Chapter 16- Intro to Property and Liability Insurance

Assume a building has a replacement cost of $200,000 but the policyowner carries only $140,000 of coverage on a replacement cost basis on a policy with an 80 percent coinsurance clause. Also assume a windstorm destroys a roof that would cost $8,000 to replace. the insurer will pay

$7,000 · Insurance amount/what insurance should have been have X loss amount= reimbursement 140,000/160,000 * 8,000= 7,000

Property and liability insurance is important in financial planning for reasons that include the following:

(1) Families often spend more on property and liability insurance than on all other types of insurance. (2) Failure to carry appropriate property and liability insurance can lead to uninsured losses that scuttle an otherwise sound capital accumulation and preservation plan. (3) Property and liability insurance is complicated. (4) Property and liability insurance planning is related to other planning issues, such as emergency funding and taxation. (5) Coverage in standard policies is limited, and many options can be used to tailor coverage for specific client's needs.

mortgagee

(lender, mortgage holder)

Strict (absolute) liability

- liability regardless of fault or negligence. Applies to certain high risk activities, such as keeping wild animals or blasting. Don't even bother going to court, you're guilty.

property insurance does not protect property. It protects (1) that meet two qualifications. First, they must have (2) and second, their (3)

1. property owners and other parties 2. an insurable interest in the property at the time of the loss, 3, interest must be insured under a contract of insurance

Liability under contract law is based on (1). It occurs only as a result of a contract between one party and another. In contrast, liability under tort law is based on (2). It can result from either common law or statute.

1. the invasion of another's rights under a contract 2. the breach of one's duty to respect the rights of the general public

When a property loss occurs, what duties are typically imposed on the insured? what obligations does the insurer typically have?

A typical property insurance policy requires that the insured must promptly tell the insurer there has been a property loss, and the insured must cooperate with the insurer in showing that a covered loss occurred within the policy period. If property coverage is on a named-perils basis, the insured needs to establish that the loss was caused by one of the named perils. The insured also needs to cooperate with the insurer in establishing the value of covered property that has been lost or damaged. The insurance company has a duty to pay losses fairly and promptly once the coverage and the value of the property loss have been established. The insurance policy and/or state law might specify that losses are payable within a stated period, such as 60 days. The insurer will settle property insurance claims by paying the policyowner unless some other person with an insurable interest is also covered by the policy.

With property and liability insurance, what basic tax rules apply to taxation of benefits?

Benefits paid under liability insurance policies do not result in taxable income to the policyowner or insured even if they are paid on their behalf. Under property insurance policies, benefits paid for direct loss to real or personal property result in a capital gain to the extent that a taxpayer receives reimbursement in excess of his or her basis in the property. However, the situation is treated as an involuntary conversion, and the gain can be postponed to the extent that a taxpayer uses the proceeds to purchase replacement property, and the purchase amount exceeds the taxpayer's basis in the lost or damaged property. The situation for certain consequential losses is less clear. To the extent that benefits are paid for actual expenses incurred, there is no taxable income. Business interruption coverage, however, will result in ordinary income if it is written on a basis that insures the policyowner against loss of net profits

(T/F) Compensatory damages are intended to punish a wrongdoer whose outrageous conduct has caused injury or damage to another party.

False. Compensatory damages are intended to indemnify a person for the costs resulting from his or her injury or damage.

(T/F) If Pete was only 20 percent at fault for an auto accident in a state that relies on the contributory negligence standard, he could collect 80 percent of his damages from the other party.

False. If Pete was only 20 percent at fault for an auto accident in a state that relies on the contributory negligence standard, he could collect no damages from the other party.

(T/F) Standardized property and liability insurance policies largely eliminate the need for consumers to make choices other than policy amounts.

False. Many additional choices must be made. With property insurance, consumers often need to decide which causes of loss will be covered and to select a deductible. Because most policies contain exclusions and limitations, consumers also need to ensure that their policy or policies cover all significant property that is exposed to loss. Endorsements or additional policies may be needed to provide some necessary coverages. With liability insurance, it is important to recognize that large claims or judgments can consume a client's financial resources and to make sure that all relevant sources of liability loss are recognized and covered, using additional policies or endorsements as necessary.

