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P&C Insurance prep
| Question | Answer |
|---|---|
| What are the two types of Risk? | •Speculative risk - Change of loss or gain. Not insurance •Pure risk - chance of loss only - insurance companies will insure |
| What is a Peril? | •a cause of loss (example, if a house burns down, peril is the fire |
| Direct | •physical loss (house burned down) |
| Indirect | •consequence of the direct loss (smoke damaged other items in home, lost work wages) |
| Hazard | •increases the chance of a loss |
| Physical hazard | •hazard can bee seen |
| Moral hazard | •dishonesty |
| Morale hazard | •carelessness |
| STARR Method of handling risk | •Sharing •Transfer •Avoidance •Retention •Reduction |
| Contract policy | a•n agreement between the insured and the insurer 1st party - insured (customer) 2nd party insurer (insurance company) |
| Law of large numbers | •the larger the group, the more accurately future losses can be predicted |
| CANHAM - Elements of an insurable risk | •Calculable •Affordable •Non-Catastrophic •Homogeneous •Accidental •Measurable |
| Adverse Selection | •Risks that have a greater-than-average chance of loss •Not wanted by insurers •Tendency for high-risk individuals to get and keep insurance •Why insurers go through the underwriting process •High risk - higher rate or refusal to insure |
| Reinsurance | •an insurance company (the ceding company) paying another insurance company (reinsurer) to take some of the company's risk •Reinsurers help spread the insurers risk •Facultative - the reinsurer evaluates the risk before allowing the transfer |
| Stock insurer | •Owned by stockholders •Dividend is not guaranteed •Dividend is paid to stockholder •Dividend is taxable to stockholders •Issues non-participating policies |
| Mutual insurer | •Owned by the policyholders (customers) •Dividend is not guaranteed •Dividend is paid to policyholder •Dividend is not taxable, considered a refund of premium •Issues participating policies |
| Fraternal insurer | •provides insurance and other benefits •Must be a member of the society to get the benefits |
| Reciprocal insurer | •Unincorporated •Members are required to pay an assessed amount if a loss to any member of the group occurs •Managed by an attorney in fact |
| Lloyd's association | •insurance provided by individual underwriters, not companies •Insures unusual risks Hole in one contests Athlete's arm Celebrity's hair |
| Risk Retention group | •Liability insurance company created for policyholders from the same industry •for example, a car dealers risk retention group in which only car dealers can be policy holders |
| Risk Purchasing group | •A group of businesses from the same industry joining together to buy liability insurance from an insurance company The risk purchasing group is not the insurance company |
| Self-insurance | •a business that pays its own claims reserves funds to cover losses retains risk rather than transfers |
| Federal government provides residual marker insurance | •insurance from the state or federal government war risk insurance nuclear energy insurance flood insurance federal crop insurance unemployment insurance workders compensation |
| Insurance company locations | •Domestic - the state where a company is incorporated •Foreign - company is located in another state or US territory •Alien - company is incorporated in another country |
| Certificate of authority | •state license for an insurance company |
| Admitted or authorized | •state requires the insurance company to have a certificate of authority |
| Non-admitted or unauthorized | •insurance company not required to have a certificate of authority from the state |
| Surplus lines | •insurance sold by unauthorized/non-admitted insurers if on the states approved list of surplus insurers •Can only be sold to certain high-risk insureds •Cannot be sold solely for a cheaper rate than licensed/admitted insurers |
| Financial strength rating | •a report card of the company |
| Methods of marketing | •Independent •Exclusive or captive •general agents or managing general agents •direct-writing companies |
| Direct response | •no agent/producer involved direct mail, magazines, television, internet, and radio advertisements |
| Agency | •the insurance agent acts on behalf of the principal (insurance company) |
