C-12 Insurance Of Property Chapter 3

Front 1

ch 3 what is premium for fire insurance policies?

Back 1

its a specified proportion of the amount of insurance

the proportion is expressed as a rate per $100 or less frequently, per $1,000 of the amount of insurance.

Rate of Premium or even Rate.

Rates vary between properties

Front 2

ch 3 Public Fire Protection

Back 2

has a substantial effect on premium charged

a fire is more likely to be extinguished before it destroys property completely than it would be in a small community that has no water mains

large cities have sophisticated firefighting apparatus.

Front 3

ch 3 Private Fire Protection

Back 3

can also affect the premium

they are there own firefighters

large manufacturing plants with auto sprinklers

Front 4

ch 3 Occupancy with Premium Rates

Back 4

occupancy affects the premium

a business using highly combustible materials or hazardous processes attracts a higher rate than one using less hazardous substances

Front 5

ch 3 Construction with Premiums

Back 5

# of storeys affect ratings

buildings constructed of combustible material like frame attract higher rates than buildings constructed of non-combustible material (concrete)

Front 6

ch 3 Susceptibility for Premiums

Back 6

fire, smoke, water

its combustibility and its perishability

contents are often damaged by insured perils more than is the building housing them

for example, the rate for masonry buildings is often less than for stock in such buildings; the rate for furniture, fixtures, equipment is often less than for stock.

Front 7

ch 3 Deductibles and how does it help insurer and insured?

Back 7

small frequent claims are expensive for insurers

to avoid this expense and so reduce premiums for the insureds, insurers introduce a deductible to the policy.

A deductible is the amount by which the payment received by an insured for a loss will be reduced. it is the insured portion of the loss

Front 8

ch 3 describe different ways a deductible may be applied?

Back 8

1. if the total amount of insurance is subdivided into more than 1 item, the deductible may apply separately to the amount recoverable under each item

2. the deductible may apply to an occurrence. the deductible may be subtracted from the total amount of loss or damage arising from a single event insured under all items of the policy

3. the policy may provide that no loss be paid below a specified amount but that a loss greater than the amount be paid in full.

example: deductible is $1,000, the policy would not respond to a loss of $950 but a loss of $1,050 would be paid in full.

Front 9

ch 3 Coinsurance and how is it unfair sometimes?

Back 9

most fire losses are partial losses

example: Mike and Mary each own a building worth $100,000. the buildings are the same in terms of criteria. they each pay a rate of $1.00 per $100 of insurance. Mike buys $80k of insurance for his building. Mary believes the largest loss her building would likely suffer is only $20k. she buys $20k of insurance.

At a rate of 1 per cent, Mike pays premium of $800; Mary pays only $200. if each suffers a loss of $20k both will recover in full. BUT Mike paid 4 times the premium for his indemnity that Mary paid for hers.

this is unfair because if people are allowed to buy insurance in whatever proportion they want of the value of their property, the premiums of those less willing to gamble subsidize the losses of those more willing to gamble. this is so unfair

Front 10

ch 3 Coinsurance and how to make it more fair?

what is premium calculation?

Back 10

Charge insureds different rates for similar risks based on the amount of insurance relative to the value of insureds property.

this is more practical.

Premium Calculation - insurers will assume insureds have bought insurance on full value of their property and then assign rates to similar risks within groups determined by rating criteria.

Front 11

ch 3 what is the purpose of Coinsurance?

Back 11

A coinsurance clause in a fire insurance policy forces the insured to maintain a specified minimum amount of insurance based on value of the property insured or else share with the insurer any partial loss who becomes a Coinsurer of the loss.

Front 12

ch 3 what is the co insurance formula?

Back 12

Amount of Insurance Carried/Minimum Amount X amount of loss

- amount recoverable by Insured.

the amount recoverable can NOT be more than the amount of insurance carried.

Front 13

ch 3 co insurance: what happens if the Insured buys too little insurance and suffers a total loss?

Back 13

the recovery will be limited by the amount of insurance carried rather than by the coinsurance penalty.

The Coinsurance Clause forces the insured to assume a share of the risk on a partial loss as well as on a total loss

Front 14

ch 3 Coinsurance minimum amount

Back 14

the Coinsurance clause in property policies requires the insured to maintain throughout the policy period an amount of insurance equal to at least 80% of the actual cash value of property insured.

insureds can buy more, but not less if they will receive full payment for any partial loss.

Front 15

ch 3 coinsurance: how should insureds decide how much insurance to buy?

Back 15

insureds should consider the effect of Inflation on property values.

if values increase more rapidly than expected, insureds may want to increase the amount of insurance during the policy period rather than waiting until the renewal.

