AD Banker Ch. 1 - General Ins.

Managing General Agent (MGA)

A Managing General Agent is a licensed property or casualty broker-agent or life agent that: Has a written agreement and appointment on file with the Commissioner with one or more admitted insurers Manages the transactions of one or more classes of insurance written by those insurers in that territory Has the power to appoint, supervise, and terminate the appointments of local agents in that territory Has the power to accept or decline risks (in property and casualty insurance only) Collects premium moneys from broker-agent and remits to insurers Acts as a fiduciary for all funds received A Managing General Agent can be any person, firm, association, partnership, or corporation that manages all or part of an insurer's business, including a separate division, department, or underwriting office.

Mutual Insurance Company

A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors is elected by policyholders to manage the company. Policyholders may receive non-taxable dividends as a return of any divisible surplus when and if declared by the directors. Traditionally, mutual insurers issue Participating policies. Most mutual companies are non-assessable, meaning they cannot charge members a pro rata share of loss and expense at the end of the policy period.

Insurance Solicitor

A natural person licensed to transact insurance who is employed by a Property and Casualty agent or broker to assist in transacting lines of insurance other than life insurance, disability, or health. The solicitor license must be for the same line or lines of insurance as the agent or broker who employs them and a solicitor may be employed by only one agent or broker at any one time.

Personal Lines Licensee

A person authorized to transact automobile insurance, including noncommercial recreational vehicles, personal watercraft, residential property insurance, including earthquake, flood, inland marine covering personal property, and umbrella or excess liability insurance.

Limited Lines Automobile Insurance Agent

A person authorized to transact automobile insurance, which includes liability, physical damage and collision coverage for individually owned motor vehicles. The person must be licensed as an agent and endorsed or appointed by an insurer or business entity to act as one. Under the California Insurance Code, the Limited Lines Automobile Insurance Agent is not authorized to "broker" limited lines automobile insurance business and charge broker fees under this license. Limited lines automobile licenses are issued for 2-year terms.

Fiduciary Duty (additional info)

A person can commingle additional funds with fiduciary funds for the purpose of advancing premiums, establishing reserves for the payment of return commissions or other contingencies. If there is a written agreement between the insurer and agent, these funds may be maintained in U.S. Government bonds or treasury certificates, or certificates of deposit. In the case of any alternative method of maintaining fiduciary funds under a written agreement, such agreements must be obtained from every insurer or person entitled to the funds authorizing the maintenance and retention of any earnings on those funds. Any agent, broker, solicitor, surplus line broker or bail agent who diverts or appropriates premiums or return of premiums for his/her own use is guilty of theft and will be punished under the law.

Surplus Lines and Special Lines Surplus Lines Broker

A person licensed to write insurance coverage with non-admitted insurers when such coverage cannot be placed with an admitted insurer.

Insurance Broker

A person who, for compensation and on behalf of another person, transacts insurance (other than life, disability, and health insurance) with, but not on behalf of an insurance company. A broker must have a written agreement with an insured if he/she receives any compensation for services directly from the insured. This agreement is called a Brokers Service Contract. The contract must state the services to be provided and the charge for each, and must be agreed upon in advance of the contract. Only brokers may charge fees, not agents.

Physical Hazard

A physical condition that increases the probability of loss. For example, faulty wiring may increase the chance of a fire.

Pure Risk

A possibility of loss or no loss. There is no possibility for gain. Pure risks are insurable, but speculative risks are not.

Speculative Risk

A possibility of loss, no loss, or gain

Reciprocal Insurance Company

A reciprocal insurance company is a group-owned insurer whose main activity is risk sharing. A reciprocal insurer is unincorporated, and is an aggregation of individuals, firms, and business corporations, which exchange insurance on one another. Each member is known as a subscriber. The exchange of insurance is affected through an Attorney-In-Fact. Each subscriber assumes a part of the risk of all other subscribers. If premiums collected are insufficient to pay losses, an assessment of additional premium can be made.

Stock Insurance Company

A stock company is owned by stockholders or shareholders. Directors and officers are elected by stockholders and carry out the company's mission. Stockholders may receive taxable corporate dividends as a share of the company's profit when and if declared by the Directors. Traditionally, stock insurers issue Non-Participating policies.

The following are not considered as MGAs under California law:

An employee of the insurer A United States manager of the United States branch of an alien insurer An underwriting manager who manages the insurance operations of an insurer whose compensation is not based on the volume of premiums written An attorney-in-fact authorized by and acting for the subscribers of a reciprocal insurer or inter-insurance exchange under powers of attorney

Exclusive Agency

An exclusive or captive agent is a person under agreement to represent a single insurer, or a group of insurers, having common ownership. The insurer retains the rights to the business written by the agent. If the agent leaves the insurer, the book of business is kept by the insurer. The insurer normally provides services to its exclusive agents, such as providing office space and clerical support, preparing contracts, and mailing renewals

Insurance Agent (Producer)

An insurance agent is a person who transacts insurance, other than life, disability, or health insurance, on behalf of an admitted insurance company. An agent may be referred to as a producer.

