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87 Cards in this Set

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Under a property insurance policy, what does the amount payable depend on?
*Valuation methods
*Policy Limits
*Deductibles
*Coinsurance or other insurance-to-value provisions.
Insurance to Value
The choice of a limit in property insurance that approximates the maximum potential loss.
Why is insuring to value beneficial for an insurer?
1. Premium is enough to cover potential losses.
2. Simplifies underwriting process.
Why is insuring to value beneficial for an insured?
1. Enough money is available in the event of a total loss
2. Uncertainty associated with large retained losses is reduced.
What can insurers encourage property insurance buyers to do in order to minimize problems associated with valuation?
*Hire an appraiser
*Purchase inflation guard coverage
*Buy peak season endorsement if values fluctuate
*Review and revise limits periodically.
What are the two most common valuation methods in property insurance? What is another method?
1. ACV
2. Replacement costs.

*Actual Loss Sustained.
_______ is one of the most prevalent methods property insurance polices use. Why?
ACV
Becasue it supports the principle of indemnity.
ACV
A valuation method which is calculated as replacement cost at the time of the loss minus depreciation.
Replacement Cost
The cost to repair or replace property using new materials of like kind/quality with no deduction for depreciation.
Depreciation
The reduction in value caused by the physical wear and tear or technological/economic obsolescence of property.
_______ reflects the value of the use the insured has already received from property.
Depreciation.
ACV calculation is based on _______ depreciation, not _______ depreciation.
Economic

