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113 Cards in this Set
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- Back
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The Insurance Contract -
What are the parts that property and casualty Insurance policies include? |
1-Declaration Page 2-Insuring Agreement (insuring clause) 3-Conditions 4-Exclusions 5-Endorsement 6-Definitions |
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Endorsement |
A clause under which the stated coverage of an insurance policy maybe altered.
The signature, instructions, etc., placed on the reverse of a commercial document, for the purpose of assigning the interest therein to another. |
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Declarations Page |
This usually the first page of a contract and is the personalized part that includes the parties to the contract, the policy term (period), the amount of insurance that has been purchased, the amount of premium, and it identifies the property or person to be insured. It is the information on the declarations page that makes the policy unique to the purchaser. |
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Insuring agreement |
This is the "heart" of the contract that states the perils are insured against. This is also the insurance company's promise to provide the coverage as stated in the contract. |
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Perils |
Perils are the actual cause of a loss such as a fire, theft, wind, hail, etc. |
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How many methods does the property insurance has, of determining what perils are insured against in the insuring agreement? |
Two methods:
Named peril basis
and
Open Peril (also known as: special, all risk) basis. Ex: Inland Marine |
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What is:
Named Peril basis? |
A named peril policy provides coverage only for the those perils that are identified (named) in the policy.
Unless a loss is caused by a named peril, there will not be insurance coverage provided.
The burden of proof is said to be on the insured to prove that their loss was caused by a covered named peril |
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What is:
Open Peril basis? |
An Open Peril policy will insure against all perils unless they are specifically excluded from the coverage.
The burden of proof lies with the insurer to demonstrate that the loss was caused by and excluded peril. Such proof is necessary in order for the insurance company to refuse payment for the claim. |
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Conditions |
These are provisions and stipulations of the policy.
Conditions state the rules of conduct (behavior) for both the insured and the insurance company, that is, what must the insured do, what must the insurance company do. |
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Exclusions: |
This lists the perils or what property is not covered.
Exclusions tend to be those things that are considered by the insurance company to be uninsurable unless the insured is willing to pay an additional premium.
Some exclusions may be covered if the insured purchases the coverage by an endorsement and pays an additional premium. |
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Definitions: |
This part of the contract explains the meaning of important terms found in the contract, such as who is the named insured, who is an insured, what constitutes a premises, etc. |
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Indemnity |
1.protection or security against damage or loss.
2.compensation for damage or loss sustained.
3.something paid by way of such compensation.
4.protection, as by insurance, from liabilities or penalties incurred by one's actions. |
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Indemnify |
REPAY |
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Insurable Interest |
Financial interest |
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Direct Loss |
Property damage to a business or asset that requires it to cease operation, inhabitance for a period of time. |
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Indirect Loss` |
Loss resulting from the inability to use the damaged property, such as loss of income produced by the property, like the loss of rental income, or extra expenses incurred while the insured's property or asset is being repaired or replaced. Such as temporary housing. |
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Replacement cost coverage (coinsurance) |
coverage that pays to replace the damaged property with new property of the like kind and like quality with NO deduction for depreciation
provided the insured is carrying insurance to value (normally 80% or 90% of the value of the building or dwelling) at the time of loss and will pay up to the policy's dollar limit. |
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Actual Cash Value (ACV) |
ACV coverage pays to replace the damaged property with new property MINUS a deduction for depreciation - because of wear and tear and\or aging and will pay up to the policy's dollar limit. |
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Dwelling Coverage |
Dwelling Coverage in property policies cover the cost of repair/ rebuilding the home and attached structures, such as garages and decks, equipment, and fixtures that are permanently affixed to the home that pertains to the service of the home, such as heat pumps, kitchen cabinets, central air conditioning. In the event that they are damaged or destroyed by a covered peril, such as fire. |
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What are: "Other Structures"? |
Other structures are referred to as:
Detached structures
or
Appurtenant structures |
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Other structure coverage |
Other structure coverage in a property policy covers the cost of repairing/ rebuilding other structures in the property other than the home.
These include: detached garages, utility buildings |
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Why is Liability Insurance purchased? |
Liability Insurance is purchased by individuals and business to meet the unexpected costs imposed by law.
