Insurance Terms and Concepts

*?*To receive property or casualty insurance protection, an insured must have an insurable interest in the subject of the insurance at the time a covered loss occurs. The insurable interest need not be present at time the policy was purchased or throughout the policy period. (Example)

For Example Jay won big in Las Vegas, and returned to buy a home from Anna Gramm. Anna did not cancel her homeowner's insurance policy upon the sale. Three months later, the house suffered a $25,000 fire loss. When Anna called her insurance agent to make a claim for the fire loss, the agent informed her that she could not collect, as she did not have an insurable interest in the house at the time of the loss.

hazard

A hazard is a condition that creates or increases the chance of loss from a peril (cause of loss).

Peril

A peril is what causes a loss. Property insurance policies insure against losses caused by such perils as fire, vandalism, windstorm, collapse, etc. Some policies are considered named peril policies, while others are called open peril policies:

Insurable Interest

An insurable interest in property is an interest that might result in a financial loss. Owners, tenants and lenders hold insurable interests in property, since they would suffer a financial loss if the property were damaged.

Casualty Insurance

Casualty insurance includes a wide assortment of unrelated coverages, including: •general and professional liability insurance. •insurance of obligations of employers for workers compensation. •crime insurance. •automotive insurance.

Property insurance

Property insurance is insurance against: •direct loss of or damage to real and personal property. •indirect loss resulting from that loss or damage.

Proximate cause

Proximate cause is the actual key act or event that starts an unbroken chain of events leading to a loss or further losses. A policy covering an indirect loss will cover that loss when a peril insured against is the proximate cause of loss. For Example Jay's insurance policy not only covered the cost to repair or replace items damaged by the fire, but also the damage caused by the water used to put out the fire. This is because the fire was the proximate cause of the water damage. If there had been no fire there would have been no water damage. His policy did not pay for the damage to the fire truck on its way to put out the fire when it collided with a car that had run a red light, since the fire was not the proximate cause of the accident.

Property insurance may cover direct physical losses to property and/or cover indirect (consequential) losses resulting from direct losses: Direct loss vs. Indirect (consequential) loss

•Direct loss. A direct loss is physical damage to the property or the actual loss of the property, no matter how caused. •Indirect (consequential) loss. An indirect lossis a loss resulting from a direct loss. It includes: ◦the loss of business when a business has to close for repairs; and ◦increased expenses when a person has additional living expense or a business has additional business expenses while trying to continue to operate while damage caused by a direct loss is being repaired. Some policies cover indirect loss automatically; others do not. For Example When Jay had returned home to find the fire department extinguishing the fire at his home, he realized he had a direct loss to a building that included the cost to repair or replace items damaged by the fire, by smoke from the fire, by water used to put out the fire, and by the firefighters in attempting to control or put out fire. Since his insurance policy insured against direct loss caused by fire, it covered all of these losses. * * * In addition to suffering the direct loss resulting from damage to his property caused by the fire, Jay had to stay in a hotel while the fire damage was repaired. Also, because the fire destroyed his home office, he had to lease equipment to continue his business until the repair work was completed. The increased expenses resulting from living in a hotel room and renting business equipment were indirect losses resulting from the fire. His homeowners policy covered the additional living expenses and his businessowners policy covered the extra expense of continuing his business while his office was being restored.

Named peril vs. Open peril policies

•Named peril policies list (name) the specific perils insured against. Losses caused by perils not named are not covered. Named peril property insurance policies cover one or more perils under either a Basic Form (covering the fewest perils) or a Broad Form (covering the basic perils plus others). •Open peril policies (called Special Forms) provide the most comprehensive coverage. This scope of coverage is sometimes referred to as "all risk" policy coverage. This erroneous term implies that "all risks of loss" are covered by the policy and is commonly used incorrectly by insurance producers. No insurance policy will cover all types of loss that occur, and if this term is used, it will give the consumer the wrong impression of how their policy covers them. Instead the producer should use the term "open peril," which means that the policy will: ◦insure against all direct causes of loss except those specifically excluded. ◦list the perils not covered, instead of listing the perils covered. In these policies, any peril not excluded is covered. For Example In Jay's case, the fire causing the losses is a peril. Jay's homeowners policy specified that it would cover losses caused by the perils of fire, lightning, explosion and theft. Jay's policy is a named perils policy. * * * Jay's neighbor, Kay Tell, suffered a $50,000 loss from the same fire. She had a homeowners policy which covered all direct losses except such specified perils as flood, earthquake, war and government action. Her policy was a Special Form. Since the policy did not exclude the peril of fire, her loss was covered.

Hazards may be 1.Physical 2.Moral 3.Morale

•Physical. A physical hazard is a physical characteristic that increases the probability of loss. It is the condition of the property itself. •Moral. A moral hazard relates to a person's sense of right and wrong that may lead him to want the loss to occur. •Morale. A morale hazard relates to a person's attitude, as reflected in his personal and business habits. It is a condition related to carelessness or indifference. Physical: Poor Condition (run Down House) Moral: 0Right vs. Wrong (Burring down a house) Morale: Carelessness (Smoking in Bed, AKA Dumba**) For Example Guy and Barb Dwyer's home has faulty wiring, missing roof shingles, and a loose step leading up to the front porch. These are all physical hazards that increase the probability of a loss. A fire is more likely due to the wiring; water damage is more likely due to the missing shingles; an injury is more likely due to the loose step. * * * Robin Banks owns a rental building that is on shaky financial grounds. It is making no profit, and he cannot find a buyer for it. The only way he can see ever recovering his investment is if it were to burn to the ground. After his insurance agent checked on Robin's financial condition, he recommended that the insurance application be rejected because of the potential moral hazard. * * * Mel Lowe is a somewhat laid-back and lazy person. He smokes in bed, never locks his car doors, and does not drain the outside water pipes in the winter. When his insurance agent could not convince Mel to place a lock on the gate surrounding his outdoor swimming pool, the insurance company decided to not renew Mel's coverage because he represented a morale hazard.