Chapter 6
agreed value method
typically cover commercial watercraft, antiques, painting,s and other objects whose value can be difficult to determine; if a total loss occurs, the insurer will pay the agreed value specified in the policy; partial loses are paid based on actual cash value, repair cost, replacement cost, or whatever other valuation method the policy specifies; the agreed value method does not stipulate what the agreed value has to be relative to the true value of the property--the only stipulation is that both parties have to agree to the value in the policy
ownership interest in property
includes buildings, copyrights, patents, and trademarks; ownership rights to both tangible and intangible property have economic value and are guaranteed and protected by the law
legal bases for insurable interest
insurable interest can arise from a legal relationship between the party filing the claim and the subject of insurance
representation of another party
insurable interest can be based on one party acting as a representative of another party (i.e. an agent or trustee); the representative can obtain insurance on property for the benefit of the property's owner
coinsurance clauses
make the insured responsible for retaining part of any loss if the property is underinsured below some specified percentage of the property's insurable value
actual cash value
one of the most prevalent methods; supports the principle of indemnity by restoring the insured to its pre-loss condition; traditional ACV is limited to (replacement cost - depreciation); calculation is based on economic depreciation, not accounting depreciation
market value
price at which a particular piece of property could be sold on the open market; easy to establish for autos, personal computers, and other property that has many buyers and sellers; difficult to establish if there have been few recent transactions involving comparable property; useful when property of like kind and quality is unavailable for purchase (such as antiques or works of art); when dealing with real property, the land's value must be eliminated in established insurable values because most insurance policies cover buildings and structures but not land
credit card protection plan
protects property purchased with the card against theft or accidental damage; could be covered under a homeowner's policy
depreciation
reflects the value of the use that the insured has already received from the property
self-insured retention (SIR)
the insurer pays only losses that exceed the SIR amount; insurer does not defend claims below the SIR amount; consequently, the organization is responsible for adjusting and paying its own losses up to the SIR amount; the full policy limit is payable on top of the SIR, while a liability policy deductible may reduce the policy limit; usually requires strict reporting to the insurer of any claims that have the potential of exceeding the SIR amount; common in professional liability insurance policies and some other specialty policies
subrogation
the substitution of one person or group by another in respect of a debt or insurance claim accompanied by the transfer of any associated rights and duties
amount payable=
(limit of insurance /[value at time of loss]x[coinsurance %]) x total amount of covered loss [did / should] x loss
reasons for coinsurance limits:
1. amount of insurance necessary to meet coinsurance requirements is based on the insured property's value at the time of the loss; however, the policy limit is selected when the policy is purchased 2. an insurance buyer typically estimates property values based on an informed guess 3. the insurable value at the time of the loss often cannot be precisely measured until the property is actually rebuilt or replaced 4. values change over time
reasons for property insurance deductibles
1. encourage risk control: theoretically gives the insured the risk control incentive to prevent or reduce losses; deductibles that are too small do not offer enough financial incentive, and those that are too large defeat the purpose of transferring the loss exposure to the insurer; deductivles are not particularly effective when used with large property exposures 2. reduce insurer's cost: the insurer's loss adjustment expenses often exceed the amount of indemnity payable to the insured; help eliminate dollar trading (expensive and inefficient process of insuring small claims; deductibles reduce the premiums insurers must charge and ultimately benefit the insured by reducing the overall loss costs and loss adjustment expenses, provide insured with risk control incentives; insured can choose from a variety of deductible levels; premium reduction is not directly proportional to the size of the deductible; premium credit increases much more slowly than the size of the deductible; tend to encourage the use of medium-sized deductibles that eliminate dollar trading for small losses but that provide a reliable source of recovery for large losses
steps that insurance professionals take to help property insurance buyers minimize problems associated with valuation
1. hire a qualified appraiser to establish the property's current replacement cost value and set policy limits 2. review and advise policy limits periodically to ensure that they are adequate to cover potential losses 3. consider appropriate coverage options (i.e. agreed value optional coverage, inflation guard protection, and the peak season endorsement
property may be jointly owned according to these interests
1. joint tenancy (an automatic right of one tenant to the share of the other tenant when that other tenant dies) 2. tenancy by the entirety (joint tenancy between husband and wife--if one dies the other becomes the sole owner; combined interests would be twice the property's value, but insurance would pay no more than the property value 3. tenancy in common (concurrent ownership of property, in equal or unequal shares, by two or more owners); no survivorship rights; each party's insurable interest is limited to that share of the property and any insurance payouts would probably be made out to the first name insured, who would be responsible for distributing the appropriate share to the other tenants in common 4. tenancy in partnership (concurrent ownership by a partnership and its individual partners of personal property used by the partnership); the partnership and all partners have rights of survivorship; both the partnership entity and the individual partners have an insurable interest in property used by the partnership; the combined interests could be many times the actual property value because each partner would have an interest worth the entire insurable amount; if a loss occurred, the claim settlement would be paid to the first named insured, which could be the partnership entity or a partner
policy limits
1. liability policy or liability provisions within a multiline policy may be subject to several or one policy limit 2. when a liability policy contains multiple limits, the mac amount payable for a covered claim depends on a complete analysis of the interactions among the various limits 3. insurers also agree to pay defense costs and various supplementary payments such as cost of surety bonds required in connection with claims and interest on judgments 4. once the insurer has paid out the acceptable limits for a claim, the insurer's duty to defend and pay supplementary payments ends 5. in specialty liability policies, the insurer's payments for defense costs and supplementary payments are typically applied to reduce the policy limits
contractual obligations
1. regarding people: contract may give one party the right to bring a claim against a second party without entitling the first party to any specific property that belongs to the second party (i.e. credit card company debt does not have the right to possess debtor's property) 2. regarding property: some contracts allow one party to bring a claim against specific property held by a second party