Insurance Agent

An insurance agent is authorized to transact all classes of insurance other than life, disability, and health insurance. This definition includes property and casualty licensees. An insurance agent represents the insurance company in all transactions. Only brokers may charge fees, not agents.

Foreign Insurer

An insurer not organized under the laws of California, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

Domestic Insurer

An insurer organized under the laws of California, whether or not it is admitted to do business in this state.

Alien Insurer

An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state.

Managing Risk

Analyzing exposures that create risk and designing programs to minimize the possibility of a loss.

Purchasing Group

Any group which purchases liability insurance only for its group members and only to cover similar or related liability exposure. A purchasing group must be domiciled in any state and may purchase insurance through a Risk Retention Group.

Penalties

Anyone who knowingly obtains information about an individual from an insurance company, agent or insurance-support organization under false pretenses, or who is found to be in possession of such information without legitimate purpose, is subject to a fine of up to $10,000, confinement for not more than 1 year in county jail, or both.

Risk Retention Groups (RRG)

As defined by the federal Liability Risk Retention Act, this is a corporation or other limited liability association whose primary activity consists of assuming and spreading all or any portion of the liability exposure of its group members. Membership is limited to risks with similar liability exposures through a common business, trade, product, service, premises or operation. RRGs are insurers licensed as a liability insurance company under the laws of any state and may insure members of the group in any other state. Example: Theme parks, go-cart tracks, waterslides

Responsibilities to the Applicant/Insured

At the time of the application, the agent has the responsibility to obtain information that may affect underwriting and insurability, as well as the suitability of coverage for an insured. This includes information about an applicant's risk profile, as well as in-depth knowledge of policy coverages, provisions, and limits. The purpose, duties and authority of a producer or agency include: Completing the application and submitting to the insurer for further underwriting Issuing any binders to the applicant that provide temporary insurance coverage until the policy is issued Providing a certificate of liability insurance or evidence of property insurance once the policy is issued Gathering information and updating the policy at renewal

Self-Funding (Self-Insurers)

Groups such as employers can self-fund their coverage. Employer self-funded plans are governed by the Employer Retirement Income Security Act (ERISA). They are appealing to employers because of the greater level of flexibility that comes with being able to tailor the plan to their needs with fewer state-mandated features. While firms take on additional financial risk, they are able to limit their total risk through the purchase of a stop-loss policy. Further, they benefit from the increased cost savings typical of self-funded modes.

Morale Hazard

Indifference to loss, or the failure to take proper care. Morale hazard and moral hazard are very similar, but can usually be distinguished by contrasting the tendency to take an action resulting in loss (moral hazard) with the tendency to fail to take an action that would have prevented a loss. For example, failing to take precautions regarding one's own health and safety is generally considered to be a morale, not moral, hazard.

Insurance

Insurance is a contract permitting one party to indemnify another against loss, damage, or liability arising from a contingent event. Indemnify means to make one whole or restore a person to the same financial condition as before the loss. Insurance is a social device for spreading risk. There is an exchange of a small certain expense (premium) for a large uncertain loss (possible claim). Insurance transfers the risk and protects against uncertainty.

Liability Loss

Losses arising out of negligence

Private vs. Government Insurers

Most insurance is written through private insurers. However, there are instances where governmental-based insurers step in to offer an insurance alternative when private insurers are unable to provide protection. This usually relates to the catastrophic nature of the risk, capacity to handle the risk, and lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking.

Admitted vs. Non-Admitted

Refers to whether or not an insurer is approved or authorized to write business in this State. The domicile does not impact whether an insurer may be admitted to do business in this State.

Reinsurance Companies

Reinsurance is a device used by insurers to transfer or share in a risk with a third party. Reinsurance takes place to limit the loss an insurer will face if a very large claim becomes payable. At least two insurers are involved: the primary insurer originating the application (ceding company), and the insurer who shares in the risk (reinsurance insurer), the third party. Reinsurance is what makes insurance affordable. No single insurance company is exposed to 100% of the losses it insures. When claims are paid by the insurer to the policyowner, the funds may come from both the insurer and its reinsurer but the policyowner will not know how much came from each. Types of reinsurance: Treaty Agreements Facultative Agreements

Retention

Risk retention involves incorporating anticipated risks in one's financial plan, and paying out of pocket when they occur. One example of this is self-insurance, whereby an organization sets aside funds to pay potential losses. A self-insurer is free from having to pay premium or meet underwriting requirements. However, self-insurance can result in tremendous financial loss, not just for the loss of property or business income, but also through subsequent lawsuits. This method is best only for those secure enough to withstand significant economic hardship.

Risk transfer

Risk transfer involves shifting a risk to another party, as with an insurance policy, which makes the insurer responsible for paying covered losses. Technically transfer is a type of sharing, since the insured assumes some of the responsibility for covered losses in the form of premiums, deductibles, and coinsurance. Transfer is the technique employed by an insurance policy.