(T/F) People can be held responsible only for their own negligent acts.

False. People can be responsible not only for their own negligent acts but also for those of others. For example, employers can be personally liable for the torts of their employees. In states with vicarious liability laws, the owner of an auto can be liable for the acts of another person driving the car.

(T/F) Torts can result from negligence or contractual obligations.

False. Torts can result from negligence, intentional acts or omissions, and strict or absolute liability.

With property and liability insurance, what basic tax rules apply to taxation of premiums for employees?

Group property and liability insurance as an employee benefit typically requires that an employee pays the full cost of his or her coverage, and the tax implications are the same as if the employee had purchased an individual policy. If the employer pays any part of an employee's premium, for either individual or group coverage, the employer can deduct this cost as a business expense. However, the employer must report this amount as taxable income.

When a liability loss occurs, what are the typical duties of the insured? the obligations of the insurance company?

Insured- to give written notice as soon as practical to the company or its agent; to forward promptly to the insurance company every notice, demand, summons, or other process relating to the accident or occurrence; to assist the insurance company, at its request, to (1) make settlement, (2) enforce the insured's rights against others who may be liable to the insured, (3) help with the conduct of suits and attend hearings and trials, (4) secure and give evidence, and (5) obtain the evidence of witnesses Insured company- First, the insurer will provide a defense at its expense by a counsel of its choice, even if a suit is groundless, false, or fraudulent. Second, the insurer will pay up to the limit of liability for the damages for which the insured is legally liable.

agreed value property valuation

Insurer pays agreed value when total loss occurs Used with fine arts, antiques, and other hard to value property

named perils vs open perils

Named-perils policies contain a list of the covered perils. If a peril is not listed, losses resulting from that peril are not covered. In contrast, open-perils policies cover all losses to covered property unless the loss is specifically excluded.

______________ is a tort, and most of the liability imposed by law stems from accidents attributable to ________________-

Negligence

With property and liability insurance, what basic tax rules apply to deductibility of premium?

Premiums paid by individual taxpayers for personal property and liability insurance are not deductible. However, premiums paid for business coverage by an individual, partnership, or corporation are a deductible business expense.

What property and liability loss exposures do families and businesses face?

Property loss exposures involve the possibility that a person or organization will sustain a property loss resulting from the damaging, destruction, taking, or loss of use of a house, car, or other property in which that person or organization has a financial interest. A liability loss exposure involves the possibility of a claim alleging a person's or organization's legal responsibility for injury or damage suffered by another party; one example is the possibility of causing an auto accident.

With property and liability insurance, what basic tax rules apply to deductibility of uninsured losses?

The IRS allows a deduction for certain losses to the extent that they are not compensated for by insurance. Those losses must arise from fire, storm, shipwreck, or other casualty, or from theft. The maximum amount of the losses for tax purposes is the lesser of (1) the decrease in the fair market value of the property as a result of the casualty or theft or (2) the taxpayer's adjusted basis in the property. Losses can be deducted in full by businesses and by individual taxpayers if the loss is incurred in a trade or business or any transaction entered into for profit. Other losses of individual taxpayers are deductible only if the taxpayer itemizes income tax deductions and then only to the extent that (1) each separate loss exceeds $100 and (2) the total of all casualty and theft losses for the year exceeds 10 percent of adjusted gross income.

(T/F) A typical property insurance policy requires that whenever a property loss occurs, the insured must give prompt notice to the insurer.

True

(T/F) Deductibles both minimize attitudinal hazard and lower premium costs.

True

(T/F) In a liability insurance policy, the insurance company has an obligation to provide a defense at its expense.

True

(T/F) Most property and liability policies contain a provision that specifies how an insurer's obligation is affected by the existence of other insurance that covers a loss.

True

(T/F) Property and liability insurance premiums paid for business coverage are generally deductible as a business expense.

True

(T/F) Property losses can occur to either real or personal property.

