C12 - 2012 - Chapter 2 & 3- The Evolution Of Property Insurance

Front 1

The insuring agreement embodies the 5 Elements any agreement must have to be a legal contract. It establishes the policy as:

Back 1

1) An agreement

2) Between legally capable parties

3) For a consideration

4) Demonstrating intent

5) To do something that is legal.

The insurer’s promise is to pay for specified financial loss arising from damage to or destruction of specified property during the period stated in the policy, in consideration of the premium paid by the insured.

Front 2

Define Insurable Interest

Back 2

To have insurance interest in the subject matter of an insurance contract, a person must stand to benefit from the continued existence of that property or be prejudiced by its loss.

Front 3

Define Indemnity

Back 3

The principle of indemnity is that the insured shall not receive more than the actual loss suffered.

The object of the contract is to return the insured as nearly as possible to the financial position they enjoyed immediately prior to a loss.

The loss must be fortuitous as far as the insured is concerned.

Front 4

Define Subrogation

Back 4

Subrogation is the substitution of one party for another as creditor.

It describes how someone who has discharged the debt of another person acquires the right to enforce a claim against that person to recover the amount of debt.

In property insurance it is the principle under which an insurer assumes the rights of an insured against whoever was responsible for loss or damage to insured property once the insured has paid the insured’s loss.

Front 5

Define Proximate Cause

Back 5

The active efficient cause that sets in motion a train of events which brings about a result without the intervention of any other force started and working actively from a new and independent source.

Front 6

What are the 2 main ways in which insurers adapt the Basic Fire Policy to their own purposes:

Back 6

· A specific policy

· A modular policy

Front 7

Explain and describe a Specific Policy

Back 7

· Builds on a standard policy that includes the insuring agreement, all normal exclusion and limitations, and the Statutory or General Conditions.

· Often includes a schedule describing the property insured and defining important terms

· This standard policy is adapted to specific needs by attaching riders to add or subtract perils or otherwise modify the standard policy terms.

Front 8

Explain and describe a Modular Policy

Back 8

· There is a declarations page at the front, showing such details as the names and addresses of the insurer and the insured, the policy period, and the premium. The address, construction, and occupancy of the subject matter of the insurance may also be shown here along with the amount of insurance. Pages are added to complete the policy, each containing a portion of the contract.

· Some modular policies are even more elaborate covering other classes of insurance such as liability or crime.

Front 9

Explain the differences between direct and indirect loss

Back 9

Direct Loss
* refers to the value of the physical property that is damaged or destroyed.

Indirect Loss
* arises from direct loss; it encompasses other loss suffered as a consequence of the damage to or destruction of the physical property. (Can include lost revenue or income, etc.)
* Business interruption is the most common type of indirect loss.

Front 10

Name the 7 parts of a basic fire insurance policy

Back 10

1) The Insuring Agreement

2) The contracting parties

3) Peril Insured Against

4) Amount of Insurance

5) Basis of Indemnity

6) Exclusions

7) Extensions of Coverage

Front 11

Explain the basis of indemnity

Back 11

a. he Basic Fire Policy gives effect to the principle of indemnity by making the amount payable to the insured the least of:

i. The actual cash value of the damaged or destroyed property at the time of the loss

ii. The interest of the insured in the property; or

iii. The amount of insurance

Front 12

What are the first 4 exclusions for the first group of exclusions in the basic fire policy?

Back 12

1) Electrical Devices Exclusion

2) Application of Heat Exclusion

3) War Risks Exclusion

4) Nuclear Incident Exclusion

Front 13

Explain the Electrical Devices Exclusion

Back 13

1. Loss to electrical devices or appliances is excluded if caused by lightning or other electrical currents.

Front 14

Explain the Application of Heat Exclusion

Back 14

1. Loss to good caused by any process involving the application of heat is excluded, but will cover damage to other insured property damaged if the fire spreads.

Front 15

Explain the War Risks Exclusion

Back 15

1. Loss arising from foreign or civil war or riot or other civil disturbance is excluded.

Front 16

Nuclear Incident Exclusion

Back 16

Definition: an occurrence resulting in injury or damage that is attributable to a breach of the duty imposed on an operator by this Act.

1. Both direct and indirect loss caused by nuclear incident are excluded, except for ensuing loss directly from fire, lightning, or explosion of natural, coal, or manufactured gas.

2. Direct and indirect loss caused by contamination by radioactive material is also excluded.

Front 17

name the second group of exclusions in the basic fire policy

Back 17

1. Money, books of account, securities for money, evidences of debt or title; automobiles, tractors and other motor vehicles; aircraft; and watercraft.