Gramm-Leach-Bliley Act (GLBA, the Financial Services Modernization Act of 1999)

The Gramm-Leach-Bliley Act (GLBA) governs a wide gamut of financial transactions, many of which involve the insurance industry. Among the most important provisions of GLBA was the implementation of a set of minimum privacy protections for consumers in financial transactions, regulating the gathering, retaining, and disseminating of account numbers, copies of income tax returns, financial statements, driver license numbers, Social Security Numbers, Alien Registration, or Passport information. Under GLBA, consumers must be given the right to "opt out" of information sharing, with the understanding that refusal to allow certain sharing may result in the lawful denial of services. Every financial institution governed under GLBA (including insurers) must develop a written plan for protecting a consumer's personal information, which includes: Designating at least one employee to manage the safeguards Constructing a thorough risk management on each department handling the nonpublic information Developing, monitoring, and testing a program to assure the security of the information Changing the safeguards as needed with the changes in how information is collected, stored, and used A security plan must also: Be appropriate in size and complexity for the institution Be specific about its nature and activities Emphasize information sensitivity Be periodically tested and evaluated Be flexible and keep pace with risk/threat changes

Insurance Information and Privacy Protection Act

The Insurance Information and Privacy Protection Act establishes standards for the collection, use, preservation, and disclosure of information gathered during insurance transactions, providing a balance between the industry's need for information and fairness to the public in its information practices. The primary objectives of the law include: Minimizing intrusiveness Allowing customers to ascertain what information is being or has been collected about them Limiting the disclosure of information collected Enabling applicants and policyholders to obtain the reasons for any adverse underwriting decisions Providing a notice of information practices to all applicants or policyholders prior to or at the time of policy delivery, when the collection of personal information is taken from a source other than the applicant, and not later than at the policy renewal date or the date on which policy renewal is confirmed, or in the case of policy reinstatement or change in insurance benefits Note: Notice is not required when personal information is collected from no sources other than the policyholder or public records, or when a prior notice meeting the disclosure requirements was provided to the customer within the previous 24 months. All notices required to be provided to persons under the Insurance Information and Privacy Protection Act must be in writing and contain the following information: A statement that information may be collected from persons other than the insured A list of the types of information that may be collected, and the investigative or other methods used to obtain information The types of permissible disclosures A description of the insured's rights and how the rights may be exercised A statement that the information obtained may be retained by the insurer and disclosed to other persons as permitted by law

Insurance Regulation at the Federal Level

The McCarran-Ferguson Act of 1945 determined that the federal government cannot regulate insurance in areas over which states have the authority to do so. Congress created federal agencies to provide regulatory oversight impacting insurance practices. Government insurers step in (as a last resort) when private insurers are unable to provide protection relative to the catastrophic nature or unpredictability of a risk.

Suspense/Diary System

This system is used to remind the agent to check on policy issuance, renewals, binders, endorsements, claims, or other correspondence. It can be manual or there are numerous software programs that include such a system.

Allowable Information Sharing

Under both GLBA and Cal-GLBA, consumers must be advised that a financial institution has authority to share their personal financial information in the following ways : Sharing customer data between affiliates in single line of business under the same regulators Transactionally (necessary to effect, administer or enforce a transaction requested or authorized by the consumer and with the consent of or at the direction of the consumer) Operationally (security reasons, customer disputes or inquiries) With law enforcement in the course of an investigation and subject to orders of the court Or for the following reasons: To comply with provisions of the USA PATRIOT Act To identify or locate missing and abducted children, parents delinquent in child support payments, organ and bone marrow donors, pension fund beneficiaries, and missing heirs To comply with federal, state, or local laws and judicial processes To protect against or prevent actual or potential fraud (identity theft, for example) Relating to a business merger, sale, or transfer During the investigation of elder financial abuse cases (known or suspected) For permissible "outsourcing functions" with certain vendors (mail house or data processing)

Agreement (Offer and Acceptance)

A person makes the offer by submitting an application for insurance. Acceptance takes the form of the issued policy or binder, which is the insurer's promise to pay.

Personal Contract

Insurance policies cover the insurable interest of the insured. The insured cannot transfer or assign any policy, except life insurance.

Life

Insurance upon the lives of persons and the granting, purchasing, or disposing of annuities. Note: Annuities is not a class in itself, but is part of the class of life insurance.

All Insurance Contracts must include these 6 requirements or specifications:

1. The parties between whom the contract is made 2. The property or life insured 3. The interest of the insured in the property insured, if he is not the absolute owner 4. The risks insured against 5. The period during which the insurance is to continue 6. A statement of the premium, or a statement of the basis and rates upon which the final premium is to be determined Each party to an insurance contract must communicate in good faith with another and disclose all facts which he/she has knowledge and which are necessary.

Direct Writer

A direct writer is an agent who is employed by, rather than contracted with, an insurer.

Moral Hazard

A disposition to be dishonest which increases the chance of a loss. Examples: An addiction to gambling may increase the chance of fraud or theft.

Misrepresentation

A false statement contained in the application; usually does not void coverage or the policy.

Hazard

A hazard is something that increases the chance of a loss.