True

(T/F) The key difference between a settlement on an actual cash value basis and a replacement cost basis is that depreciation is considered in calculating the actual cash value of the loss.

True

Billy's employer is required to pay the injured driver of the other car only 80 percent of her damages because a police officer at a radar trap indicated that the other driver had entered the intersection at an excessive rate of speed and the court held that the other driver was 20 percent at fault.

Under comparative negligence, damages are diminished in proportion to the amount of negligence attributable to the person injured or to the owner or person in control of the damaged property.

Neither Billy nor his employer is required to pay the injured driver of the other car because a police officer at a radar trap indicated that the other driver had entered the intersection at an excessive rate of speed and the court held that the other driver was 20 percent at fault.

Under contributory negligence, anyone who is so negligent as to contribute to his or her own injuries or damage cannot recover from another for these injuries.

arguments for replacement cost

When property is valued on a replacement cost basis (as the dwelling building is in most homeowners policies), no deduction is made for depreciation. In the past, it was argued that this method of settlement violated the principle of indemnity because the insured was put into a better position after the loss. In many cases, however, there is no way to put the insured into exactly the same position that existed before the loss.

tort

a civil wrong other than a breach of contract

personal injury

a group of legal liability offenses that typically include libel, slander, invasion of privacy, false arrest, and defamation of character covered offenses are named in the policy

Bill has a property loss of $90,000 and finds that it is covered by two policies—Policy A for $100,000 and Policy B for $80,000. Ignoring deductibles, how much of the loss would be paid by each policy in each of the following situations? a. Policy A and Policy B both have pro rata other insurance provisions. b. Policy A is written on a primary basis, and Policy B is written on an excess basis. c. Policy A excludes property covered by other insurance.

a. If Policy A and Policy B both have pro rata other insurance provisions, Policy A would pay 55.56 percent ($100,000/$180,000) of the loss, or $50,000, and Policy B would pay 44.44 percent ($80,000/$180,000) of the loss, or $40,000. b. If Policy A is written on a primary basis and Policy B is written on an excess basis, Policy A would pay first up to a maximum of its limit and then Policy B would pay any unpaid loss up to a maximum of its limit. In this case, Policy A would pay $90,000 (the entire loss) and Policy B would not be required to pay. c. Policy B would pay $80,000 (its limit) and Policy A would pay nothing

Billy, a summer employee at Jones Dry Cleaners, was driving the company truck to pick up dry cleaning in the neighborhood when he failed to see a stop sign, bounced off a car that had the right of way, and hit a phone pole. Indicate the type of liability loss if each of the following resulted from the accident: a. the cost of surgery, loss of income, and pain and suffering for the driver of the car that Billy hit b. the cost to the phone company to repair its pole c. the suit by the driver of the other car that resulted from Billy's slandering her with foul language in front of witnesses at the accident scene

a. The cost of surgery, loss of income, and pain and suffering for the driver of the car that Billy hit are bodily injury liability losses. b. The cost to the phone company to repair its pole is a property damage liability loss. c. The suit by the driver of the other car that resulted from Billy slandering her with foul language in front of the witnesses at the accident scene is under personal injury liability.

Other illustrations of this trend include the _______________ (up to certain amounts) that airlines have for the safety of their passengers and workers' compensation laws, which hold the employer liable for most employee work-related injuries and diseases.

absolute/strict liability

The concept of ____________ is based on the principle of indemnity, which means that an insured should not profit from a loss but should be put into approximately the same financial position that existed before a loss

actual cash value

replacement cost less a reduction for depreciation and/or obsolescence

actual cash value

a method of valuing property in which value is determined before loss and the agreed value is paid in the event of a total loss

agreed value

bodily harm, sickness, or disease. It includes required care, loss of services, and death that results.

bodily injury

replacement cost is common with

both commercial and residential personal property

the legal principle whereby an injured party can recover a portion of the damages for his or her injuries if he or she was also negligent. In some jurisdictions, a plaintiff can recover only if his or her negligence is less (or not more) than the defendant's negligence.