| Agent Authority | •Express - what the agent's written contract with the company says •Implied - not written; activities an agent normally does to sell insurance •Apparent - activities an agent does that a reasonable person would assume as authority; based on the agents |
| Fiduciary Trust | •Insured sends premiums to insurer •Has knowledge of products •Complies with laws and regulations •Does not comingle funds |
| Elements of a legal contract - CLOAC | •Consideration = giving something of value (insured, statements on app + premium) insurer (promises to pay) •Legal purpose - risk transfer doesn't violate the law •Offer •Acceptance •Competent parties - legal age, sane, and sober |
| Consideration | •premium and statements made on application |
| Legal purpose | •risk transfer doesn't violate the law |
| Offer and acceptance | •Offer - made by insured Insured submits application and first month premium to insurer Insurer accepts or insurer declines the risk Counteroffer - made by insurer Agrees to issue policy buy with higher premium or restrictions/exclusion |
| Competent parties | •Legal age (usually 18) •Mentally sane •Sober |
| Adhesion | •Policy written by the insurance company •Contract is like glue - cannot be changed •Insured has no input •If ambiguous (not clear), court will take the side of the insured |
| Aleatory | •Not equal value •Small premium for a large amount of coverage |
| Utmost good faith | •the insured and insurance company have a right to expect honesty from each other |
| Unilateral | •only one legally enforceable promise made |
| Personal | •contract between the insurance company and insured, cannot be changed to someone else |
| Conditional | •insured must pay the premium for coverage and file a claim if a loss occurs |
| Indemnity | •makes whole restores the insured to a pre-loss state pays for the loss with no gain no more, no less |
| Representation | •believed to be true Statements on applications are considered to be representations |
| Material misrepresentation | •information that is given that is not true and DOES affect the insurer's decision |
| Warranty | •promise Always made by the insurance company breach of warranty may void the contract May be made by the insured Breach of warranty made void the contract |
| Concealment | •failure to disclose; hiding information if intentional and the information is material (important), •coverage could be voided If not intentional, coverage can NOT be voided |
| Fraud | •intentional act to cheat another |
| Waiver | •voluntarily giving up a right |
| Estoppel | •Once a waiver has been created, it can't be reinstated |
| Property Insurance | •Covers building and personal belongings •Loss caused by covered peril •First party losses - insurer pays insured |
| Casualty Insurance | •Casualty = Liability •Always pay the other guy, never me •Third Party losses First Party - me(insured) Second Party - my insurer Thired party - other guy |
| Policy Sections (DICEE) | •Declarations - who, what, when, where, and how much •Insuring agreement(s) - promise to pay and perils covered •Conditions - rules for the policy •Endorsement - changes to the original policy •Exclusions - not covered |
| Additional/Supplementary Coverage | •Payment for additional expenses not normally covered •May have separate limit of insurance |
| Insureds | •Named Insured - in the declarations •First-named insured - first in the declarations (commercial policies when multiple partners) •Insureds - by definition •Additional insured - added by endorsement |
| Policy period and Territory | • Policy period—when the policy begins and ends • Policy territory—where a loss must occur Cancellation and Nonrenewal |
| Cancellation | occurs before the policy expiration date - Company cancellation requires advance notice |
| Named insured cancellation | Partial refund of unearned premium, short rate |
| Nonrenewal | occurs at the expiration date Company must give advance notice - No advance notice required by the insured |
| Deductible | • Amount of the loss paid by the insured • The higher the deductible, the lower the premium |
| Other Insurance Provision | • Multiple policies insuring the same loss Primary/excess—Primary policy pays first; excess pays what's left - Equal shares Pro rata-each policy pays its share according to the total ins |