Estoppel

A legal doctrine that prevents the denial of a fact, if the fact was admitted to be true by a previous action. Waiver and estoppel are related concepts. If, for example, an insurer waives its right to enforce a cancellation provision for nonpayment of premium by a certain date, the doctrine of estoppel means that other insureds have the right to expect that waiver if they should miss payment deadline.

broker-agent

A licensed broker-agent is considered to be an agent representing an insurer in the transaction of insurance when a notice of appointment for that licensee has been filed with the Commissioner. Only brokers may charge fees, not agents.

Personnel Loss

A loss of a key employee due to death or disability

Direct Mail (also called direct response)

A marketing system that does not use an agent. Policies are usually marketed directly from the insurer's home office. The insurer offers its contracts to the public through direct mail campaigns, and newspaper, radio, television, magazine and internet advertising.

Non-Admitted (Unauthorized) Insurer

A non-admitted insurance company is not authorized to transact insurance in California, either by failing to comply with California requirements, or by not seeking admission.

Public Adjuster

A person who acts on behalf of an insured in negotiating or obtaining the settlement of a claim for loss or damage under any policy of insurance covering real or personal property.

Insurance Adjuster

A person who, for compensation by the insurer, investigates claims for the purpose of adjusting and/or disposing the claim under an insurance policy.

Loss Cost Rating

A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit. The expense and profit components to develop the final rate must be added by individual Insurers based upon their projections Loss cost rating is used on risks for which the insurer may not have enough data to develop the rate.

Materiality

A statement is material if its disclosure or lack of disclosure would change the insurer's decision to issue a policy for the same premium. Materiality is not determined by the event but rather by the facts that a party failed to communicate (or miscommunicated) and is judged by the importance or relevance to the contract and the influence of the facts on the party to whom the communication is owed.

Adverse Selection

Adverse selection is the principle that less desirable risks (those more subject to possible loss) tend to seek insurance to a greater extent than better risks. For example, people living in earthquake zones will be more likely to purchase earthquake coverage. Because of the tendency of greater risk to seek insurance, insurers will seek to insure perils with a good spread of risk. For example, earthquake coverage is excluded from many property policies and must be added by endorsement for an increased premium.

Indemnity Contract

An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs. Under the principle of indemnity, insurance will only restore the insured to the same financial condition that existed before the loss. The insured cannot profit from the loss.

Independent Agency

An independent agent is a person who enters into an agency agreement with more than one insurer. The independent agent has ownership of the business written, pays the cost of office space, clerical support, marketing, and the collection of renewal information.

Elements of a Legal Contract

An insurance policy is a legal contract between two parties. A valid contract requires four elements and the absence of any of these elements can void the contract.

Representations

An oral or written statement made at the time of application or before issuance of the policy that is believed to be true to the best of the knowledge and belief of the applicant. A representation may be altered or withdrawn before the insurance is in effect, but not afterwards. A representation cannot qualify an express provision in a contract of insurance; but it may qualify an implied warranty.

Insurable Events

Any contingent or unknown event that causes loss or damage to a person having an insurable interest, or that creates a liability against him/her. This excludes lotteries or gambling.

Transacting Insurance

As applied to insurance, transacting includes any of the following: Solicitation of insurance Negotiations preliminary to the execution of an insurance contract Execution of a contract of insurance Transaction of matters subsequent to the execution of the contract (e.g. collecting premium, settling claims) No one may transact insurance in California without a license. Willfully transacting insurance business in California without a license is committing a public offense subject to a penalty of imprisonment for up to 1 year, a fine of up to $100,000 or both imprisonment and a fine.

Authority

Authority indicates the capacity in which an agent legally represents an insurer, and may be express, implied, or apparent. All three are equally binding. Express authority Implied authority Apparent authority

Utmost Good Faith

Both parties bargain in good faith in forming the contract. Applicants are required to make a full, fair, and honest disclosure.

Conditional Contract

Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy's terms and conditions.

Rate Approval in California

California uses the "prior approval" method of rate approval. Every insurer desiring to adjust a rate must file a complete rate application with the Commissioner. The application must prove the requested rate change is necessary. The application will be deemed approved 60 days after public notice unless a hearing is held for one of the following reasons: A consumer requests and is granted a hearing within 45 days of public notice The proposed rate adjustment exceeds 7% of the current rate for personal lines or 15% for commercial lines Any other reason determined by the Commissioner A rate change application will be deemed approved 180 days after the rate application is received by the Commissioner unless previously disapproved.

Consideration

Consideration is the exchange of value that makes a contract binding. The insured's consideration is the payment of premium, or the promise to pay, plus an agreement to abide by the conditions of the contract. The insurer's promise to indemnify in the event of a loss is its consideration.

Contract Law

Contract Law pertains to the formation and enforcement of contracts. Tort Law pertains to injuries suffered by one party as a result of another party's actions or negligence where there is no contract. A tort is a civil wrong other than a crime or a breach of contract. Liability insurance is concerned with torts. An individual committing a tort may be referred to as a "tortfeasor".

Legal Hazard

Court actions increasing the possibility of a loss. For example, laws protecting patients against medical malpractice.