Liability is designed to offer specific protection against THIRD PARTY claims (by others) |
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Who does Liability Insurance pay? |
Liability Insurance claim payments are NOT made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. |
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What is meant by: supplemental payments? |
Liability Insurance are additional payment benefits:
The insurance company has a duty and right to defend the insured against both real and alleged claims. These legal defense costs are know as SUPPLEMENTAL PAYMENTS, and are paid in addition to the actual judgement imposed. |
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Bodily Injury Liability (BI) |
pays for another person's physical injury which results from an accident for which an insured is held to be legally liable, such as an injury caused when a guest slips on a wet floor and falls at an insured's home. |
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Strict Liability |
Sometimes called absolute liability, is the legal responsibility for damages or injuries even if the person found strictly liable was not at fault or negligent.
For example: In worker's compensation cases, compensation is made without any consideration of fault or negligence on ether side. However losses resulting from intentional self-inflicted injuries, intoxication and undisclosed preexisting health conditions may be excluded. |
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Vicarious Liability |
Assigns liability for an injury to an insured who did not cause the injury but who has a relationship to the person who did act negligently.
Legal relationship that can lead to negligence include the relationship between parent and child, owners and their pets, and employers and employees. |
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Personal Injury Liability |
Is designed to protect an insured from lawsuits alleging damage to another person's character and/ or reputation, such as defamation, libel, slander, malicious prosecution and false arrest. |
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Property Damage liability (PD) |
pays for damages an insured causes to another person's belongings, such as their car. |
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Split Limit Liability |
A split limit provides a set amount of coverage for bodily injury claims (per person, per accident) and another set amount for property damage in any given accident.
ex: 50.000/100,000/50,000 - This means the policy would pay 50k to anyone person injured in the accident, 100K to all persons injured in the same accident, and 50K for the property damage involved in the same accident.
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Combined Single Limit |
A combined single limit provided one set amount of coverage for both bodily injury and property damage in any given accident. |
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Aggregate Limit Liability -
stated in commercial general liability policies. |
An aggregate limit is designed to "cap" an insurance company's loss exposure during a single policy term, normally one year. If the total claims made by a policyholder during the policy term exceed the aggregate limit, the policyholder is responsible for the damages above the aggregate limit. |
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Subrogation |
Refers to the legal process an insurance company uses to seek reimbursement from the responsible party that has caused a policyholder they insure a loss for which they have paid the policyholder. |
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What is: Deposit Premium? |
Deposit premium is an estimated premium required by an insurance company for plans that are subject to premium adjustments.
Ex: Worker's Compensation and Commercial General Liability. |
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What is:
Initial Premium? |
Initial premium is paid to put a commercial insurance policy into force. |
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What is:
Final premium? |
The final Premium is determined at the end of the policy period based on the insured's actual exposure that is determined by an audit. |
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Risk |
Uncertainty |
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Insurance |
Insurance is a plan of spreading the risk of possible loss over a large number of people.
It is based on a mathematical principal called the: Law of Large Number.
Insurance protects against the uncertainty (risk) of when a financial loss might occur. |
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Types of risks: |
1- Speculative
2- Pure
3- Insurable |
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Speculative Risk |
A Speculative Risk is when there is a chance to gain as well as a chance to loss.
Ex: Buying a stock or gambling
Insurance is NOT intended to protect against this type of risk. |
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Pure Risk |
A Pure Risk is when there is a chance to loss only.
These risks are subject to insurance protection, however not all pure risks are insurable. |
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Insurable Risk |
An Insurable risk in one that an insurance company is willing to accept |
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Insurable Risk - Characteristics: |
A. Low probability of loss occurring
B. Less than catastrophic results
C. The loss must be measurable
D. The loss must be significant
E. The loss must be accidental and unintended. |
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Probability |
Probability measures the chance of an event occurring. It is the measure of uncertainty.
Uncertainty is the highest when probability is 50% |
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The Law of Large Numbers:
(Law of Averages) |
The Law of Large Numbers is the mathematical principle that makes it possible to predict future losses upon prior experiences.
The law states that as a larger number of events are included, the difference between actual and expected results become smaller. |
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Geographic Dispersion
(Spread of Risk) |
is spreading exposed "units" over a large area in order to avoid high losses in the event of catastrophe in an area. |
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Adverse Selection ( Bad risk ) |
Adverse Selection is the increased tendency of people to with a higher than normal probability of having a loss to buy and maintain insurance coverage.
