Property Insurance - Section Ill

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The insured must have an insurable interest in the person or property covered by an insurance policy. For example, mortgagees and leaseholders may have an insurable interest in their respective properties.

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x

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Insurable interest must exist

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at the time of loss.

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Underwriting

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the process of reviewing applications for insurance and the information on the application. A risk selection process.

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The underwriter's function

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refers to the operations of an insurance company where an employee (the underwriter) is responsible for evaluating applications submitted to the insurer and determining whether a policy should be issued.

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Loss ratio

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refers to a formula used by insurance companies to compare premium income to losses, including claims paid and claim-related expenses.

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Loss ratio

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(Incurred losses plus Loss adjusting expense) divided by Earned premium

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An insurance rate

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the amount charged for a particular amount of coverage.

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Class rating (or manual rating)

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refers to the practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics.

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The advantage of the class-rating system

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is that it permits the insurer to apply a single rate to a large number of insureds, simplifying the process of determining premiums.

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Class rating

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is the most common approach in use by the insurance industry and is used in life insurance and most property and casualty fields.

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There are 5 basic individual rate-making approaches:

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* Judgement rating * Schedule rating * Experience rating * Merit rating

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Judgement rating

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is used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class.

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(In) schedule rating

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the rates are developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure.

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(In) experience rating

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the insured's own past loss experience enters into the determination of the final premium.

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Retrospective rating

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a self-rating plan under which the actual losses during the policy period determine the final premium

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Merit rating

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most commonly used in personal auto insurance. The premium isn't based on the actual loss record, but on other factors that indicate the probability that loss will occur.

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Loss costs

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a rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses or profit and are based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time. the actual or expected cost to an insurer of indemnity payments and allocated loss adjustment expenses (A.L.A.E.s)

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Components

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factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profits.

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(A) named peril

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a listed specific covered peril.

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(An) open peril

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any risk of loss that is not specifically excluded.

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The two types of property losses that an individual or business can be exposed to are DIRECT and INDIRECT. Property insurance only covers direct losses, which mean direct, physical damage to property.

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x

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Direct loss

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also includes other damage where the insured peril was the proximate cause of loss. If firefighters spray down a building and there's water damage, the damage is paid under the peril of fire because fire was the proximate cause.

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Indirect losses

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also known as consequential losses, are losses considered a result of direct loss. Such losses usually result from the time that it takes to repair or replace damaged property.

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Blanket insurance

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a single property insurance policy that provides coverage for multiple classes of property at one location, or for one or more classes of property at multiple locations.

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Specific insurance

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a property insurance that covers a specific kind or unit of property for a specific amount of insurance.

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Masonry

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less combustible than frame, frame gets the lowest rating.

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Loss valuation

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a factor in determining the premium charged and the amount of insurance required.

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ACV

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Current Replacement Cost minus Depreciation equals Actual Cash Value.

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Replacement cost

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the cost to replace damaged property with like kind and quality at today's price, without any deduction for depreciation.

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Functional replacement cost

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the cost to replace damaged property with less expensive and more modern construction or equipment.

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Market value

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a seldom-used method of valuing a loss based upon the amount a willing buyer would pay to a willing seller for the property prior to the loss.

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Agreed value

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a property policy with a provision agreed upon by the insurer and the insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is written.

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(A) stated amount

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an amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the event of a covered loss.

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Valued policies

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used when it is difficult to establish the value of insured property after a loss occurs, or when it is desirable to agree on a specific value in advance. It provides for payment of the full policy amount in the event of a total loss WITHOUT regard to actual value or depreciation.

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Policy components

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Declarations, Definitions, Insuring Agreement, Additional Coverage, Conditions, Exclusions, and Endorsements.

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Declarations

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contain the basic underwriting information, such as insured name, address, amount of coverage and premiums, and a description of insured locations.

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(An) insuring agreement

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the section of an insurance policy containing the insurer's promise to pay.

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Conditions

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indicates the general rules or procedures that the insurer and insured agree to follow under the terms of the policy.

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Endorsements

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are printed addendums to a contract that are used to change the policy's original terms, conditions, or coverages. May be used to add or delete coverage or correct items such as insured name, address, etc.

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Name insured

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means the person whose name appears on the declarations.

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First named insured

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who appears first.

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Additional insureds

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are not named but are protected.

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(The) policy period

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the time period duringwhich the policy provides coverage.

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Policy territory

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defines the location where coverage will be provided.

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Policy limits

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(also known as limitations) are the maxmimum amount that an insured may collect, or for which an insured is protected under the terms of the policy.

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Insurance policies covering property have a limit that shows the maximum amount the insurer will pay in the event of a total loss. In the event of a partial loss, the insurer only will pay for the actual amount of that loss.