Credit

Covers business against loss by reason of debtors defaulting on loan or credit payments.

Property Loss

Damage, destruction, or theft of real or personal property

Fraternal Benefit Societies

Fraternal societies are primarily social organizations that engage in charitable and benevolent activities that provide insurance, primarily life insurance to its members. They are usually organized on a nonprofit basis. Membership is typically drawn from members of a given lodge, order, or society.

Mortgage

Guaranteeing the principal, interest and other sums agreed to be paid under the terms of any note or bond secured by mortgage. It also covers against losses on the mortgage.

Surety

Guarantees the behavior of persons and the performance of contracts.

Premium Offsets

If an insured is due a refund of premiums, the refund amount may be offset by any amounts owed to the insurer, such as unpaid premiums. Any insurer may pay return premiums to the producer or broker for that purpose.

Material Misrepresentation

If material to the issuance of coverage, meaning the insurer would not have issued coverage had the misrepresentation not been made, coverage does not apply. Violation by either party of the material provision of a policy entitles the other party to void the policy (rescission).

The following information does NOT need to be communicated in an insurance contract:

Information already known by both parties Information that should be known by both parties Information for which a party waives communication Information that is not material to a risk The financial rating of an insurance company is not required to be specified in an insurance policy Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question

Marine

Insurance against any and all kinds of loss of or damage to: Vessels and vehicles of every kind (excluding aircraft and automobiles operating under their own power, or while in storage not incidental to transportation). Goods and merchandise subject to the perils of navigation, transit, or transportation, including war risks. This class includes personal articles floater risks.

Plate Glass

Insurance against breakage of glass. This is particularly important in commercial coverages, as glass is often excluded from fire and property policies.

Mortgage Guaranty

Insurance against financial loss to a mortgagee when the debtor defaults on the mortgage and doesn't pay the principal, interest and other sums agreed to be paid under the terms of the mortgage.

Insolvency

Insurance against loss arising from the failure of an insolvent insurer to discharge its obligations under its insurance policies.

Burglary

Insurance against loss by burglary or theft or both. It excludes coverage when the property is in the custody of, or being transported by any carrier for hire or in the mail. Such burglary losses are covered under the carrier's policies.

Fire

Insurance against loss by fire, lightning, windstorm, tornado, or earthquake.

Liability

Insurance against loss caused by the insured resulting in injury or damage to the persons or property of others. It does not include losses that can be covered by Workers' Compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.

Boiler and Machinery (Equipment Breakdown)

Insurance against loss of property and injury to persons from explosion of, or accident to, boilers, tanks, pipes, pressure vessels, engines, wheels, electrical machinery, or any apparatus connected with its operation.

Common Carrier Liability

Insurance against loss resulting from liability of a common carrier for accident or injury to any person.

Team and Vehicle

Insurance against loss through property damage or liability for property damage, caused by the use of teams or vehicles other than ships, boats, or railroad rolling stock.

Sprinkler

Insurance against loss to property through water damage resulting from breakage or leakage of sprinklers, pumps, or other apparatus that are placed for extinguishing fires. It can also cover loss resulting from the breakage or leakage of water pipes.

Workers' Compensation

Insurance compensating employees and their dependents for injury sustained by the employees arising out of and in the course of the employment, regardless of either party's negligence or fault.

Legal Purpose

Insurance may not be issued for an illegal activity or immoral purpose. Every insured must have an insurable interest.

Aircraft

Insurance of aircraft owners, users, dealers or others having insurable interests against loss through hazards incidental to ownership, maintenance, operation and use of aircraft, other than against loss resulting from accident or physical injury, fatal or nonfatal, to any natural person.

Automobile

Insurance of automobile owners, users, dealers, or others having insurable interests, against hazards incidental to ownership, maintenance, operation, and use of automobiles.

Disability

Insurance pertaining to injury, disablement or death resulting from accidents or sickness. Note: Health/Medical Expense, Long-Term Care, Critical Illness/Dread Disease, Accidental Death & Dismemberment, Hospital Indemnity Income, Medicare Supplement, and Medicare Advantage are all forms of Disability Insurance.

Prior Approval

Insurers cannot use rates until approved by the Department of Insurance and are often required to provide justification. The general procedure is that if a rate is not disapproved within a specific time then the rate is approved.

Title

Insures owners of real or personal property or the holders of liens against loss or damage suffered by reason of defects in a property's title.

Fraud

Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements: False statement, made intentionally and that pertains to a material fact Disregard for the victim Victim believes the false statement Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement Victim's decision and/or action results in harm Not all misrepresentations are considered fraud. If an applicant makes a false representation on an application without the intent to obtain value, no fraud has been committed.

Merit Rating

Merit rating combines manual rating with an analysis of other factors that would not be found in the rate manual. One example is experience rating, where the insured's actual loss history is factored in. Likewise, an insured who takes measures to decrease the probability of loss may be rewarded with a discounted rate.

Concealment

Neglect to communicate known information that is material. Concealment, whether intentional or unintentional, results in denial of coverage and may void the policy (rescission).

