Basics of Property and Casualty Insurance
Definitions Section
Clarifies the meanings of certain terms used in the policy. -definitions common to the entire policy are found in this section -insurance contracts are legal documents, so there must be an attempt made to clarify and define terms used in the contract
Insuring Agreement
Describes the coverage perils or risks assumed by the insurer and makes reference to the contractual agreement between the insurer and insured. -if the policy provides liability coverage, the promise to defend the insured, if sued, is found here. -it summarizes the major promises of the insurance company, as well as states what is covered.
Endorsements Section
Endorsements add, modify or take away coverage. -an endorsement is attached to the policy and is part of the legal contract.
Policy Structure DICEE
Even though property and casualty covers different types of risks, they have a similarity in their structure. Policies contain several parts, and, in order to remember these parts, use the acronym DICEE D.I.C.E.E. -Declarations- who, what, when, where and how much -Insuring Agreements- promise to pay the perils covered -Conditions- rules for the policy -Endorsements and Additional Supplementary Coverages- changes the original policy -Exclusions- items not covered
Exclusions Section
Exclusions take coverage away from the insuring agreement by describing property, perils, hazards or losses arising from specific causes which are not covered by the policy. -for example, flood damage may be an exclusion in a policy.
Unearned Premium
If the insured paid premiums in advance for future months, any unused premium must be returned to the insured upon cancellation.
Declarations
Information relative to who, what, when and where is found on the first page of the policy- the DECLARATION section. -the name of the insured, a current address, a legal description of the insured property, the policy deductibles and the term of the coverage are contained in this section. -this information is used to help determine the premium cost of the policy.
Cancellation and Nonrenwal
Insurance policies have a beginning date and an ending date, also known as an inception date. And expiration date. An insurance policy can be stopped by the insured before the expiration date, which is known as cancellation. The named insured can cancel the policy at any time by notifying the insurer. -for example, Joe discovers that he can save $150 a year by switching to a different insurance company for his car insurance. He notifies his insurer and cancels his policy in order to save the money. -this is a perfect example of how insurance policies are unilateral contracts; the insured can cancel at any time, but the insurer cannot. -protects the insured
Nonrenewal Process
It is common that a policy is extended at the end of its term or policy period. However, the insurer may choose not to renew a policy for another term or the insured may choose to end their coverage and not pay the premium. -the nonrenewal process has mandated state rules that must be followed.
Salvage
Many property insurance policies contain a salvage condition that states that the insurance company can take possession of damaged property after payment of loss. When the insurance company determines it will cost more to fix the body damage than its actual cash value, the company will pay a total loss. The insured will receive what the insurance company deems as the actual cash value, then the insurer will own the remains of the vehicle; this is known as "right of salvage." Salvaged goods can reduce the cost of the claim to the insurance company. For Example: You are in a car accident that causes extensive damage to the body of the car but very little damage to the engine and tires. It would still cost your insurance company more money to fix the body damage than the actual cash value of the vehicle. The insurance company could potentially sell the tires and the engine to reduce the cost of the claim.
Casualty Policies (Liability Insurance)
Often called liability insurance, protect and individual or business when it is found legally liable for negligent acts or omissions that cause injury or property damage to others. -casualty insurance never pays the insured; it pays the "other guy." -these are referred to as THIRD PARTY LOSSES -for example, if a person is injured at your house due to your negligence, your casualty policy would not pay for your injury. -Casualty = Liability and always pays the other guy, never me. -THIRD PARTY LOSSES; 1st party- me (insured), 2nd party- my insurer, 3rd party- the other guy.
Primary and Excess
PRIMARY INSURANCE attaches immediately upon the occurrence or loss. EXCESS COVERAGE pays whatever is not paid by the primary policy up to the amount of the loss or excess coverage limit, whichever is less. -for example, Company X has the insured property covered up to $10,000 and Company Y also has it covered for up to $10,000. Company X is the primary insurer and Company Y is the excess insurer. Assuming a $15,000 loss, Company X pays $10,000 and Company Y pays $5,000 for the loss.