This removes the randomness of probability and changes it against the company. Therefore, insurers attempt to prevent adverse selection. |
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Methods of Handling Risk: |
1 - Retention
2 - Transfer
3 - Control or Reduction |
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Retention: |
Retention is when liability for a loss is maintained by an individual by not purchasing insurance.
A deductible in an insurance policy is another example of retention in that an individual retains a portion of the covered loss. |
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Transfer: |
Transfer is to shift the responsibility for a loss to an insurance company through the purchase of insurance. |
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Control or Reduction |
Control or Reduction is an attempt to prevent a loss or reduce the amount of a loss.
Ex: Installation of a sprinkler system to reduce the amount of a loss. |
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Hazards |
Hazards increase the probability of a peril occurring.
Bald tires on an automobile increase the chance of a wreck happening. The tires are the hazard, the wreck is the peril. |
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Principle of Indemnity |
The purpose of insurance is to restore the insured to the original financial position that was enjoyed before a loss, but without gain.
All insurance, except life, attempts to pay to the insured only what has been lost. |
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Property Insurance |
Indemnifies (repays) a person or business with an interest in the physical integrity of tangible property for its loss or the loss of income produced by that property. |
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Casualty Insurance |
Provides protection to meet the unexpected costs imposed by law due to acts that have caused bodily injury or property damage to another individual. Included in the field of casualty (liability) insurance are automobile, crime an Surety Bonds |
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Private or Voluntary Insurance |
Private or Voluntary Insurance is the portion of the insurance industry where individuals seek coverage to meet recognized needs. These coverages are neither required nor made available by government. |
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Social Insurance |
Social Insurance, on the other hand, are programs either required or made available by government.
The North Carolina Automobile Reinsurance Facility, Workers Compensation and Flood Insurance are examples. |
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Reinsurance |
Reinsurance is a field of the industry where insurers sell portions of the individual contracts of insurance to other companies. This activity helps with the spread of risk and/or improves cash positions by lowering reserve requirements for these contracts. Insurance companies also purchase reinsurance to protect themselves in case of catastrophic losses. |
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Capital Stock Companies |
Capital Stock Companies are proprietary companies that are in business to make a profit for their stockholders.
These companies are owned by the stockholders who retain management responsibility through the election of a Board of Directors.
Profits are paid to the stockholders in the form of a commercials stock dividend that is fully taxable to the stockholder. |
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Mutual Companies |
Mutual Companies are organized on a non profit basis. Ownership of the non profit corporations rest with the policyholders who have purchased coverage.
Operating surpluses of these companies are returned as an overcharge of premium to the policyholders in the form of a non-taxable policy dividend. |
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Reciprocal (Assessment) |
Reciprocal (Assessment) companies are non-incorporated associations of individuals or business (subscribers) who engage in cooperative insurance.
Each policyholder is insured by all other policyholders and each policyholder insures the others as coverage is exchanged in a reciprocal basis.
1. They are governed by an Attorney in Fact (not necessarily a lawyer)
2. The attorney in fact can assess the policyholder for additional premiums if underwriting losses jeopardize financial solvency. |
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Direct Loss |
Direct loss is the actual monetary loss caused by the physical damage to or destruction of tangible property.
Ex: a fire that causes $10,000 damage to a house. |
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Indirect (consequential) loss |
Indirect loss results as a consequence of direct loss. An indirect loss involves a loss of revenues or extra expenses that result from physical damage to or destruction of property.
ex: loss of profit due to merchandise being destroyed. The cost of merchandise is a direct loss, but the loss of profit would be an indirect loss. |
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Domicile and Approval of insurers |
"Where is the Home Office" - Insurance companies are classified by the location of their incorporation (organization).
From the view point of the State of North Carolina each company is classified as:
1- Domestic 2- Foreign 3- Alien |
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Domestic company |
Domestic companies are those companies organized in this state. |
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Foreign company |
Foreign companies are organized in another state. |
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Allien companies |
Alien companies are organized in another country. |
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Admitted or Authorized Companies |
Domestic, Foreign or Alien companies could be approved to do business in the State of North Carolina if the state so authorizes them.
When authorized by the state, the companies receive a CERTIFICATE OF AUTHORITY and become known as admitted or authorized companies. |
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NON ADMITTED or NOT AUTHORIZED companies |
Companies that hold NO Certificate of Authority.