Avoidance

One might avoid a risk by declining to own a business or property, make investments, or engage in foreign travel. However, avoidance is not always practical. Everyone is at risk for accident and sickness to some degree, and declining from assuming the risks of property and business eliminates the possibility of enjoying their advantages. In these cases, other risk management techniques much be used.

Contract of Adhesion

One party writes the contract, without input from the other party. One party (insurer) prepares the contract and presents it to the other party (applicant) on a "take-it-or-leave-it" basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).

Unilateral Contract

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract.

Joint Underwriting or Joint Reinsurance Pool

Participating insurers accept every eligible risk, and then may choose to reinsure some of those risks.

Competent Parties

Parties to a contract must have the legal capacity to enter into a contract. Parties are assumed to be competent unless they are one of the following: Minors Mentally incompetent Under the influence of drugs or alcohol

Manual Rating (also called class rating)

Rates are based on classes of insureds who have similar exposures. Base rates contained in a manual published by the insurer are multiplied by the number of units to calculate premium.

Judgment Rating

Rates are based on the underwriter's judgment and experience, on an individual basis.

Open Competition

Rates are not regulated by the state and no filing is required.

Loss

Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.

Risk

Risk is the uncertainty concerning a loss.

Reduction

Risk reduction involves mitigating the risks we cannot completely avoid. Taking in your car for regular maintenance may help reduce the chance of an accident. Diet and exercise may help reduce the risk of disease, and building with fire-resistive materials may reduce damage in the event of a fire. Reduction is usually not a complete solution to most risks, however, since it can't completely account for the element of chance.

Warranties

Statements in the application or stipulations in the policy that are guaranteed true in all respects. If warranties are later discovered untrue or breached (past, present or future), coverage (and sometimes the contract) is voided. A warranty is a promise made by the insured in the contract, such as "the insured will maintain an anti-theft device." Failure to comply with a warranty breaches the contract, even if the statement is not material. By contrast, if an insurer wishes to cancel a contract based on misrepresentation, it must positively establish that the misrepresentation was material. A material breach of warranty is grounds for rescission of the contract. An express warranty is one that is stipulated in the contract. Every express warranty made at or before the execution of a policy must be contained in the policy itself and signed by the insured. An implied warranty is binding even if not mentioned in the contract, because it originates in custom or law.

A personal lines licensee may apply to become a property agent or casualty agent by:

Submitting an application on a form provided by the Commissioner Completing prelicensing education Passing a qualifying examination

Excess and Surplus Line Insurance

Surplus Line coverage includes those types of insurance that cannot be obtained from admitted insurers, usually because the risk is too great, or too difficult to underwrite. The insurance may not be placed with a non-admitted insurer solely to receive financial advantages that would not be available by placing the business with an admitted carrier. An agent cannot assist in the procurement of surplus line coverage if the risk can be covered in the standard market. An Excess and Surplus line insurer writes standard coverages in a state where the insurer is unlicensed. Property and Casualty producers may not transact surplus lines business on behalf of a surplus line broker's organizational license, without also holding an individual surplus line broker license.

Rescission

Termination of a contract from the beginning (as if it never existed). Canceling the policy back to the inception of the contract results in a refund of premiums since the contract is not valid. The insurer has the right to rescind a policy due to concealment (INTENTIONAL OR UNINTENTIONAL), material misrepresentation, or material breach of warranty.

Insurability

The ability of an applicant to meet an insurer's underwriting requirements.

Aleatory Contract

The exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. The insurer's payment in the event of a loss may be much greater, or much less (e.g., $0 in the event a loss doesn't occur), than the insured's premium payment.

Insurance Regulation at the State Level

The insurance industry is regulated primarily at the state level. The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public. The judicial branch is responsible for interpreting and determining the constitutionality of the statutes. The role of a state's executive branch is to enforce the existing statutes that have been put in place. The Commissioner of Insurance supervises and regulates insurance affairs in California. The Commissioner has the power to issue rules and regulations to help enforce these statutes.

Insurer as Principal

The insurer is the source of the authority in which the agent must abide, as stipulated in the agency contract. This means that the insurer is responsible for the agent's acts, as long as they remain in the bounds of the contract. When the agent exceeds this authority, the agent may become personally liable for his/her actions.

Legal

The obligation to reimburse the insured against all or a portion of his/her fees, costs, and expenses related to or arising out of legal services performed by a licensed attorney.

Insurance Policy

The policy is the written instrument (document) setting forth a contract of insurance.

Insurable Interest

The policyowner must have a potential for financial hardship in the event of a loss. Insurable interest must exist between the policyowner and the insured or the contract is void. In property and casualty insurance, insurable interest must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime; an interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs. A merely contingent or expectant interest not founded on an actual right to the item in question, nor upon any valid contract for it, is not insurable. For example, failing to receive an expected inheritance that is not actually specified in a will is not an insurable loss.

Waiver

The voluntary abandonment of a known or legal right or advantage. When an insurer fails to enforce a provision of a contract, this constitutes a form of waiver.