compensable amount of the claim
1. settlement of the claim: gives the insurer and the claimant the right to reach a settlement within the policy limits; usually determined through negotiations but may be determined in a formal trial; for claims exceeding policy limits, the insured has a right to legal counsel, usually at the insured's expense; legal expenses are usually paid outside of the policy limit; legal expenses do not erode the policy limit 2. extend of damages: key issue affecting the valuation of liability claim is the amount of monetary compensation that will reasonably indemnify the party who incurred the loss; the US common law system requires the amount of damages awarded to compensate the claimant for loss incurred as of the trial date; the claimant usually has the burden of proof regarding bodily injury and property damage; the claimant must establish what losses were proximately caused by the insured
reasons for insurable interest
1. supports the principle of indemnity 2. prevents the use of insurance as a wagering mechanism 3. reduced the moral hazard incentive that insurance may create for the insured
reasons for limited use of liability insurance
1. the insured mat not report seemingly minor incidents until the situation has escalated; insurers want to be involved even in small liability claims 2. deductibles would not noticeably reduce premiums 3. the insurer usually must pay the third-party claimant the agreed-upon settlement in full, without deduction for any deductible (insurer has the right to recover the amount of the deductible from the insured, if it is not paid, the insurer may have to pay the cost 4. common with some specialty liability policies, such as those covering profesional liability or directors and officers liability, to encourage risk control
when a property is damaged, the owner may recover:
1. the reasonable cost to repair the property, of the cost to replace it 2. the damages to compensate for the loss of use of the property for a reasonable period 3. under certain circumstances, lost profits from the inabiity to use the damaged or destroyed property (i.e. bodily injury claims, an insurance professional will consider reasonable and necessary medical ecpenses incurred and those expected to be incurred in the future and type of bodily injury 4. wage loss or loss of earning capacity because of the bodily injury 5. other out of pocket expenses (i.e. household assistance) 6. current and future pain and suffering resulting from the bodily injury 7. extend and permanency of disability and impairment 8. disfigurement resulting from the bodily injury 9. preexisting conditions that could have contributed to the bodily injury
negligent third parties
a party who is injured or whose property is damaged by a negligent third party has a right to recover damages from the third party; recovery could overlap with the insured's own property insurance policy; most policies have subrogation provisions that address this
insurable interest
arises as the result of a relationship with a person or a right with respect to property; whether an insurable interest exists depends on the relationship between the claiming party and the property, person, or event that is the subject of the insurance policy
life insurance--insurable interest requirement
beneficiary must have an insurable interest in the life of the insured when the policy is purchased, but not necessarily at the time of the insured's death
extended auto warranty, home warranty, appliance service agreements
can provide contractually enforceable source of recovery that may overlap with an auto or homeowner's policy; many homeowner policies include a provision addressing noninsurance service agreements indicating that the coverage provided by the homeowner's policy is excess over any recovery that the insured may be able to get from a service agreement provider
replacement cost
commonly used in insurance policies covering buildings and in many policies covering personal property; if property covered on a replacement cost basis is damaged or destroyed, the insured is entitled to the current cost of repairing damaged property or of buying or building new property of like kind and quality, even if the destroy property is several years old, and even if its replacement cost exceeds the original purchase price; if the cost of new property has decreased (i.e. with computers or other electronic equipment) replacement cost coverage pays the current lower cost; replacement cost coverage often does not apply to property such as antiques or artwork, primarily because there is no adequate replacement for such property; an insured who sustains a loss to old, used propery and receive insurance payment for new property has profited from the loss; to reduce the moral hazard, most replacement cost policies pay out only after the insured has actually replaced the damaged or destroyed property; many policies give the insured the option of settling the claim based on ACV and then has 180 days to refile the claim on the replacement cost basis; if the policy specifies that property is covered on a replacement cost basis, the insured must select a policy limit to fully insure the replacement cost property value
why insurers seek insurance to value
lack of insurance to value affects premium adequacy; addresses this problem by charging a higher rate on property insurance when the policy limit is less than the property's value or requiring insured to carry policy limits that are close to the full value of the property; insured benefits from insurance to value because sufficient funds are available in the event of a total loss and the uncertainty associated with large retained losses is reduced
how insurers encourage insurance to value
many policies include insurance-to-value provisions that reduce the amount payable for both partial and total losses if the insured has not purchased adequate limits of coverage; rewards those who have insured to value and penalizes those who do not
where insurable interest is required
matter of law and exists even in the absence of policy provisions specifically addressing insurable interest; requirement for insurable interest is different in property casualty insurance than in life insurance
insurance to value
motivate each insured to buy a limit of insurance that approximates the full value of the covered property
property casualty--insurable interest requirement
must be present at the time of the loss
exposure to legal ability
sometimes one party can have legal responsibility for property owned by others (i.e. a contractor typically has an insurable interest in a building under construction; the responsible party has an insurable interest based on potential legal liability for damage to the owner's property
functional valuation method
sometimes used when replacing buildings or personal property with property of like kind and quality is not practical and when the ACV method does not match insurance needs; for commercial property, the insurer is required to pay no more than the cost to repair or to replace the damaged or destroyed property with property that its functional is equivalent; when applied to personal property, the insurer is required to pay no more than the cost to replace the equivalent but less expensive property; when applied to real property, the insurer is permitted to use common construction methods and materials
survival action
when a bodily injury results in a claimant's death
multiple parties with insurable interest
when one or more person owns the same property, the nature of the ownership affects the extent of each party's insurable interest