Front 16

ch 3 coinsurance: what requirements can happen sometimes?

Back 16

sometimes Insurers require an amount of insurance of 90% of the value of the property.

the physical characteristics of property (auto sprinklers) make the loss potentially very low.

the rate is low then and they may make the insured gamble with underinsurance like Mary did in the example.

High coinsurance percentages may be required with arrangements of coverages too

Front 17

ch 3 Waiver of Coinsurance

Back 17

Property policies include a Waiver of Coinsurance for small losses where the calculation of actual cash value to determine if a coinsurance penalty applies is not economical for either the insurer or the insured.

Like the coinsurance policy, the Waiver of Coinsurance applies separately to each item of the policy

if the loss exceeds 2% or $5,000 then the co insurance clause applies

Front 18

ch 3 Coinsurance: what happens when there are multiple policies

Back 18

there can be several policies in force at the time of a loss

the clause does NOT require that the amount of insurance on that policy equal the required percentage of value of the property covered by all policies.

but the clause DOES require that the policy be concurrent (existing or done at the same time) with all the other policies. (same terms and conditions)

Front 19

ch 3 what is the difference between the Stated Amount Coinsurance and the Standard Coinsurance Clause?

Back 19

the stated amount coinsurance clause is an alternative.

it encourages insureds to maintain the minimum amount of insurance, specified in dollars instead of percentage

the insurer establishes usually 90% or 100% of values. the insured reports the values in a signed Statement of Values prepared with accountants.

Easier to determine adequacy of amount.

the amount is adequate for Stated Amount Coinsurance if it Equals or exceeds the dollar figure specified.

just like the Standard clause, it penalizes insured for underinsuring.

they recover that portion of a loss that the amount of insurance bears to the specified minimum bearing the remainder themselves as a coinsurance penalty.

this clause expires independently of the policy, usually 3 months later.

the insured has 3 months after renewing the policy to confirm values for the renewal term and for the renewal of the Stated Amount clause.

Failing to do this, the clause is replaced on its expiry by the Standard Clause 3 months after renewal of policy.

Front 20

ch 3 how is there protection on value swings with Stated Amount Coinsurance??

Back 20

this clause protects insureds from fluctuations in property values that might penalize them unexpectedly for partial loss.

with the requirement of annual statement of values, also gives insurers more confidence in adequacy of the amount of insurance.

this clause is more likely to be used when insuring large, high values, insured under a single item.

Front 21

ch 3 Average Distribution Clauses

Back 21

this is not common.

in operations like manufacturing, goods move from one building to another so it can be difficult to arrange separate amounts of insurance for the contents of each building. IF the total value remains fairly constant, the insurer may agree to a policy covering all goods in all buildings under a single item (blanket basis)

goods spread among the buildings.

it does not penalize the insured if when a loss occurs, the amount of insurance equals or exceeds the value at risk.

underinsurance is spread proportionally over all locations insured.

Front 22

ch 3 Deferred Payment Clause

Back 22

on farm policies

vacant buildings

the insured is indemnified for only a portion of the total loss to a building at the time of a loss.

the remainder of loss payment is deferred until the insured repairs or replaces the building.

its partial indemnity to start

we will give you the rest when you fix the place with interest

the clause discourages insured from contriving to burn down their buildings for insurance proceeds.

Front 23

ch 3 Mortgage, Chattel Mortgage

Back 23

where the security is real property, the loan arrangement is called a mortgage.

a mortgage conveys an interest in property as security for a debt. the borrower is the mortgagor, retains possession and use of the property but the lender, mortgagee, acquires an interest in the property and the right to sell it if the borrower defaults on the debt.

Mortgagees who have accepted insured property as security for their loans will certainly be prejudiced by its destruction, so they have insurable interest in it.

where the security is personal property (property other than land and buildings) the loan arrangement is called chattel mortgage. movable property

Front 24

ch 3 can a mortgagee protect itself??

Back 24

a mortgagee could protect its interest with an insurance policy for the unpaid portion of the loan. this is rare. the lender does not control the property directly either. the borrower might not act in good faith and complicating the insurer's adjustment of a claim.

Front 25

ch 3 if a loss happens, how is the lender taken care of?

Back 25

the lender must be repaid even if the property is damaged. the loan agreement may require of the borrower immediate repayment in full if the property is destroyed.

borrowers have a more incentive than lenders to insure their interests.

Front 26

ch 3 how to show evidence of a lender on a policy??