Miscellaneous

This includes insurance against loss to producers of film media or exhibitions when the production or exhibition is interrupted, postponed or cancelled due to property damage by lightning, windstorm, tornado, or earthquake. It also covers losses resulting from sickness, injury or death of performers, directors or other key employees. Any other risk not already specified that are the proper subject of insurance may also be covered.

Law of Agency

This is a relationship between 2 parties where one (the agent) may act on the behalf of the other (the principal) and bind the actions or words of the principal.

Lost Policy Release

This is a statement typically signed by the insured if the insurer provides a replacement policy because the original policy has been lost, misplaced or otherwise unavailable. It's also used when an insured wishes to cancel a policy and cannot return the original. It relieves the insurer of all liability of the misplaced or lost contract.

Reserves

are accounting measurements of an insurer's future obligation to its policyholders. A Loss Reserve is defined as an estimate of the amount an insurer will pay for a claim.

Insurance Agencies

are independent organizations that recruit, contract with, and support sales agents and producers.

Insurance Agents or Producers

are licensed individuals authorized, by and on behalf of an insurer, to transact insurance through an admitted insurance company.

Expense Ratio

is determined by dividing an insurer's underwriting expenses by the written premiums.

Loss Ratio

is determined by dividing the sum of total losses incurred (paid and reserves) and loss adjustment expenses by the total earned premium.

Combined Ratio

is the sum of the loss ratio and expense ratio.

An MGA may

produce and underwrite gross direct written premium equal to or more than 5% of the policyholder surplus as reported in the insurer's last annual statement and either: Adjusts or pays claims in excess of an amount determined by the Commissioner; or Negotiates and binds ceding reinsurance contracts on behalf of an insurer, or who manages the insurance business of an insurer and acts as an agent for that insurer

Peril

A peril is the cause of a loss that a policy insures against. These terms are used interchangeably (e.g. a "causes of loss form" is a list of perils.) Examples of perils include fire, theft, or illness.

Fiduciary Duty

A fiduciary is an agent or broker who handles insurer funds in a trust capacity. If fiduciary funds are received by an insurance agent, broker, solicitor, life and/or accident and health agent, analyst or surplus lines broker, then he/she must: Keep accurate records as a public trust Not commingle premiums collected with his/her own funds Remit premiums, less commissions, to the insurer or return premiums to the person Maintain the fiduciary funds received by him/her in a trust account at a bank or depository in California

Property Licensee and Casualty Licensee

A person authorized to act as an insurance agent, broker, or solicitor. A property/casualty broker-agent is authorized to transact insurance coverage.

Producer

A producer is an agent, broker, or solicitor who generates insurance policies.

Residual Markets

A residual market is one designed for those risks unable to find coverage in the ordinary market.

Admitted (Authorized) Insurer

An admitted insurance company, whether domestic, foreign or alien, is authorized to transact insurance in California by the California Department of Insurance (CDI). An Admitted or Authorized insurer must have a Certificate of Authority granted from the California Department of Insurance

Principle of Indemnity

In a property and casualty contract, the insured must be restored to the same financial condition as he/she enjoyed prior to the loss. An insured may not profit from a claim by being restored to a more favorable condition (this is called overinsurance). For example, when an insured files a claim for loss by a covered peril to a building, the insurer is obligated to pay the insured to restore or replace the building.

Financial Rating Services

Independent financial rating services evaluate and rate the financial stability of insurance companies. Financial rating companies assign rating codes to show financial strength or weakness of each insurance company rated and the ratings are available to the public. Producers are responsible for placing business with insurers that are financially sound.The financial rating of an insurer is not required to be specified in the insurance policy Examples of rating services include: A.M. Best Company, Standard &Poor's, Moody's Investment Services, Weiss Insurance Rating, and Fitch Ratings.

Risk Sharing Plan

Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.

Law of Large Numbers

Large number of homogeneous units or groups with the same perils. The combining of a large number of homogeneous (like) units helps an insurer to predict a possible loss by relying upon statistical probability. Individual losses are too difficult to predict based on the role of chance. When aggregated these losses follow more predictable patterns, assisting in the effective calculation of premium rates to compensate for losses. The chance of loss must be calculable. A statistical expectation of loss is used by insurers to calculate premiums. The loss must be measurable (definite and verifiable in terms of amount, cause, place and time). The premiums must be affordable. From the perspective of the insured, the loss must be accidental in nature. Catastrophic perils are not covered; examples include war, nuclear hazard and illegal operations.

Loss Exposure

Loss exposure is the potential of being at risk for a loss as a result of a covered peril. Types of loss exposures include: Property Loss - Damage, destruction, or theft of real or personal property Liability Loss - Losses arising out of negligence Human or Personal Loss - Losses arising out of death, illness, or unemployment Personnel Loss - A loss of a key employee due to death or disability

Human or Personal Loss

Losses arising out of death, illness, or unemployment

Facultative Agreements

Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks

Treaty Agreements

Reinsurance agreement that covers all risks contained in the subject lines of the business automatically

Risk sharing

Risk sharing means distributing or pooling a risk among several risk-takers. For example, the members of a condominium association agree to share the costs of maintaining the outer structure of the building via association fees. This reverses the severity of the loss for any one party.

