CH 8 Common Policy Concepts

Dollar Trading

An insurance premium and loss exchange in which the insured pays the insurer premiums for low value losses, and the insurer pays the same dollars back to the insured, after subtracting expenses.

Valuation of Liability Claims

Most liability policies do not specify how the amount of a covered claim is determined. Max amount is typically the compensable amount of the claim or the policy limits.

Replacement Cost Minus Depreciation

Most property has highest value when new and depreciates steadily as a result of age and use. Depreciation reflects the value of the use the insured has already received from the property and can be based on wear and tear or age alone, obsolescence caused by fashion, technological changes or other factors. ACV is based on economic depreciation, not accounting depreciation.

Tenancy in Partnership

A concurrent ownership by a partnership and its individual partners of a personal property used by the partnership. The partnership and all partners have the right to survivorship. The combined interest could be many times the property value because each partner and the partnership would have interest worth the entire insurable amount. First named insured would disburse claim payment.

Tenancy in Common

A concurrent ownership of property, in equal or unequal shares, but two or more owners. No survivorship rights. If one dies, the other shares would not change and the deceased owner's shares are passed to his/her heirs. Insurable interest is limited to their share of the property, so their combined interests are equal to the property's full value. First named insured would distribute loss payment to other tenants in common.

Broad Evidence Rule

A court ruling explicitly requiring that all relevant factors be considered in determining ACV. More than just depreciation must be considered including obsolescence, present use, alternate buildings, neighborhood characteristics, long-term community plans, inflation/deflation, etc.

Self Insured Retention

A dollar amount specified in an insurance policy that the insured must pay before the insurer will make any payment for a claim. Insurer pays only losses that exceed SIR amount, and does not defend claims under SIR amount. Full policy limit is payable on top of SIR, but deductible may still reduce policy limit. Common in professional liability policies and umbrellas.

Tenancy by the Entirety

A joint tenancy between husband and wife. Each of them owns the entire property. If one dies, the other becomes the sole owner. Each spouse has insurable interest to the full value, but policy would pay no more than the property's value.

Inflation Guard Protection

A method of protecting against inflation by increasing the applicable limit for the covered property by a specified percentage of the policy period.

Agreed Value Method

A method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the max amount that will be paid in the event of a total loss. Watercraft, antiques, paintings, objects with value difficult to determine. Partial losses are paid on ACV, repair cost or replacement cost or whatever the policy specifies. No formula, the two parties just have to agree on what it should be. *Not Agreed Value Optional Coverage which suspends the coinsurance clause in commercial property insurance.

Negligent Third Parties

A party who is injured or whose property is damaged by a negligent third party generally has a right to recover damages from the third party - regardless of whether the third party has liability insurance. Subrogation.

Insurance to Value Provision

A provision in property insurance policies that encourages insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property.

Factual Expectancy

A situation in which a party experiences an economic advantage if an insured event does not occur or, conversely, economic harm if the event does occur. ie stolen engagement ring is stolen, the bride can recover.

Coinsurance Clause

A type of insurance to value provisions. A clause the requires the insured to carry insurance equal to at least a specified percentage of the insured property's value. Amount Payable = (limit of insurance)/[(value of property x coinsurance percentage)] x total amount of covered loss Amount Payable = (did/should) x loss For HO and BOP, the amount payable is never less than ACV; replacement cost if at least 80% coinsurance met, ACV if less than 80% coinsurance or amount between ACV and RC.

Functional Valuation Method

A valuation method in which the insurer is required to pay no more than the cost to repair or replace the damaged or destroyed property with property that is its functional equivalent. Used when replacing property with like kind and quality is not practical and ACV method does not match insurance needs. Common for computers and electronics. Buildings built for one purpose but used for another, historical buildings. Allows insurer to use common construction methods and materials.

Agreed Value Optional Coverage

Optional coverage that suspends the coinsurance condition if the insured carries the amount of insurance agreed to by the insurer and insured.

Insurable Interest

An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss. Arises as the result of a relationship with a person or a right with respect to property. Claimant for property loss must be insured under the policy and must have an insurable interest in the property. Recovery is limited to no more than the claimant's interest in the covered property at the time of loss. For life insurance, the 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. Policies have an insurable interest requirement for these reasons: -It supports the principle of indemnity -It prevents the use of insurance as a wagering mechanism -It reduces the moral hazard incentive that insurance may create for the insured

Legal Basis for Insurable Interest

Arises from a legal relationship between the party filing the claim and the subject of insurance. Ownership Interest in Property: The extent of legal ownership determines the extent of insurable interest. Can be tangible or intangible. Contractual Obligations: People: One party can bring a claim against a second party without entitling the first party to any specific property ie credit card. Property: One party brings a claim against specific property held by a second party ie mortgage. Exposure to Legal Liability: Responsible party has insurable interest based on legal liability for damage to the owner's property. Extent is property's full value. Factual Expectancy: Focus is on insured's financial position rather than legal interest. ie stolen ring is stolen. Representation of Another Party: Agent, trustee, bailee - the party obtaining insurance does not have to have an independent insurable interest in the property.