Back 26

it is simpler to issue a single policy in the name of the borrower and include the lenders interest.

most lenders insist on evidence of fire insurance.

instead of having separate policies of the lender and borrower

Front 27

ch 3 Loss Payees

Back 27

Mortgagees included in policies by such an arrangement is called Payees or Loss Payees.

joint claim payment

any cheque issued by the insurer to settle a claim will be drawn jointly in the names of the insured (borrower) and the loss payee (cheques to contractors for repair work with loss payees consent).

the parties will determine on how to proceed to reduce or discharge the loan.

only the named insured may instruct the insurer to show loss payable to the lender.

not anyone can just add on mortgagee

Front 28

ch 3 Loss Payees: what does the loan agreement require?

Back 28

the loan agreement may require a borrower to include the lender as loss payee on a policy insuring the property that is security for the loan but only the borrower as named insured may require this of the insurer.

the insurer may respond to a direct request from the lender only if it has insured's written consent.

it is UNLIKELY that the insurer will decline to insure the borrower.

should the insurer decline to add the lender as a loss payee, the lender will probably require the borrower to seek coverage from a more accommodating insurer.

Front 29

ch 3 how can the insurer cancel a policy with a payee involved?

Back 29

the insurer can not cancel or alter a policy to the instruction of the payee without written notice to the payee.

if insurer fails to give notice, the insurers obligations to the payee remain effective until the policy expiry date. Often, an insureds request for cancellation is accompanied by a release of interest signed by the loss payee.

Front 30

ch 3 how does the provincial legislation protect the interests of loss payee?

Back 30

the insurer should give written notice to the payee as required by law.

Front 31

ch 3 Payees may be denied

Back 31

loss payees can still be denied indemnity under an insurance policy for their interest in the damaged property.

for example:

the policy could be void from the insureds misrepresentation of a material fact about the risk.

OR

a fraudulent statement about a loss may result in the insured claim being denied

OR

non-payment of the premium may result in the insurers cancelling

Front 32

ch 3 is there a separate agreement with insured and payee?

Back 32

there is no separate agreement with the loss payee. the insureds inability to recover under the policy would prevent the payee's recovery too.

Front 33

ch 3 Mortgage Clauses

Back 33

the fortunes of the loss payee follow those of the insured is a disadvantage of the payee.

this clause is not a solution for all payees.

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

Front 34

ch 3 Mortgage Clauses: what is a main benefit for the mortgagee??

Back 34

the main benefit of this 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.

the clause creates a separate contract between the insurer and the mortgagee governed by the perils, exclusions and amounts and limitations applying to the policy itself.

the mortgagees ability to recover is no longer restricted to losses

Front 35

ch 3 Mortgagee: can give proof of loss?

Back 35

the clause permits the mortgagee to give notice of loss immediately on becoming aware of it and proof of loss as soon as possible.

Front 36

ch 3 what is the mortgagees obligation ?

Back 36

to notify the insurer immediately on learning of any vacancy or non-occupancy extending beyond 30 consecutive days, or any transfer of interest, or increase in hazard

they must also pay for any increased hazard

Front 37

ch 3 how is Subrogation involved in Mortgagee Clause

Back 37

under the clause, the insurer becomes subrogated to the rights of the mortgagee against the insured BUT only to the amount of the loss paid to the mortgagee.

the insurer can subrogate.

Front 38

ch 3 what happens when the mortgagee becomes the insured?

Back 38

for example, if the insurer subrogates the insureds rights to recover from a third part responsible for a loss, BUT a claim is denied, then the insurer will still be forced by the clause to indemnify the mortgagee.

effectively, the mortgagee becomes the insured.

the payment to the mortgagee arises out of the contract between the insurer and the mortgagee. they can still take action against 3rd party, to recover the amount of loss

Front 39

ch 3 what happens when the amount of insurance is inadequate to reimburse the mortgagee??

Back 39

if the insurer has to take over the mortgage then they can. the insurer may become the mortgagee.

Front 40

ch 3 what happens if there is more than 1 policy and a loss happens?

Back 40

the insured may be entitled to claim under more than 1 policy.

the breach of a condition of 1 policy may not affect the others for example, the insured may have misrepresented a material fact to one insurer but not to the others.

this clause cannot bind other insurers but it can limit the mortgagee's recovery under that policy to which the clause is attached.

Front 41

ch 3 Termination involving a mortgagee

Back 41

the clause allows the insurer to cancel the policy according to the statutory requirements (Insurance Acts in common law),

in common law, the clause requires the same notice to mortgagees as the statutory conditions require to insureds. insurers almost always notify mortgagees and insured alike by registered mail.

Front 42

ch 3 would a chattel mortgage welcome a mortgage clause on a policy?

Back 42

yes but likely the insurer will not agree to it.