked together to put out the fire before it spread to the neighbor's yard. They all suffered some burns. All of the parties involved in fighting the fire will be able to collect compensation for their medical bills to treat their burns from the Medical Payments to Others coverage from the Rothwells' HO-3, EXCEPT:

Jeff because Jeff is an insured. Medical Payments to Others covers medical payments incurred by others, not insureds or regular household residents.

Broad pollution coverage is not typically included in liability policies primarily as an attempt to

Keep premiums reasonable.

Rachel is an insurance broker. She has received a sales referral from another broker concerning an airport management company, Airport Ltd. The company plans to operate a large, national airport in a major city and has requested a quote for airport liability coverage. Rachel will probably recommend the use of which one of the following types of policy forms?

Manuscript. A manuscript policy is a customized contract developed for a specific insured or group of insureds who share unique coverage needs.

Q: When Amy applied for insurance, her agent asked her if she had received more than three traffic tickets in the last five years. Amy had received four, but remembered only three. Thus, she told the agent she had received only three. Amy's statement is an example of

Misrepresentation

A commercial package policy is an example of a

Modular policy. because it combines different forms, depending on an insured's needs.

Which one of the following types of insurers is the most likely to include its bylaws as part of its policies?

Mutual insurers - Policyholders of mutual insurers typically have rights and duties associated with managing the insurer's operations. Their policies specify these rights and duties by incorporating corporate documents.

Under a liability policy, the maximum amount an insurer will pay for both bodily injury and property damage arising from a single occurrence is known as the

Occurrence limit. Under a liability policy, the maximum amount an insurer will pay for both bodily injury and property damage arising from a single occurrence is known as the occurrence limit.

Within the Personal Auto Policy (PAP), the name of a lender, loss payee, or lienholder is usually shown

On the Declarations page.

In commercial insurance policies, several different individuals and businesses may be listed as named insureds.Which one of the following is the term used to refer to the party that is responsible for paying premiums and that has the right to receive any return premiums and cancel the policy?

The first named insured. The first named insured is responsible for paying premiums and has the right to receive any return premiums and to cancel the policy.

XYZ Manufacturing (XYZ) has a Commercial General Liability (CGL) Coverage Form with a $2,000,000 each occurrence limit, a $3,000,000 general aggregate limit, and a $3,000,000 aggregate limit for products and completed operations. If XYZ has products liability losses of $1,500,000, $1,200,000, and $500,000 during the policy period, how much would the CGL policy pay for the losses? A. $1,500,000 B. $2,000,000 C. $3,000,000 D. $3,200,000

XYZ's policy would pay up to the aggregate limit for products and completed operations ($3,000,000).

conditional contract

a contract that one or more parties must perform under certain conditions

endorsement

adds to or modfies and insurance policy

Q: Albert tells the insurance agent the building is used to store steel, but it is actually used to store steel drums containing flammable liquids. What is that an example of?

an example of material misrepresentation by Albert, a businessman applying for property insurance on a building he owns

contract of indemnity

an insurer agrees to pay an amount directly related to the amount of the covered loss

who does not have the capacity to contract?

being insane, under the influence, a minor

principle of indemnity

insurance policies should provide a benefit no greater than the loss suffered by the insured (the insured does not profit from a loss)

As usually defined in liability insurance policies, personal injury includes

invasion of privacy.

contract of adhesion

one party must accept or reject the agreements as written

The aggregate limit in a liability policy is the maximum amount an insurer will pay for all covered losses during the

policy period

liability insurance

to pay damages (usually for bodily injury or property damage) for which an insured becomes legally liable and to which the coverage applies. The insurer also promises to pay related defense costs.