comparative negligence

damages designed to financially compensate, or reimburse, a claimant who has suffered a loss for which another party is legally responsible

compensatory damages

a provision whereby a property owner must share in a loss if the amount of insurance carried is less than a specified percentage of the property's insurable value

coninsurance (property)

torts include all civil laws not based on

contracts

the assumption of legal liability of others through a written or oral contract

contractual liability

the legal principle whereby an injured person cannot recover damages for injuries from another negligent party if the injured party was also negligent

contributory negligence

two categories of legal wrongs in liability

criminal wrongs (public) civil wrongs (private) based on torts and contracts

Mortgage Clause

designed to protect the mortgagee's insurable interest • receive any loss payments from the insurer to the extent of its insurable interest in the property. The mortgagee has a right to this payment even if the policyowner's claim is denied, so long as the mortgagee: • notifies the insurer of any change in ownership or occupancy or any increase in hazard of which the mortgagee is aware • pays any premium due if the policyowner fails to do so • surrenders any claim it might have against the policyowner to the extent the insurer pays the mortgagee • receive separate advance notice if the insurer decides to cancel or nonrenew the policy

Jim Smith has a homeowners policy with replacement cost coverage. After a fire at his home, the damage is estimated at $50,000 on an actual cash value basis and $60,000, ignoring depreciation (that is, on a replacement cost basis). The replacement cost of his home at the time of the loss is $300,000. Ignoring the deductible, how much would Jim recover in each of the following situations? a. if Coverage A in his policy is $250,000 b. if Coverage A in his policy is $220,000 c. if Coverage A in his policy is $180,000

first, find that 80% coinsurance coverage is 240,000 a- full 60k b- 55k c- 45k

Teenagers who have a party at your house and drive home and gets in accident.

imputed negligence

the legal principle whereby an injured party can recover a portion of the damages for his or her injuries if he or she was also negligent. In some jurisdictions, a plaintiff can recover only if his or her negligence is less (or not more) than the defendant's negligence.

imputed negligence

Billy's employer is found liable for the injuries suffered by others that were caused by Billy

imputed negligence, legal responsibility for injuries or damage is extended to other persons, such as employers. In this case, because the negligent party, Billy, acted in the capacity of employee or agent of Jones Dry Cleaners, both the wrongdoer and the owner of the property can be held liable

bodily injury liability

insurance that covers physical injuries caused by a vehicle accident for which you are responsible bodily harm, sickness, or disease. Includes required care, loss of services, and death that results

the legal principle that holds that although a claimant is negligent, the defendant is liable if he or she had the last clear chance to avoid an accident and failed to take advantage of that chance

last clear chance doctrine

when you hear the work liability, what 2 words should you think of

legally responsbile

The amount payable under a policy that provides property insurance coverage is also affected by the policy's

limits, deductibles, and insurance-to-value provisions.

a provision in a property insurance policy that protects a lender's insurable interest in personal property. If a covered loss occurs, the lender receives payment to the extent of its insurable interest.

loss payable clause

the lender will still be paid if the policyowner is denied coverage but only if coverage was denied because of certain fraudulent acts or omissions. The lender receives notification if the policy is canceled so other provisions can be made to protect its insurable interest. However, the lender cannot pay the premium to keep the coverage in force.

loss payable clause

a provision in property insurance policies that protects a lender's insurable interest in real property. If a covered loss occurs, the lender can receive payments to the extent of its insurable interest, even if a policyowner's claim is denied.

mortgage clause

an insurance contract that covers only losses that arise from one of a series of listed perils. If the peril is not listed, it is not covered by the policy.

named perils coverages

The most common basis for liability insurance claims

negligence

failure to exercise the proper degree of care required by the circumstances

negligence

an insurance coverage that covers all types of losses except those that are specifically excluded by the policy's terms

open perils coverages

a provision in property and liability insurance policies that specifies how losses are shared if more than one policy covers a loss

other insurance clause

a group of legal liability offenses that typically include libel, slander, invasion of privacy, false arrest, and defamation of character

personal property

property other than real property

personal property

a policy to provide open-perils coverage for unscheduled personal property worldwide

personal property floater

damages awarded in addition to compensatory damages when a defendant's behavior is so severe that the legal system feels an example should be made of the behavior

punitive damages

land and anything on the land that has been permanently attached or affixed to the land

real property

Property insurance deals with property in two broad categories:

real property and personal property

the cost necessary to replace or repair damaged property using equivalent materials and workmanship. Depreciation is not factored into an asset's replacement cost.

