Fil 260-Topic 16

Front 1

What is insurance important topic in a real estate course?

Back 1

owning real estate exposes you to possible financial losses (your property is destroyed, someone sues you) and cuz lenders will not extend financing unless their financial interests are protected by insurance

Front 2

Real estate owners are exposed to risk in 3 ways:

Back 2

1. Loss of property or its value
2. Liability- money owed to others who may be harmed financially cuz of the insured party's negligence
3. Added expneses incurred if property can't be used (after fire)

Front 3

Ways to handle risk:

Back 3

1. Avoid risk- don't own real estate
2. Assume the risk- pay for losses yourself
3. Transfer the risk to a third party- do this by buying an insurance policy

Front 4

What is Peril?

Back 4

the direct cause of a loss; EX: fire, windstorm, flood, someone else's injury

Front 5

What is a Hazard?

Back 5

condition that increases the liklihood that a peril will occur

Front 6

What are the three types of Hazards?

Back 6

1. Physical
2. Moral (wanting to set your house on fire to collect insurance money)
3. Morale (being careless cuz insurance will pay for any losses your suffer)

Front 7

What is Insurable Interest?

Back 7

must have a financial interst in a property to insure it
EX: can't buy an insurance policy on my house--Moral hazard would exist

Front 8

What is Indemnity?

Back 8

idea that insured should be repaid only the amount of loss suffered and not actually gain money
1. Even if you insure for more than an item's value, the insurer will pay only the value of what was lost
2. There may be a pro-rata clause- an insured party has bought policies from more than one insurance company, each company pays only a fraction of the total loss, you can't collect double by getting 2 policies

EX: auto and real property insurance

Front 9

What is coinsurance?

Back 9

if the insured doesn't buy coverage for at least 80% of the value of the improvements, the insurer will pay only a percentage of any loss suffered

**this term is only used in connection with medical insurance to denote the percentage of a doctor or hospital bill that the patient must pay

Front 10

An example of coinsurance?

Back 10

**cost to replace improvements= 200,000
**Multiply by 80% = 160,000
**Coverage actually purchased= 112,000

The insured has only 112/160 = 70% as much coverage---so on a 25,000 loss she can collect only 70% of 25,000 or 17,500 from her insurance company

Front 11

Why would we coinsurance?

Back 11

If a fire or other peril occurs, it is not likely to cause complete destruction of the improvements. So a lot of people might choose to insure their houses only for a % of the value, knowing that there would be only a small chance that any peril would cause a higher amt of damage, but the insurance company would not collect enough in premiums to cover its costs

Front 12

What is Replacement vs Reproduction Cost?

Back 12

1. On the structure- if coverage is for replacement cost, damages are repaired with modern methods and materials
**In recent yrs insurers have been phasing the reproduction cost option out of the policies they sell, offering instead only an "extended replacement cost" choice pays up to 20% more than standard replacement cost for unusual situations
2. On contents (your furniture)- standard coverage is for actual cash value (cost to buy a new item, minus a percentage for "depreciation"
**you can buy a more expensive policy that pays "full replacement cost" meaning that the insurer will pay for a new TV even if the set you lost in a fire was several yrs old

Front 13

What are the Types of Real Property Insurance Coverage?

Back 13

1. Standard Fire Policy
2. Flood Insurance- US gov (HUD) subsidizes this coverage to those who live in federally designated floodprone areas; they must obtain this coverage if they are to get loans from federally insured dlenders
3. Earthquake insurance- sold in the private market but it must be purchased as an endorsement to the HO policies that most people tend to buy
4. HO Policies
5. Title Insurance
6. Mortgage life insurance
7. Business Insurance related to real estate ownership

Front 14

What is one concern that insurers have with both flood and earthquake coverage?

Back 14

potential for catastrophic loss- the chance that large numbers of insured parties will los property value in the same location at the same time

Front 15

what does Section 1 of HO policies cover?

Back 15

covers structure, contents, extra living expenses, some unusual things like unauthorized use of your credit cards

**People with expensive jewelry need separate "floater" policies as additions to their standard policies to cover the higher values in the event that such valuable items would be lost, stolen or destroyed

Front 16

What does Section 2 of HO policies cover?

Back 16

Covers liability exposure, including the medical bills for people injured on your property

Front 17

What are hte various types of HO policies for a property (real or personal) owner to choose from?

Back 17

1. HO-1: Basic policy
2. HO-2: Broad coverage (more perils are covered)
3. HO-5: Comprehensive policy (all perils except those specifically excluded like earthquake)
4. HO-3: broad coverage on contents and comprehensive coverage on structure
5. HO-4: Renter's policy (tenants personal possessions and liability
6. HO-6: Condominium owner's policy
7. HO-8 Policy for an older home that owuld cost far more to rebuild than its market value

Front 18

What is Title Insurance?

Back 18

interesting type of coverage in that it insures only for events that alread occurred and excludes future events (title insurer has no obligation if a subsequent event clouds your title), whereas most insurance excludes things that already happened and covers only future events

**covers your leagal costs and possible dollar losses cuz of 3rd party ownership claims arising from among other things,improperly indexed or recorded documents and unrecorded mechanics lien

Front 19

What is Mortgage life insurance?

Back 19

repay the mortgage loan in the event of the death of a family's breadwinner(s), it is typically of the decreasing term variety, to roughly parallel the declining loan balance