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x

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Cancellation

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the termination of an in-force insurance policy.

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Nonrenewal

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the termination of an insurance policy at its expiration date by not offering a continuation ofthe existing policy or a replacement policy.

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(A) deductible

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a dollar amount an insured must pay on a claim before the insurance policy provides coverage.

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Coinsurance clause

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states that, in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insuranceon the insured property. If the amount of insurance maintained is less than the coinsurance clause requirement, the insurer will only pay the percent of the loss that the insurance bears in relation to the amount of insurance that should have been carried.

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Loss Payment

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= (Insurance carried / Insurance required) X Loss Amount

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Other insurance

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a provision in an insurance policy that defines how the policy will respond if there is other valid insurance on the same risk.

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Nonconcurrency

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refers to other insurance written on the same risk, but not on the same coverage basis.

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(A) primary policy

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is the policy that pays first in the event of a covered loss.

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Excess policy

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is the policy that only pays after the primary policy or amount has paid its limit.

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Pro rata

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a provision found in some property insurance policies that provides for the sharing of loss with other insurance that may be written on the same risk in the same proportion as their limits of insurance bear to the total coverage of all policies covering the risk, whether collectible or not.

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In the event of a loss covered by the policy, the named insured is required to:

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Protect from further damage * Prepare an inventory of damaged property * Cooperate with insurerin settling loss * Notify police in case of theft loss * Submit to the insurer a sworn proof of loss within an allotted amount of time.

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Assignment

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the transfer of a legal right or interest in an insurance policy.

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Abandonment

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the relinquishing of insured property into the hands of another, or into the possession of nobody in particular. Most property insurance policiesprohibit abandonment and require that the insured protect the property from further loss.

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Insurer provisions

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are used in the event of loss to repair or replace damaged property with property oflike kind and quality,or to adjust the loss and make paymentto the insured within 60 days of receiving proof of loss.

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Liberalization

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a property insurance clause that extends broader legislated or regulated coverage to current policies, as long as it does not result in a higher premium.

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Subrogation

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the insurer's legal right to seek damages from third parties, after it has reimbursed the insured for the loss. Prevents the insured from collecting on the loss from the insurer and the third party.

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Salvage

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the amount of money realized from the sale of damaged merchandise.

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Loss payment (claim settlement)

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At the time of los, the insurer's loss payment, or claim settlement, options include paying the least of the value of the lost or damaged property, the cost of repairing or replacing, the cost of taking part of the property at an agreed/appraised value, and the cost of replacing the property with like kind and quality.

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Third-party provisions

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address the rights of a third party that may have a secured financial interest in the insured property.

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Standard mortgage clause

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a basis provision of all property policies for "real" property.

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Real property

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Non-movable property such as houses and other structures.

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Personal property

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Movable property such as autos, mobile homes, furniture, and equipment.

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In the event of a loss to real property

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Payment will be made to the insured and their mortgagee as their interest appears.

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If an insurance policy is to be cancelled

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A mortgagee must receive prior written notice of such.

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Loss payable clause

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the clause to cover the interest of a secured lender in personal property.

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No benefit to the bailee provision

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excludes any assignment or granting of any policy provision to any person or organization managing property for a fee.

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(A) bailee

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A business that has temporary possession of a property of another and will do something with that property for the mutual benefit of both parties.

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The Michigan Property and Casualty Guaranty ASsociation

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established to protect insureds against financial loss because of insurance company insolvencies. All insurers authorized to sell are required to be members.

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Claims covered by the Association in the event of an insurer's insolvencyare those that meet the following requirements:

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* Derive from insurance policies issued or payable to MI residents, * Are unpaid by an insolvent insurer, * Are presented to the Association before the fixed filing date, * Existed before or were incurred within 30 days of the appointment of the receiver, * Arise out of INS other than life/health, * Arise out of INS policies issued on or before the last date the insurer was a member.

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No MPCGA coverage is provided for the following claims:

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* Involving refunds of unearned premium over $500, * A refund for an amount less than $50 for unearned premiums, * Obligations incurred after the exp date of the insurance policy, * Obligations arising out of fraud.

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To secure funds for payment of claims, the Association may:

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Levy assessments on all member insurers upto 1% of each insurer's direct written premium during the previous calendar year.

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The Standard Fire Policy (SFP) insures against:

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Loss from perils of fire, lightning, and removal. Loss payment is determined on the basis of ACV.