2. Alterations and Additions Exclusion

3. Vacancy, Unoccupancy, Disuse Exclusion

4. Volatile Substance Exclusion

5. By-laws Exclusion

Front 18

Explain the Alterations and Additions Exclusion

Back 18

Loss to a building or its contents during and resulting from alterations or additions to the building is excluded unless written permission has been granted for them; normal repairs are allowed without permission.

Front 19

Explain the Vacancy, Unoccupancy, and Disuse Exclusion

Back 19

Loss to the insured building or property in it is excluded while the insured knows the building to be vacant or unoccupied for more than 30 consecutive days or, if it is a manufacturer, that it has ceased operations for more than 30 consecutive days.

Front 20

Explain the Volatile Substance Exclusion

Back 20

a. Loss is excluded while the insured knows there are certain volatile substances in the insured building or the building where insured property is kept.

b. This exclusion applies to amounts over a gallon of gasoline, benzene, naphtha, or other substance of equal or lower flashpoint.

Front 21

Explain the By-Laws Exclusion

Back 21

a. Loss due to a by-law regulation, ordinance, or law regulating zoning or the demolition, repair, or construction of buildings is excluded.

b. After a loss, only the extra cost of meeting the new standard by-law is not recoverable.

Front 22

What the the 2 Extensions of Coverage?

Back 22

- Removal of Insured Property

- Debris Removal

Front 23

Name 3 Rating Criteria

Back 23

· Public fire protection

· Private fire protection

· Occupancy\construction\susceptibility

Front 24

Name the different ways that a deductible can apply

Back 24

· If the total amount of insurance is subdivided into more than one item, the deductible may apply separately to the amount recoverable under each item.

· The deductibles may apply to an occurrence.

The policy may provide that no loss be paid below a specified amount (the deductible), but that a loss greater than this amount be paid in full.

Front 25

Explain Coinsurance

Back 25

A coinsurance clause in a fire insurance policy obliges the insured to maintain a specified minimum of insurance in relation to the value of the property insured or else share with the insurer any partial loss- becoming, in effect, a co-insurer of the loss.

This can be demonstrated by a simple formula:

Amount of Insurance Carried x Amount of Loss = Amount Recoverable by Insured
Minimum Amt. of Ins. Required

Coinsurance clause obliges an insured to assume a share in the risk on a partial loss as well as on a total loss. Although typically policies include a Waiver of Coinsurance for small losses.

Generally 80%.

Some companies will specifically state the $ amount as opposed to a %.

Front 26

Explain Average Distribution Clause

Back 26

Replaces a coinsurance clause and applies a “blanket” policy for such operations as manufacturing or processing, where goods move from one building to another.

Such a clause apportions the total amount of insurance, when a loss occurs, by the ratio of the values in each building to the values in all buildings.

The proportion applies not to the amount of loss, as in coinsurance, but to the total amount of insurance.

Front 27

Explain the deferred payment clause

Back 27

Under this clause, the insured is indemnified for only a portion of the total loss to a building at the time of loss. The remainder of the loss payment is deferred until the insured repairs or replaces the building.

This clause deters insureds from contriving to burn down their buildings for the insurance proceeds.

Typically if a building suffers damage equal to 2/3 or more of its value, 50% of the amount of loss is paid at the time of loss. If within 9 months the insured repairs or replaces the building and spends an amount at least equal to the amount payable under the policy in respect to the loss, the insurer will pay the insured the balance of the loss settlement, with interest.

If the insured does not rebuild or replace the building as required, the insured initial payment of 50%v becomes the final loss settlement.

The insureds premium is reduced where the policy includes a Deferred Payment clause.

Front 28

What is the benefit to the mortgagee with regards to the mortgage clause?

Back 28

A mortgage clause offers greater protection for a mortgagee in exchange for some benefits that accrue to the insurer.

The main benefit of a Mortgage clause for the mortgagee is that the policy covers the mortgagee even if the named insured is unable to recover because a condition of the policy has been breached.

It creates a separate contract between the insurer and the mortgagee.

The mortgagee clause amends Statutory Condition 8, permitting the mortgagee to give notice of loss immediately on becoming aware of it and proof of loss as soon as practicable.

The clause also broadens Condition 3 to include the mortgagee and its assigns among those who, acquiring title to the insured property, are automatically entitled to be insured under the policy until it’s cancelled or expires.

Front 29

What obligations do mortgagees incur in exchange for their rights under the mortgage clause?

Back 29

The mortgagee must notify the insurer immediately on learning of

- any vacancy or non-occupancy extending beyond 30 consecutive days

- any transfer of interest

- Any increase in hazard.

- The mortgagee must also pay for any increased hazard from the time such increased hazard existed until the policy is cancelled or expired.