Accounting.
Market Value
The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller.
Many courts have ruled that ACV means _______.
Market value.
When can it be difficult to establish market value?
If there have been few recent transactions involving comparable property.
The market value of real property reflects the value of what?
The land and location, as well as the value of buildings and structures on the land.
Broad evidence rule
A method for determining ACV based on court decisions tha require all relevant factors to be considered.
Why did the broad evidence rule arise?
Because courts stipulated insurers had to consider more than just depreciation or market value when determining ACV.
List some factors to be considered in determining ACV for a building.
*Obsolescense
*Present use and profitability
*Alternate uses
*Present neighborhood characteristics
*Long-term plans for area where located (new roadways, urban renewal prospects)
*Inflation/deflation trends.
Residential personal property is valued at...
Replacement cost new at the time of loss minus depreciation.
Business personal property in use is valued at...
Replacement cost new at time of loss minus depreciation.
Stocks of merchandise are valued at...
The cost of replacing the property (not the owner's selling price). Transportation charges are added, and depreciation is subtracted.
Stocks of merchandise on the sales floor (active) that cannot be replaced within a reasonable time are valued at...
Selling price, less depreciation.
Replacement cost is used most often with what types of policies?
*Policies covering buildings
*Policies covering personal property.
Replacement cost basis
The current cost of repairing damaged property or of buying/building new property, even if the destroyed property is several years old and replacement cost exceeds original purchase price.
What type of property is usually not covered at replacement cost and why?
How are they covered instead?
Antiques/art work
Because there is no adequate replacement for this type of property. They are usually valued at ACV.
Technically, _______ violates the principle of indemnity because...
Replacement cost coverage
Because an insured who has a loss involving old, used property and receives payment for new has profited.
To reduce moral hazards with replacement cost coverage, how do most replacement cost policies pay out?
After the insured has replaced the damage or destroyed property, the policy will pay replacement cost, before then it will pay out as ACV.
_______ is generally higher than _______, so this type of coverage costs more.
Replacement cost
ACV.
Actual Loss Sustained
A valuation method that is not that common. Used in business income policies, make insured whole by demonstrating the actual amount of loss that occurs during the period of restoration.
What are some other valuation methods, used for special classes of property?
*Agreed value method
*Functional valuation method
*Cost of reproduction
*Pair or set clauses
*Money and securities valuation method.
Agreed value method
A valuation method in which the insurer and insured agree on the value of the insured object and state it in a policy schedule.
What types of property are generally covered by an agreed value valuation method?
Antiques, paintings, other objects whose value can be difficult to determine.
Functional Valuation Method
A valuation method that determines the value of property by comparing it to the cost of property that can perform the same function even if its not identical.
What types of property are generally covered by a functional valuation method?
*Commercial property
*Residential buildings
*Electronics
*Computers.
What types of property are generally covered by a cost of reproduction valuation method?
Valuable papers and records.
Pair or Set Clause
A policy provision that indicates how values will be determined when part of a pair or set is lost, damaged, or destroyed.
With a Pair or Set Clauses valuation method, the loss of half of the pair...
does not constitute a total loss, unless the remaining part or parts have become worthless.
When a loss involves money, the insurer pays...
no mor than its face value.
What are the reasons insurance policies contain limits?
RASL:
1. Limit insurer's obligations
2. Accommodate consumer preference
3. Reflect insurer financial capacity
4. Substitute for exclusions.
What are the 2 types of policy limits that apply to individual pieces of personal property?
1. Scheduled - policy covers a list of property items, each subject to a limit.
2. Unscheduled (blanket) coverage.
Specific limit
The maximum dollar amount the insurer will pay, per item or per occurrence, for each loss of a particular item or class of property.
Blanket Limit
The maximum dollar amount the insurer will pay for 2 or more items or classes of property at one or more locations.
With _______ insurance, insureds can often purchase slightly lower limits on the policy than the sum of all the specific limits that would have been needed, and still meet the contractual requirements.
Blanket insurance.
Blanket limits can be helpful when...
The total value of a firm's movable property is pretty constant, but the values may shift between covered locations.
Blanket insurance is less important for _______ than for _______. Why?
buildings
Personal property
Because building values don't change rapidly.
Sublimits
A policy provision tha imposes smaller limits for certain kinds of peroperty or lines of insurance.
Give an example of sublimits.
In the HO policy, there is a sublimit for personal property usually located at an insured's secondary residence.
When is it best to change policy limits?
As they change during the policy period, rather than only at policy renewal.
Waht are some ways limits can be automatically changed?
1. Inflation guard endorsements
2. Peak season endorsements
3. Value reporting forms.
Inflation guard protection
A method of protecting against inflation by increasing the applicable limit for covered property by a specified % over the policy period, on a daily basis.
It is usually best to link the inflation guard protection increase to...
some index, not just by using an arbitrary %.
Peak Season Endorsement
A commercial property endorsement that covers the fluctuating values of business personal property by providing differing amounts of insurance for certain periods during the overall policy period.
What are the major disadvantages of using the Peak Season Endorsement?
*Depends on advance estimate of the pattern of variable values during a future policy period
*Does not respond to unprojected changes.
What is an example of a Nondollar Limit?
Auto PD Coverage - policy limit is ACV of stolen/damaged property, or amount to repair/replace.
Deductible
A portion of a covered loss not paid by the insurer.
Deductibles reduce the premium cost to the insured because they:
1. Reduce moral/morale hazard incentives
2. Encourage risk control by insured.
3. Eliminate the need for insurer to process small losses, reducing insurer loss costs and adjustment expenses.
Dollar Trading
An insurance premium and loss exchange in which the insured pays the insurer premiums for low value losses, and the insurer pays the same dollars back to the insured, after subtracting expenses.
What is one way to eliminate dollar trading?
Set sizable property insurance deductibles.
Deductibles can be placed into what 2 broad categories?
1. Per event deductibles
2. Aggregate deductibles.
Per event deductible
A deductible that applies to each item, each location, each claim, or each occurrence.
Aggregate deductible
A deductible that applies collectively to all losses occurring during a specific period, typically a policy year.
Straight deductible
A dollar amount the insured must pay toward a covered loss.
What does it mean to absorb a deductible?
To apply the deductible to the loss amount before applying any coverage limits...only if the loss exceeds limits.
Split deductible
A deductible provision that applies one deductible for most COL but a different, higher deductible for other specified COL.
Percentage deductible
A deductible expressed as a % of some other amount such as the amount of insurance, the covered property's value, or the amount of the loss.
Percentage deductibles are normally based on what? What does this tend to discourage and why?
Amount of insurance purchased.
Tends to discourage insurance to value becasue insureds are rewarded with a lower $ deductible.
Time deductible
A deductible expressed in terms of the time delay between when a loss occurs and when the coverage begins.
Give an example of a time deductible
When an auto is stolen, there is a 48 hour wait time for rental.
What are the provisions that provide incentive for insuring to value?
1. Coinsurance clause
2. Insurance-to-value provision.
Coinsurance is a requirement in most property insurance policies that makes...
the insured responsible for part of a loss if the property is underinsured below some specified % of the property's insurable value.
What is the most common coinsurance amount and why?
80%
*It's the traditional practice
*Few property losses are total...so this provides adequate insurance to cover most losses.
*Allows some margin in error for predicting the full insurable value.
Amount payable (under coinsurance clause) =
(Did/Should) x Loss.
Under Coinsurance clause formula, Should =
Value of covered property x Coinsurance %.
With insurance-to-value provisions, the amount payable by the insurer will not be less than...
the ACV.
The insurance-to-value provision has a stated _______% requirement.
80%
What are some alternative ways (besides maintaining insurance to value) to avoid coinsurance penalties?
*Flat policies
*Agreed Value
*Monthly limit of indemnity
*Maximum period of indemnity.
Flat policy
A property insurance policy without a coinsurance clause (substantially more expensive).
Many insurers require what to support the statement of values submitted by an insured in an Agreed value policy?
An appraisal.
In an agreed value policy, the amount of insurance may equal the agreed value, but if agreed value is only a % of the full property value...
the insured will still retain part of a total loss.
Monthly limit of indemnity
A limit in business income policies on the amount of insurance that can be collected during any 30-day period, subject to the limit of insurance.
Maximum Period of Indemnity
An option in business income policies in which the insurer agrees to pay the amount of covered losses and expenses sustained during a 120-day period, up to the limit of insurance.
Appraisal clause
A policy provision that prescribes a method for resolving a disputed claim about the value of property or the amount of property loss.
Subrogation
The process by which an insurer recovers payment from a liable 3rd party who has caused a property or liability loss that the insurer has paid to, or on behalf of, an insured.
Salvage
The process by which an insurer takes possession of damaged property for which it has paid a total loss and recovers a portion of the loss payment by selling the damaged property.
What 2 activities within the claim department enable insurers to recover a portion of the money paid out to satisfy claims?
Subrogation
Salvage.
Recovered Property Provision
A policy provision that clarifies the insured's options when a claim based on the loss of property has been settled but the property is later recovered.