Pro Rata
Pro Rata is one method of preventing overpayment of claim. -in this method, each company will pay part of the loss according to the percentage of the total amount of insurance the policy provides. -to calculate pro Rata responsibly, determine the percentage each policy contributes to the total
Property Insurance Policies
Protect the insured from loss caused by damage from a covered peril to the insured property. -property insurance pays the insured for covered losses to the property. These are referred to as FIRST PARTY LOSSES. -insured property can be buildings (called real property) such as a house or personal property (stuff) such as a television. -personal "my stuff" = personal belongings
Additional/Supplementary Coverage
Provides payment for certain addition expenses. Depending on the policy, this coverage may have separate limits of insurance and may be paid in addition to the maximum limit of liability. -the cost to pay attorney fees for the insured if the insured is sued by another party, the cost of making temporary repairs to a damaged building, bail and appeal bonds and other court-related costs are examples of additional/supplemental coverage. *payment for additional expenses not normally covered *may have separate limit of insurance
Subrogation
Subrogation is the transfer to the insurance company of the insured's right of recovery against others. The subrogation provision may also be called "transfer of right of recovery against others to us." Suppose an insured suffers a loss for which he is not at fault, and the party that caused the damage has no insurance or refuses to pay for the damages. The insured's insurance company may step in and pay the insured for the damages and then bring suit or file a claim against the negligent party or the other party's insurance company on the insured's behalf. This transfer of recovery is affected when the insured signs a "Release and Subrogation Assignment" form.
Policy Period and Policy Territory
The POLICY PERIOD is the DURATION of the policy. It is the date and time, including where and in what time zone, coverage begins and ends. -six months, one year or even three years are common policy periods. The POLICY TERRITORY provisions state that a loss will not be covered unless it occurs in the policy territory. -the territory may vary, but typically includes the United States, Canada, Puerto Rico and other U.S. territories and possessions. -most insurance policies DO NOT extend coverage into Mexico.
Abandonment
The abandonment condition states that the insured may not abandon property to the insurance company and ask to be reimbursed for it's full value. Suppose the insured hits a dear, causing damage to his 10-year-old vehicle, and the damage is repairable. The abandonment provision prohibits the insured from abandoning the car and demanding payment for the total loss of the automobile. The insurance company has the option to repair, rebuild, or replace the vehicle with like kind and quality.
Deductible
The amount that must be paid out of pocket by the policy owner before an insurer pays any expenses. -the purpose of a deductible is to prevent. Small insurance claims and overuse of insurance claims. -deductibles are normally provided as clauses in an insurance policy that dictate hoe much of an insurance-covered expense is paid by the policy holder. Insurance premiums are typically cheaper when they involve higher deductibles.
Assignment (CONSENT)
The assignment condition specifies that a policy may not be transferred to anyone else without the "written consent" of the insurer. If the named insurer dies, then the rights and duties under the policy are transferred to the insured's legal representative and they remain insured up to the policy renewal date. This provision is sometimes called the "transfer of rights" or "duties under this policy provisions."
Indemnity
The concept of indemnity with insurance is to restore the insured to their original pre-loss condition-no better and no worse. -the insurance payment should not make a profit for the policy owner. -there could be a situation where more than one of multiple policies covers the same loss or claim. -the OTHER INSURANCE condition defines how reimbursement will occur when this happens and is also called OTHER SOURCES OF RECOVERY or INSURANCE UNDER TWO OR MORE COVERAGES.
Conditions: Duties After Loss
The conditions section of a property insurance policy lists the duties and rights of both the named insured and insurer. These are commonly known as "provisions." Most contracts include conditions that specify what the named insured and insurer must do when a loss occurs. Together, they may be referred to as "loss provisions." The "Duties After Loss" condition lists the named insured's responsibilities after a property insurance loss. This includes: "to do list" (PPC-MSC) PROMPT "notice of claim" to the insurer or agent; PROTECT the property from further damage; COMPLETE detailed "proof of loss" (an official inventory of the damages); MAKE the property available for inspection by the company; SUBMIT to examination under oath if required; and COOPERATE with the insurer as required during the claim investigation procedure.