| Named Insured Duties after Loss (PPC-MSP) | • Prompt notice to insurer • Protect property from further damage • Complete proof of loss (if asked) • Make property available for inspection • Submit to examination under oath if required • Cooperate with insurer |
| Assignment | policy cannot be transferred without written consent from the insurer |
| Abandonment | Insured cannot abandon property that can be repaired and expect to be paid as if the loss was total |
| Salvage | Insurer has the right of salvage, not the insured • Salvaged property can lower claim cost for the insurance company |
| Liberalization | • Extended coverage to insured • No additional premium charged • No action required by insured |
| Subrogation | • Common when at-fault party does not have insurance Insurable Interest · Financial risk of loss • Must be present at time of loss |
| Underwriting | • Process of evaluating a risk • Field underwriting is performed by the agent or producer • Application is the primary source of information • Company underwriters decide if a policy is to be issued |
| Application | primary source of underwriting information |
| Binder | • Temporary insurance Usually given by the agent-verbal or in writing • Can be canceled by the company • Does not guarantee a policy will be issued • Automatically ends if a policy is issued by the underwriter |
| Financial Ratios | • Loss ratio - Compares company's operations year over year • Expense Ratio - Cost of doing business • Combined Ratio - 100% is breakeven point - Greater than 100%-underwriting loss - Less than 100%-underwriting gain |
| Rating a Risk | • Judgment—no set rates; based upon underwriter's experience • Manual (class)—set rates for specific risk classes • Experience rating (merit)—based on insured's claim history. Increases or decreases premium. - Usually a three-year period |
| Loss costs | pure claims data • No operating expenses included • No profits included |
| Rate Components | • Loss costs (estimate of claim costs) • Claims handling costs • Operating expenses • Profit |
| Fair Credit Reporting Act (FCRA) | • All insurers and producers must comply • Notice to the applicant within three days after report was requested • Maximum penalty—$5,000, 1 year in prison, or both |
| Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA) | • Result of 9/11 Attacks on U.S. • Congress originally enacted in 2002 • Limits exposure of insurers in case of another catastrophic event • Triggering event—$200 million |
| Gramm-Leach-Bliley Act (15 USC Section 206) | • A consumer is anyone about whom information is collected. • A customer has an ongoing relationship with a financial institution. • The opportunity to opt out must be offered by financial institutions when an account is established and annually |
| Fraud and False Statements | . It is illegal to make false statements. • If guilty - Fine, up to 10 years in prison, or both - Up to 15 years in prison if false statements jeopardize insurer |
| Types of Property | • Real property-buildings • Personal property—moveable contents |
| Covered Property | • Specific/scheduled—detailed list of covered items • Blanket-all of a certain type of property - Single limit of coverage - No detailed list |
| Limits of insurance | maximum coverage limits • Listed on declarations page |
| Insured Perils | • Named peril—only perils on the list are covered • Open (special) perils—covers all perils except those specifically excluded |
| Basic Perils | • Fire, lightning, and internal explosion • Extended coverage - WCSHAVVER - Vandalism and malicious mischief (V&MM) |
| Broad Perils | • All of basic (fire, lightning, and internal explosion) plus extended perils (WCSHAVVER and V&MM) Plus BIG AFFECT: - B-Burglary damage, I-Ice, sleet, and snow (weight of) - G—Glass breakage - A—Accidental discharge of water - F-Freezing objects F-Fa |
| Broad Peril Exclusions | • Weight of ice, snow, or falling objects on awnings, fences, patios, swimming pools, docks, and retaining walls • Accidental discharge over water from continuous leaking • Flooding from river or lake • Burglary if property vacant more than 60 conse |
| Special/Open Peril Coverage | • All risks of direct physical loss, except those specifically excluded • Common exclusions: - Flooding - Earthquake - Intentional damage caused by an insured Losses due to enforcement of building codes - Damage caused by a power interruption occurr |