Property Casualty and personal lines insurance agents are NOT permitted to represent or place insurance coverage with non-admitted companies. |
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Producers |
Producers are the actual people who solicit insurance on behalf of insurance companies.
There are two types of producers:
1- agents 2- brokers |
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Agents |
Agents are representatives of the insurer.
Agents must be licensed with the state to legally conduct insurance transactions.
Agents receive their authority to operate on behalf of the company by the agency contract and by an appointment.
The state requires that all licensed agents have an appointment from a company before any transactions may be conducted. Have 30 days to inform the insurance commission department. |
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Binder |
A binding premium receipt is temporary evidence that insurance is in effect without condition.
The coverage will stay in effect until terminated by either the company or the policyholder. Binders maybe written or oral. Oral binders must be replaced by a written binder as soon as possible.
The binder provides coverage until the policy arrives. Agents can NOT cancel a binder! |
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Captive or Exclusive agents |
An agent may also be "captive" or "exclusive" in that the agency contract may require that the agent represent only that company. = DIRECT = Represent only one company. |
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Brokers |
Brokers are representatives of the insured.
Brokers shop the market on behalf of their clients and obtain the coverage that best fill their client's needs.
Brokers obtain this coverage through a licensed agent of the company issuing the policy.
In order to obtain a broker's license, the individual must have a valid agent's license and post a bond of not less then $15,000 in favor of the State of North Carolina. |
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Fiduciary Capacity |
A fiduciary relationship develops when an individual places trust in someone else to perform certain duties or actions. |
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Fundamental Principles of Contracts |
All contracts, not just insurance contract, must contain certain elements to be legally binding. These elements are:
1- Offers and acceptance (agreement) 2- Consideration 3- Legal Object 4- Competent Parties
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Offers and Acceptance (Agreement) |
In the insurance contract, the offer is made by the proposed insured.
The acceptance occurs when the policy is issued.
However, sometimes it is necessary for the company to rate-up a substandard risk. This action becomes a counter-offer and the applicant must then either accept or reject the counter-offer.
Regardless all contracts must have an offer and acceptance. |
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Consideration |
This the exchange of something of value by both parties.
In insurance , the applicant submits premium in exchange for the company's promise to pay if a particular peril occurs.
Information provided by the applicant is legally considered to be a part of the consideration. |
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Legal Object - |
Contract must fulfill a legal purpose in order to be enforced |
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Legal Characteristics of The Insurance Contract |
1- Unilateral 2- Adhesion 3- Waiver 4- Representations 5- Warranties 6- Misrepresentation 7- Concealment |
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Building and Personal Property Coverage Form |
The Building and Personal Property Coverage Form provides coverage for most industrial and manufacturing risks. It is a general purpose form used to write coverage for the direct loss only of building, content or both. |
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Coverage Parts (Insuring Agreements) of the Building and Property Form (commercial property insurance): |
Coverage A: Building (s) Coverage B: Business Personal Property Coverage C: Personal Property of others in the insured's care - Bailee Coverage |
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Building and Property Form - COVERAGE A |
The structure (coverage A) is restricted to the building(s) shown on the policy declarations.
This includes permanent fixtures and maintenance/ service items such as air conditioner, fire extinguishers, alarms, etc.
Additions to the structure are also covered as well as materials to be used for additions.
There are no requirements that the insured purchase coverage A. Therefore business not owning the structure can still use this form to cover contents |
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Building and Property Form - COVERAGE B |
Business Personal Property (coverage B) is commonly referred to as contents.
Can include stock, machinery, furniture, fixtures, improvements and betterments owned by the insured and used for the insured's business.
Coverage is provided within 100 feet from the premisses. |
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Building and Property Form - COVERAGE C |
BAILEE Coverage - relates to property in the care, custody and control of the insured. Coverage extends to within 100 fee of the described premisses.
Includes property in vehicles |
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Building and Property Form - additional coverage (included by default) |
1- Debris Removal - coverage is provided if the clearance of such debris is due to covered peril. The most the insurer will pay under this coverage is 25% of the total payment for the direct physical loss plus the deductible.
If the coverage A is exhausted the insurer will pay up to an additional $10,000.00
2- Preservation of Property - removal coverage is provided to insure loss to property wen removed to protect it from further damage. This is open peril coverage provided for up to 30 days.