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Every fire insurance policy must contain the following:

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* Coverage for the ACV of the property at the time of loss, * Coverage for loss by fire/lightning and pro rata coverage for 5 days for insured property removed to another location to protect it from further damage, * Language stating that the policy may be void on the basis of fraud, * A list of the property and perils not covered, * LLanguage stating that the policy may be cancelled at any time by insured, * Language stating that the policy may be cancelled at any time by the insurer with 10 days notice, * Language stating that if insurer and insured fail to agree on ACV then they can bring in an appraiser.

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Replacement cost endorsement

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The insurer agrees to reimburse theinsured for the difference between the ACV at the time of damage and the amount actually spent to repair/replace it.

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Property policies may be cancelled at any time by

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Request of the insured.

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The insurer may cancel a policy at any time by

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Maiing notice of cancellationto the named insured no less than 10 days before cancellation is effective.

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If there is a disagreement between insured and insurer on the value of any property loss, either party can make a written demand for an appaisal.

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Each party will select a competent appraiser who will then select an umpire if they are unable to agree on a fair value.

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Insurance policies may be void on the basis of

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Misrepresentation, fraud, or concealment by the insured.

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The Terrorism Risk Insurance Act (TRIA)

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Defines an act of terromism as etc.

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Act of terrorism

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*Must be violent or dangerous to human life or property, * Must have resulted in damage within the US or on US property, * Must have been committed by somebody in an effort to coerce, * Must produce property and casualty insurance losses in excess of a specified amount,

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The Reauthorization Act of 2007

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made several amendments to the Terrorism Risk Insurance ACt. (TRIA).

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In a producer's authority to represent an insurer is terminated,

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the responsibility of an insurance producer with property rights in the renewal will continue until the existing policies of insurance have expired.

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An insurer may not cancel or refuse to renew the policy because of

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the termination of a producer's contract.

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An insurer transacting auto or home insurance cannot

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cancel a producer's contract or otherwise terminate a producer's authority except for malfeasance, breach of trust, violation of the Insurance Code, failure to perform as provided by the contract, or submission of less than 25 applications for insurance within the preceding 12 month period.

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An insurance producer licesned to represent one or more insurers must do all of the following:

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*Provide each eligible person seekinginsurance the lowest available premium quotation, * Inform the eligible person of the number of insurers that the producer represents, * Not attempt to channel an eligible person away from an insurer, * Upon request, submit an application for the eligible person for auto or home insurance to the insurer selected by them, * (For auto insurance only) at least annually provide to each insured information regarding the renewal of a policy.

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With respect to auto/home ins, an insurer may not

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penalize an individual producer by paying less than normal commissions because of the expected or actual experience produced by the producer's business or because of geographic location.

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Classification established for home insurance (other than Inland Marine ins) will be based only upon one or more of the following factors:

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* Amount and types of coverage * Security and safety devices * Repairable structural defects * Fire protection class *Construction of structure * Loss experience of the insured * Use of smoking materials within the structure * Distance from a fire hydrant * Availability of law enforcement.

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If insurance is declined, the producer or insurer must:

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inform the applicant of each specific reason for declination.

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Termination of insurance will not beeffective unless the insurer, at least 30 days prior to the date of termination, mails to the name insured at the last known address a written notice.

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The notice must state the effectice date and each specific reason for termination.

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A notice of termination mailed within the first 55 days fter initial issuance

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may be made effective no sooner than 20 days after mailing or delivery of the notice.

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Each insurer whose surplus in the annual financial statement filed with the Commissioner was $4,000,000 or less is excempt from the

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Essential Insurance Act

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Essential Insurance Act

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requires insurers to accept most applicants for automobile or home insurance, and it restricts the number and type of classifications insurers can use in order to develop rates.

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If somebody has reason to believe that they were improperly denied insurance or were charged an incorrect premium

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They are entitled to a private, informal, managerial-level conference with the insurer. And then a review before the Commissioner if the conference fails to resolve the dispute.

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(An) eligible person

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is somebody who lives in and rents/owns a building. They must occupy the dwelling.

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Ineligible people are so because of a history of:

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* Arson * Fraud *Illegal activity * Refusing to purchase insurance for at least 80% of replacement cost * Refusing to purchase insurance for at least 100% of the market cost * Non-payment (in the last 2 years) * A dwelling taht does not meet minimum standards of insurability * Not payingreal property taxes due on property in the last 2 years.

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(Under the) Michigan Essential Insurance Act (MEIA)

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An insurer cannot refuse to insure, continue to insure, or limit coverage unless the insurer has specific written underwriting rules that would allow the insurer to rejectan eligible applicant.

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All underwriting rules must be applied through the

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State

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If there's an inspection of the dwelling to determine eligibility, the criteria must not be based on the following:

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* Location, *Age of dwelling, * Market value * Amount of insurance * Race/occupation/color/marital status/sex/etc. of applicant