| Types of Loss | • Direct-the immediate damage caused by the peril • Indirect-loss over time as a result of the direct loss •Loss of income a business suffers when the building burns •Cost of a rental car because someone ran into your car |
| Classes of Construction | • Class 1–Frame •Class 2–Joisted Masonry • Class 3—Noncombustible •Class 4–Masonry Noncombustible •Class 5-Modified Fire Resistive • Class 6—Fire Resistive |
| Loss Valuation | how the insurance company determines appropriate amount of loss to be paid • Deductible reduces any amount after loss has been valued Insured to collect lesser of: - Insurable interest – Policy limits - Actual cash value (ACV). - Cost to repair - Re |
| Actual Cash Value (ACV) | • Replacement cost based on today's cost—not what was originally paid for item - Cost to replace it now! • ACV= replacement - depreciation |
| Methods of Calculating Value | •Replacement cost-current replacement cost; no depreciation •Similar kind and quality • Functional replacement-replace with modern construction • Market value—selling price; seldom used • Agreed amount-value of loss is determined before the policy is is |
| Alternative Dispute Methods | •Appraisal—disagreement on the amount of the loss •Company and insured pay their own appraisers - Appraisers get an umpire if they can't agree •Agreement of any two of the three determines the amt •Arbitration-disagreement about other areas of the loss |
| Coinsurance | •The coinsurance requirement is normally 80% of the replacement cost. If the min required amount is carried, then claims are paid in full up to policy limits. If the min is not carried, partial losses are not paid in full. |
| Vacancy and Unoccupancy | • Vacant-no property or people present at time of loss - May affect covered perils and claim value • Unoccupied—no people present at time of loss - Does not affect covered perils and claim value |
| Standard Mortgage or Loss Payable Clause | • Allows lender to pay the premium • Lender entitled to receive notice if policy is to be canceled • Lender can file a claim • Lender protected from negligent or dishonest acts •Lender only entitled to receive payment up to the amount of the debt |
| No Benefit to Bailee | • Bailee is a person or business that has temporary control of the insured's property • Bailee cannot benefit from the property owner's policy |
| Property | covers personal belongings and buildings • Example: If my house burns down, insurance pays me to rebuild. |
| Casualty | pays the “other guy" • Example: If the mailman gets bit by my dog, my insurance company will pay the mailman to pay for his medical claims due to my negligence. |
| Third-Party Losses | • The first party is the insured. • The second party is the insurance company legally representing or defending the insured. • The third party is the "other guy." |
| Liability insurance covers unintentional torts. | • Tort-civil wrong that causes someone else to suffer loss • Negligence—failure to act or not act reasonably |
| Elements of Negligence | • Owe a duty • Breach the duty • Be the proximate cause • Damages - A drunk driver is guilty of a crime but is not guilty of negligence unless he causes harm to another |
| Defenses Against a Claim of Negligence by Another | • Contributory • Comparative Assumption of risk • Intervening cause • Statute of limitations • Last clear chance |
| Absolute/Strict | liability without negligence |
| Vicarious Liability | liability for the actions of another |
| Types of Damages | • Compensatory - Special—provable monetary losses - General-nonmonetary losses • Punitive-gross negligence |
| Liability | • Bodily injury—injury to the body - Medical bills, lost wages, pain and suffering, and death • Property damage—injury to property - Cars, buildings, etc. • Personal injury—hurt feelings of a person or business |
| Limits of Liability | • Split - Bodily injury - Property damage • Combined single • Per person • Aggregate |
| Restoration of Limits/Non-Reduction of Limits | • Policy limit restored after loss. • Payment of loss reduces the aggregate limit. • Aggregate limit is restored upon renewal. |
| Duties After a Loss | • Notify company promptly • Forward notices • Assist the company • Don't assume liability |
| Exclusions | • Damage to property of an insured • Bodily injury to an insured • Bodily injury to an employee • Nuclear energy liability • Intentional damage caused by an insured |
| Dwelling | • Unique from homeowners policy • Not required to be owner occupied • Covers risks like rental property, older homes, and hunting cabins |