3- Pollutant extraction from land or water - on the premisses only, if reported within 6 months of the date of the loss, covered up to $10,000.00 in any 12 month period. |
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Building and Property Form - Other extensions of Coverage |
Other extensions of Coverage are provided without additional charge. If the insured meets certain policy conditions. The purpose is to cover limited, incidental exposures that the insured may have.
1. Newly acquired property is covered up to 30 days. At the end of the 30 days, coverage will cease unless the new property has been rated and a premium has been submited.
2. Valuable records and papers coverage will pay the cost of reconstructing such records if the destruction is due to a covered cause of loss. This extension is limited to $2500 at each described location.
3. Business Property temporarily located off premises (other than "stock") is covered up to a maximum of $10000. |
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Independent Agents |
Independent Agents can represent as many companies as wished. |
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Principal = |
Insurance Company |
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Responsibilities of Agents |
Agents who perform their duties in an acceptable manner are not liable for the contracts entered into on behalf of their principal ( ins. Company). An agent can, however, be held personally liable for certain contracts when: a) The agent has breached their authority - did something not allowed by contract b) The agent represents an incompetent principal - Non admitted Ins. Company. c) The agent commits a civil tort or crime - civil wrong doing. |
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Agent's duties to the Principal: |
A) Loyalty B) Obedience C) Use of reasonable care D) Accurate Accounting E) Communication of Information held by the agent to the company. |
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Errors and Omission (E&O) Insurance |
Insurance mal practice for agents in case of negligence protection. |
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Underwriting |
Underwriting can be thought of as the quality control department. Underwriters select those policies the company wishes to insure using standards established by the company. but always guarding against adverse selection (BAD RISK) |
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Loss Ratios |
Loss Ratio concerns: Premiums & Claims only Loss ratios are determined by dividing the losses (claims) of the company by the premiums collected. Loss ratios in conjunction with expense ratios, determine whether a company has had an underwriting loss or profit |
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Competent Parties:
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Enforceable contracts can only be executed (signed) by individuals who have the legal capacity to enter such an agreement |
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Incompetent Parties are: |
-Minors -Mentally infirm -Persons under the influence of drugs or alcohol |
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Insurable Interest |
You can never collect more than your insurable interest in a property |
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Insurance Contract |
The insurance contract is a legal contract containing: 1-Declarations Page 2-Insuring Agreement 3-Conditions 4-Exclusions 5-Endorsements |
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Declarations Page |
The personalized part of the policy that includes: -The parties to the contract -The policy term. -The amount of insurance purchased -The amount of the premium -The object or person insured ( who or what is being insured) |
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Insurance Agreement (Insurance Clause) |
This the "heart" of the contract that states the perils that are insured against. |
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Conditions (behavior) |
These are provisions and stipulations of the policy. Conditions state the rules of conduct for both the insured and insurer. |
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Exclusions |
These list what perils are NOT covered (unless one pays more premium 1- WAR = Basic contracts excludes it no matter the cost 2- One that is sold if one buys endorsements |
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Endorsements |
Endorsements modify the basic contract, have no independent existence. |
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Legal Characteristics of an Insurance Contract
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1-Unilateral 2-Adhesion 3-Waiver 4-Representation 5-Warranties 6-Misrepresentation 7-Concealment 8-Named Insured |
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Unilateral |
It can only be enforced by one party: 1-Only the insurance company may set legally enforceable promise 2- The contract maybe enforced by the insured... |
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Adhesion |
The insurance contract and its wording are prepared by the insurer. In adhesion contracts, the courts will interpret any ambiguity in the wording in favor of the party who did NOT write the contract. |
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Waiver |
A legal doctrine placed in writing that means the voluntary abandonment of the right or advantage. |
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ESTOPPEL |
STOP --> Legal consequence of signing a waiver |
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Representations |
Statements made with utmost good faith but not guaranteed as the accuracy. |
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Warranties |
Statements guaranteed as to accuracy for both past and future events. (warranties are normally placed for ocean such as sea worthiness) |
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Misrepresentation |
Simply, this is a lie 1-Material - Had the insurance company known the truth, would not have written the policy -> null -> void 2- Non - Material= Has no effect on the contract |
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Concealment |
Is the withholding of material fact. Concealment is NOT an overt lie, but a failure to state the entire truth. |
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Named Insured |
The person or business identified on the declarations page that is considered to be the 1st party of the insurance policy. - First named insured --> Commercial Insurance - Package Policy = Commercial |