Prorated Basis
The insured will receive a portion of the premium back, depending on when the policy was cancelled. -In a case where the insurer cancels the insured's policy, the entire unearned premium is returned on a PRORATED BASIS.
Insurer Conditions: LIBERALIZATION
The liberalization condition states that if the insurer broadens coverage under a policy form or endorsement without requiring an additional premium, then all existing similar policies or endorsements will be construed to contain the broadened coverage. For example: An auto insurer has decided to include in their auto policy $1,000 coverage for electronic items stolen from a covered auto. This includes cell phones, laptop computers, and any electronics found in the covered auto. This benefit is included in all new policies for no additional premium. If you already had an existing policy from this company, your policy would have this new benefit without having to wait until your policy is renewed.
Nonconcurrency
The result of two or more policies covering the same property but providing different or non-identical coverage. -this situation is not ideal because it can cause gaps or disputed payments. -nonconcurrency is most commonly seen in commercial insurance policies.
Conditions Section
The section that states policy provisions, rules of conduct, duties and obligations required for coverage. -if policy conditions are not met, the insurer can deny the claim. -examples of conditions include. That the insured must file a claim and notify the police if the loss if crime-related,, and that the insurer has the right to inspect the property being insured. -if the insured does not adhere to the conditions of the policy, the insurer may deny coverage or a claim.
Insureds- Named, First-Named, and Additional
The word INSURED can have a number of different meanings in an insurance policy. -The NAME INSURED is the person, business or other entity named in the DECLARATIONS to which the policy is issued. -The FIRST-NAMED is the person listed FIRST on the DECLARATIONS page when there is more than one named insured. The policy may assign a higher level of duties or rights to the FIRST-NAMED INSURED. -In addition to the name insured, the policy may cover other persons, businesses or entities as insureds, such as the named insured's resident relatives. These insureds are not listed by name but are insureds by DEFINITION. -In some circumstances, another individual or business may be listed as an ADDITIONAL INSURED. This is usually done by endorsement.
Calculating Pro Rata
To calculate pro rata responsibly, determine the percentage each policy contributes to the total amount of insurance. For example, if you have two homeowners policies totaling $400,000; one for $100,000 and one for $300,000, the first policy will cover 25% of an actual paid loss and the second policy will cover 75%. FORMULA for CALCULATING PRO RATA: policy limit of one / policy limit of all companies x loss Calculation Example: Policy A coverage limit = $100,000 Policy B coverage limit = $300,000 Claim/loss amount = $50,000 Total amount of insurance coverage from A and B = $400,000 Policy A calculation: $100,000 / $400,000 = .25 (25%) Policy B calculation: $300,000 / $400,000 = .75 (75%) Insured claim payment: $12,500 (A) plus $37,500 (B) = $50,000
Contribution by Equal Shares
Under the Contribution by Equal Shares provision, all insurers pay equal amounts, up to the limit of the policy with the smallest limit. When that company pays it's policy limit, it stops paying and the other companies share in the remainder of the loss. This continues until each company has paid it's policy limit or the loss is paid in full. Example #1 $24,000 liability loss covered by two policies Company XYZ = $5,000 policy limit would pay the (smallest) Company PDQ = $25,000 policy limit would pay $19,000 ($5,000 smallest plus $14,000 of it's own share) Example #2 For a $4,000 loss, XYZ would pay $2,000 and PDQ would pay $2,000
Flat Cancellation
When a policy is canceled on the effective date, by either the insurer or insured.
Short-Rated Basis
When an insured cancels a policy before the expiration date, the insurer is entitled to retain a larger percentage of the unearned premium. -there is a surcharge or a penalty for early cancellation, and it is applied on a short-rated basis.