| Dwelling Policy Eligibility | • 1 to 4 unit dwelling with boarders • Vacation dwellings • Rental dwellings • Dwellings under construction (endorsement) • Mobile homes (endorsement) • Farm dwellings NOT eligible |
| Dwelling Property Coverages | • A-dwelling • B—other structures (10% of Coverage A) • C-personal property on premises; off premise covered at 10% • D—fair rental value • E-additional living expense - Coverage E is included with DP-2 and DP-3. can add to DP-1 by endorsement. |
| Other Coverages (Automatically Included) | • Debris removal Property removed—5 days all perils Reasonable repairs Renters improvements (10% of Coverage C) Fire department service charge—$500, no deductible • Worldwide personal property—10% of Coverage C |
| Other Coverages: DP-2 and DP-3 | • All basic other coverages • Trees, shrubs, and plants - Maximum of $500 each - Total—5% of Coverage A · Collapse—cause by a covered peril • Glass • Ordinance or law (10 % of Coverage A) • Removal—30 days (5 days for DP-1) |
| Claim Values | • Personal property—ACV • Dwelling (DP-2 and DP-3)—replacement - Required to carry 80% DP-1: Basic · Fire, lightning, and internal explosion |
| DP-1 | • Only insures fire, lightning, and internal explosion automatically · EC—WCSHAVVER (additional premium) • V&MM—if has EC (additional premium) |
| DP-2: Broad | • All of DP-1 available perils (fire, lightning, internal explosion, WCSHAWER, and V&MM) • Plus (BIGAFFECT)- Burglar damage – Ice and snow weight -Glass breakage - Accidental discharge or overflow of water - Falling objects - Freezing pipes - Electrical |
| DP-2: Broad Exclusions | • Weight of ice, snow, or falling objects on awnings, fences, patios, swimming pools, docks, and retaining walls • Accidental discharge of water from continuous leaking Flood • Burglary if property vacant > 60 consecutive days |
| DP-3: Special | • Open perils—dwelling and other structures • Broad perils—personal property • Excluded perils - Intentional damage - Theft - Freezing of plumbing (if unoccupied and care not taken) - Wear and tear - Foundations |
| General Exclusions in All Dwelling Policies | • Ordinance or law • Earthquake • Flood • War • Nuclear • Intentional losses • Government seizure |
| Loss Valuations | • Loss settlement • Our option • Deductible • Pair or set • Loss payment • Other insurance • Recovered property |
| Personal Liability Supplements | • Coverage L-personal liability • At fault • Bodily injury to others • Property damage to others • On and off premises |
| Coverage M—medical payments | • Medical and bills of others • No fault • 3 years • On and off premises |
| Additional (Supplementary) Coverages—BAILED | • Bonds • Aid • Interest • Loss of earnings Expenses • Defense |
| Residential Theft Coverage | • Not automatically included in dwelling policy • On and off premise • Broad—owner occupied • Limited—not owner occupied |
| Exclusions | • Animals • Credit cards • Property in mail • Aircraft • Other insurance property • Tenant's property (not related to insured) • Business property • Property in custody of others • Motor vehicles• Special Limits |
| Endorsements | • Automatic increase in insurance automatically increases dwelling and other structure coverage at renewal (specified percentage) • Dwelling under construction-named insured must be intended occupant • Mobile home-permanent foundation |
| Homeowners Policy | • Package policy • Multiline • Includes both property and liability |
| Homeowners Eligibility | • Owner occupied (special version for a renter) • No more than 4-family dwelling • Primary purpose as a residence • Dwellings under construction are eligible (for owner-occupant) • Mobile homes (require endorsement) • Farm dwellings NOT eligible |
| Insureds | • Named insured including a resident spouse Resident relatives • Anyone under the age of 21 and in the care of an insured • Full-time student under age 24, relative, and prior resident • Representative of the named insured in the event of death |
| Cancellation | • Cancellation by the insurance company - During the first 60 days for any reason—minimum 10 days' notice - after 60 days—min 30 days' notice Material misrepresentation Substantial change in the risk - Nonpayment of premium—10 days' advance notice |
| Nonrenewal by Insurer | • Nonrenewal by insurance company—30 days' advance notice |