California Financial Information Privacy Act

The California Financial Information Privacy Act (sometimes known as "Cal-GLBA"), adds to the consumer safeguards provided by Federal law. California's modifications of GLBA provide that: Consumers have the final say in the sharing of their information Financial profiling of consumers is greatly restricted Penalties for identity theft perpetrators are doubled The Opt-Out provisions of GLBA were changed to an Opt-In standard concerning information sharing with unrelated third parties An Opt-Out standard was created for information sharing within a family of companies (affiliates and controlled subsidiaries)

Agent's Responsibilities to the Insurer

The agent is responsible for presenting, modifying, affecting, or terminating the business contracts of the insurer. After submitting an application, the agent should report any material facts that may affect the underwriting of a policy to the insurer. An agent is not required to emphasize profitable policies.

HIPAA Disclosures

The privacy constraints imposed on "protected health information" (PHI) are found in the legislation known as the Health Insurance Portability and Accountability Act (HIPAA). As the Act applies to the business of insurance, before an insurer may obtain an applicant's health records from a physician or hospital, the applicant must be informed about the insurer's data security procedures, what kinds of information may be obtained, how it will be used, and to whom it may be disclosed. The applicant must be given the opportunity to refuse the dissemination of the information. Violations of HIPAA's requirements can subject agents and insurers to civil or criminal prosecution.

Underwriting

The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage.

Fair Credit Reporting Act (FCRA)

This act protects the consumer's right to privacy, making certain the data is confidential, accurate, relevant and properly used (for a specific purpose), and the rights of the individual from overly intrusive information collection practices. Credit reports may be obtained to determine the financial and moral status of an applicant, such as employment screening or loan approval. A credit report may also be requested on an applicant applying for insurance to assist in underwriting by an insurer. At the time an application for insurance is taken, an agent must advise the applicant that a report may be obtained and that a copy of the credit report can be requested by the consumer agency that provided the credit report. If the applicant challenges the information found in the report, the credit reporting agency is required to investigate. Any inaccurate information the agency has given out within the last 2 years must be forwarded to the applicant. If the consumer reporting agency receives a request to issue corrected information, they have a maximum of 6 months to reinvestigate the facts. A person who has been denied insurance because of inaccurate information is entitled to certain rights. Under the FCRA, employers and insurers have the right to obtain a Driving History Report on applicants. This report will be acquired from the Motor Vehicle Record (MVR) Section of the Department of Motor Vehicles.

National Association of Insurance Commissioners (NAIC)

consists of all state and territorial insurance commissioners or regulators. It provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. It also promotes uniformity among states. Members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws.

Implied authority

is authority that the public assumes a producer has based on his/her actions (Examples may include: filling out applications, providing quotes, and accepting premiums for the insurer).

Apparent authority

is created when a producer/agent exceeds the authority expressed in his/her contract, and the insurer does nothing to counter the public impression that such authority exists.

Express authority

is explicitly written in the agency contract.

Insured

is the person or entity that buys insurance for protection from loss of property or liability.

Insurers (Insurance companies or Carriers)

manufacture and sell insurance coverage by way of insurance policies or contracts. In California, any person capable of making a contract may be an insurer, subject to the restrictions imposed by the insurance code. In this case, a person is defined as any individual (natural person), association, organization, partnership, business trust, limited liability company, or corporation.

Violent Crime Control and Law Enforcement Act of 1994 - Prohibited Persons

ongress enacted the Violent Crime Control and Law Enforcement Act in 1994. Among the various provisions in the Act is a prohibition against persons who have committed felonies involving dishonesty or breach of trust from being employed in any capacity in the insurance and financial services industry unless they have received a consent waiver from the state regulator governing the particular industry. The Insurance Commissioner has sole authority to review applications for waivers and either grants or denies requests from prohibited persons who wish to be licensed in any capacity in the insurance industry. In considering whether to grant or deny the waiver, the Commissioner may consider the following items: The nature and severity of the crime The length of time since the conviction The injury/loss caused by the Prohibited Person and whether the conviction was related to insurance Whether the Prohibited Person was pardoned The nature and strength of character reference letters The person's business and personal record before and after the conviction Whether the conviction was received in a foreign country Prohibited persons includes executive officers, directors, or employees of an insurance agency or an insurance company, an agent, solicitor, broker, consultant, third party administrator, managing general agent, or subcontractor representing an insurance agency or insurance company who engages in or transacts the business of insurance. Insurance institutions are required to make a diligent attempt to identify such persons in advance of employment. It is a criminal offense for any person to willfully employ, or willfully permit, such prohibited persons to participate in the business of insurance without the required written consent, punishable by a fine of up to $50,000, incarceration in federal prison for up to 10 years, or both.

Domicile

refers to the jurisdiction (i.e., state or country) where an insurer is formed or incorporated.

Demutualization

the process where a domestic incorporated mutual life insurer, or life and disability insurer, issuing nonassessable policies on a reserve basis may be converted into an incorporated stock insurer.