replacement cost

generally how actual cash value is defined

replacement cost minus physical depreciation

Based on replacement with materials or items of 'like kind and quality' Nice pair of diamond earnings, lose one, insurance company will get you matching earring or buy you a new pair and give you the other one back

replacement cost property valuation

Valued Policy Law

requires payment of the face amount of insurance to the insured if a total loss to real property occurs from a peril specified in the law **real property only

an approach to valuing property in some property insurance policies. At the time of the loss, the insurer will pay the least of the stated amount, the actual cash value, or the cost to repair or replace the property.

stated amount

liability under law, regardless of whether fault or negligence can be proved

strict liability

3 common PAYMENT approaches in property insurance policies:

· Pro rate coverage- If two similar policies provide coverage on the same property, loss payments will be prorated based on the limits of insurance. · Primary and excess coverage- A common approach with auto insurance is that one policy provides primary coverage and the other covers any losses within the scope of its coverage that have not been covered by the primary policy. · Exclusion for property covered somewhere else- n amateur photographer has a camera worth $1,000 that is specifically insured for $500 in a scheduled personal property endorsement to the homeowners policy, the insurer will pay $500 under the endorsement and nothing additional under the personal property coverage of the homeowners policy

Coinsurance Provision for property and liability

· Property owners must share in a loss if the amount of insurance carried is less than a specified percentage (usually 80%, 90%, or 100%) of the property's insurable value · Most common is 80% · Basically says if you have a home you must carry at least 80% of the replacement cost in order to collect FULL coverage on damages. · If you chose to under insure, company will apply coinsurance formula and they will under reimburse you · Insurance amount/what insurance should have been have X loss amount= reimbursement

Property and liability insurance is important for many additional reasons

• Many individuals, especially those with good employee benefits, spend more on property and liability insurance than they spend on all other types of insurance combined. • Property and liability insurance is complicated, and exposures and policies must be thoroughly analyzed to determine whether a client is adequately protected. • Many policy endorsements and other coverage options are available

negligence requires the existence of 4 specific elements

• a legal duty • a wrong • injury or damage • proximate cause (1) a legal duty to act, or not to act, depending on the circumstances and the persons involved, (2) a wrong, or voluntary breach of legal duty, based on a "prudent person" standard of conduct, (3) an injury or damage, and (4) a proximate relationship between the wrong and an injury or damage, where a continuous succession of events occurred, from the act to the final event that caused the injury. 1. A certain standard of care is owed to others. 2. That standard of care is not met. 3. There is injury or damage 4. Failure to meet the standard of care is the proximate cause of the injury or damage.

The types of liability losses typically covered by property and liability insurance fall into the following categories:

• bodily injury • property damage • personal injury • contractual liability • wrongful acts

Liability claims involve an alleged responsibility to pay damages. Damages can be categorized as

• compensatory damages, designed to financially compensate or reimburse a claimant who has suffered a loss • punitive damages, designed to punish a wrongdoer, or tortfeasor, whose outrageous conduct has caused another party to suffer a loss

few, if any, property insurance policies cover losses from every peril that could occur. Insurance policies take two distinct approaches in describing the causes of loss covered under a given policy:

• named perils, also known as "specified perils" • open perils, also referred to as "special form" or "all risks"

Liability Insurance Types of Damages

1. Compensatory Damages a. Financially compensate or reimburse a claimant b. Compensated for damage to your car and loss for day of work 2. Punitive Damages a. Punish a wrongdoer whose outrageous conduct cause another party a loss

2 kinds of losses in property and liability

1. Property loss exposure a. Possibility of property loss resulting from damage, destruction, taking, or loss of use of property 2. Liability a. Legally responsible b. Possibility of a claim alleging legal responsibility for injury or damage