| Standard Mortgagee Clause | • Can pay the premium • File a claim up to insurable interest • Receive advance notice of cancellation • Dishonesty of insured doesn't prevent mortgagee from collecting |
| Homeowner Policies | • HO-2—Broad Form: owner occupant • HO-3—Special Form: owner occupant • HO-4—Tenants or Renters • HO-5—Comprehensive Form: owner occupant • HO-6—Condominium Owners • HO-8—Modified Form |
| Property Coverages | • Dwelling - Including property attached • Other structures—separated by a clear space - Not attached to dwelling • Personal Property • Loss of Use - Indirect losses due to loss of use of home caused by a covered peril |
| Additional Coverages in All Homeowners | • Debris removal • Reasonable repairs - cost for repairs to protect from additl loss• Trees, shrubs and other plants • Fire dept service charge• Property removed• Credit cards, forgery, and counterfeit money • Except for HO-8, broken glass Loss assessment |
| Other Additional Coverages in HO-2, 3, and 5 | • Collapse - Caused by a covered peril - Not earthquake • Landlord's furnishings—$2,500 • Grave markers—$5,000 • Ordinance or law—increased cost up to 10% dwelling limit |
| Perils (Causes of Loss) Basic | - Fire, lightning, explosion, wind, hail, smoke, aircraft, vehicles, volcanic eruption, vandalism & malicious mischief, riot/civil commotion, and theft • Exclusions – Theft by the insured - Mysterious disappearance |
| Perils (Causes of Loss) Broad | • - All basic perils plus: Falling objects Accidental discharge of water (not flood) Weight of ice, sleet, or snow Freezing of plumbing (if care used) Artificially generated current Sudden tearing and breaking of heating and cooling system |
| Perils (Causes of Loss) Special | - Open peril All direct causes of loss (to the dwelling and other structures) unless specifically excluded |
| Excluded Perils in All Homeowners Policies | • Enforcement of law or ordinance regulating construction, repair, or demolition • Earth movement, earthquake & mine subsidence • Flooding & overflow from a sump pump, Power interruption that takes place off residence premises • War • Nuclear hazard |
| Excluded Perils in All Homeowners Policies cont | • The insured's failure to save & preserve property after a loss or protect it from loss • Losses caused intentionally by the insured or by someone else at insured's direction • Destruction, confiscation, or seizure of property by the govt or authority |
| Claims Payment | • Actual cash value (replacement - depreciation) - Personal property - carpeting, appliances, outdoor antennas, & outdoor equipment - Structures that are not buildings • Replacement - Dwelling & other structures - If insured for at least 80% |
| Property Endorsements | • Personal property replacement cost - Insures personal property on a replacement cost basis instead of ACV - Insured against open perils - Replacement coverage - Usually no deductible |
| Property Endorsements cont | • Permitted incidental occupancies - Removes $2,500 limit on business personal property • Earthquake, incl volcanic eruption - One deductible for 72 hours • Limited fungi, wet or dry rot, or bacteria • Home day care |
| Two Major coverages in Section II | • Coverage E • Coverage F |
| Section II | • Personal liability—bodily injury and property damage - Insured at fault - Anywhere in the world • Medical payments To others (not the insured) - No-fault - On or off premises - Covers domestic employees (on or off premises) - Three years |
| Liability Exclusions | • Liability for injury or damage that is expected or intended by the insured • Liability assumed through a contract • Bl or PD arising out of business pursuits or the rendering of or failure to render professional service |
| Additional Coverages (Automatically Included) | • Defense costs—attorney fees, court costs, etc. • Court-ordered bonds • Post-judgment interest |
| Liability Endorsements | • Watercraft endorsement-coverage for: > 50 horsepower; sailboats > 26' in length. • Business pursuits endorsement • Personal injury endorsement - Libel, slander, false arrest, invasion of privacy• Permitted incident occupancies endorsement |
| Personal Auto | • Casualty Coverages - Liability - Medical payments - Uninsured/underinsured motorists • Property Coverages - Collision - Other than Collision (comprehensive) |
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Spartan2Death