Actual Cash Value

Cost to replace property with new property of like kind and quality less depreciation. One of the most common methods used with property policies because it supports the principle of indemnity.

Other Insurance on a Similar Policy

Coverage overlaps because the same party is covered by two or more parties issued by different insurers. Resolved by each insurer sharing a proportional amount of the claim.

Noninsurance Agreements

Examples are lease agreements, credit card protection plan, extended auto warranty.

Reasons for Property Insurance Deductibles

Deductibles are a risk financing technique that requires the insured to retain a portion of the loss that is being transferred to the insurer. Encourage Risk Control: most effective when it is large enough to have a noticeable financial effect on the insured. Eliminate the need for the insurer to process small losses, which reduces costs and LAE, provide insureds with risk control incentives and reduce moral and morale hazard incentives. Insurance is not meant to cover small claims. Premium reduction is not proportional to the size of the deductible.

Compensable Amount of the Claim

Depends mainly on the variables of how the claim is settled and the extent of damages awarded. Most claims do not go to formal trial. Both parties have incentive to settle out of court due to the time and expense involved. If settlement cannot be reached, the claim will go to trial and the compensable amount is determined by jury. If court awards exceeds policy limit, the insured is responsible for the excess aware. When insured is liable for damages, the key issue affecting the valuation of the claim is the amount of monetary compensation that will reasonably indemnify the party who incurred the loss. Amount of damages awarded required as of the trial date. Claimant has burden of proof regarding bodily injury or property damage. Defense costs and supplementary payments typically paid outside the policy limits for GL. Pollution & D&O are paid inside the limits because the defense costs are really high.

Joint Tenancy

Each owner owns the entire property and has a right of survivorship, which is automatic when the other tenant dies. Each tenant has an insurable interest in the property's full value, but the policy would pay no more than the property's value.

Peak Season Endorsement

Endorsement that covers the fluctuating values of business personal property by providing differing amounts of insurance for certain times during the policy period.

Other Insurance in a Dissimilar Policy

Examples are trailer covered by HO and auto policy. Most difficult to resolve because of the lack of provisions governing coordination of coverage of dissimilar policies, but may be found in the policy's other insurance provisions.

Other Insurance on the Same Policy

Examples: endorsement that covers scheduled items that would be included in personal property, equipment used to maintain property is automatically included but could be covered under BPP. Distinction of coverage is important because it can affect the amount payable.

Agent

In the agency relationship, the party that is authorized by the principal to act on the principal's behalf.

Insurance to Value

Insurance written for an amount approximating the full value of the assets insured. Beneficial to insurer and insured. If insured do not purchase adequate coverage limits, the rates developed can be adversely affected resulting in inadequate premiums. Insurer benefits because premiums are adequate. Insured benefits because sufficient funds are available in the event of a loss. Penalties and incentives are used to encourage insurance to value.

Damages

Money claimed by, or a monetary award to, a party who has suffered bodily injury of property damage for which another party is legally responsible.

Multiple Parties with Insurable Interest

More than one party has an insurable interest in a property and the sum of all insurable interests exceeds the property's value.

Trustee

Someone who has the legal title to a property but is responsible that it be used, handled, and transferred solely for the benefit of the beneficiary.

Accounting Depreciation

The allocation of the property's value as reflected in an org's accounting and tax records, over the property's useful life.

Replacement Cost

The cost to repair or replace property using new materials of like kind and quality with no deductions for depreciation. If property covered on a RC 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 destroyed property is several years old, and even if its replacement cost exceeds the original purchase price. If cost of new property has decreased, like with computers, the policy pays the lower cost. Does not apply to antiques or artwork because there is no adequate replacement. Technically violates the principle of indemnity because loss to old property is replaced by brand new property. So insurers pay out ACV then reimburse RC once property has been replaced.

Economic Depreciation

The difference between the replacement cost of the property and its current market value. Typically the result of physical or function depreciation.

Bailor

The owner of the personal property in a bailment.

Bailee

The party temporarily possessing the personal property in a bailment.

Market Value

The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller. Difficult to to determine for unique property. Useful when property of like kind or quality is unavailable for purchase. Reflects the value of the land and its buildings, so the value of the land must be removed because land is not covered.

Functional Depreciation

The result of technological advances because the function performed by the capital expenditure is no longer needed or can be performed by better or other methods.

Physical Depreciation

The wear and tear on the property and is usually reflected in a reduction in the property's ability to perform its intended function, regardless of use.

Deductibles in Liability Policies

Used instead of a deductible for liability policies. Restricted for these reasons: -Insured may not report seemingly minor incidents until they have escalated. Insurers want to be involved in all liability claims. -Deductibles would not noticeable reduce premium because few liability claims involve small amounts. -Insurer must recover deductible from insured because they must pay third party claimants in full. Common in bailee coverage.