2. Insurance Planning. 4. Property and Casualty Insurance Flashcards
Module Introduction
Imagine the number of uninsured motorists hitting the road every day in the US. They may even be your friendly neighbors who turn into a crazed driver on the road. Who knows whom their next victim could be? Maybe you!
The problem with these uninsured (or underinsured) motorists is that they do not have enough insurance coverage or have less than normal insurance coverage.To avoid this situation, people can buy uninsured motorist coverage as part of their own auto policy, which provides payment to cover their losses in case they have an accident with an uninsured motorist.
In addition to auto insurance for those who own a car, homeowners and renters also require insurance protection. There are a multitude of options for the insurance of personal property, personal autos, commercial property, and even transportation.
The Property and Casualty Insurance module will explain the Insurance Services Office (ISO) homeowner’s package and personal auto insurance policies. The module also describes commercial property insurance with an emphasis on transportation insurance.
The online portion of this module takes the average student approximately three and a half hours to complete.
Upon completion of this module, you should be able to:
* Distinguish between real and personal property for the purposes of insurance
* Recall the eight exclusions that apply to the HO-2 policy
* Compare single limit of liability and split limits of liability
* Explain why people choose uninsured motorist coverage
* Identify the three different categories of property that are covered by the commercial property package (CPP)
* Recall the properties which are excluded in the CPP
* Recall the perils covered by the CPP
* Differentiate between continuing expenses and extra expenses
* Identify the four distinct types of loss exposures insured by ocean marine insurance policies
* Describe additional inland marine coverages, and
* Identify whether a cause of loss is a collision.
Module Overview
The Insurance Services Office (ISO) is an industry organization that provides standards that help to keep policies consistent among insurers. The ISO homeowner’s insurance program uses six forms that provide coverage based on the type of home and the insured’s interest in the structure (known as the dwelling) and its contents (personal property). The insurer’s limit of liability is divided into two sections: the property coverage and the liability coverage. The homeowner’s package is further divided by each specific type of coverage. Each coverage (A through F) is treated separately. Exclusions specify losses not covered by the policy.
Generically, the personal auto policy (PAP) provides coverage for damage to the insured’s car as well as potential liability arising from the use of an auto. Here too, several exclusions apply to restrict the scope of the liability coverage.
Umbrella policies were developed to provide an additional level of liability protection, because of the increasing size of settlements and jury awards in lawsuits.
The Commercial Property Policy (CPP) provides property insurance for commercial buildings and business property. The form for building and personal property coverage identifies the building(s) covered as those listed on the declarations page. In addition to covering the building, the CPP covers the insured’s business property. The third category of covered property is personal property not owned by the business but in its care, custody, or control.
Ocean marine insurance, one of the earliest forms of insurance, is as essential to international commerce today as it was centuries ago. Inland marine insurance, essentially an American distinction, is one of the lesser-understood types of insurance.
To ensure that you have an understanding of property and casualty insurance, the following lessons will be covered in this module:
* Personal Property Insurance
* Personal Auto Insurance
* Umbrella Liability Insurance
* Commercial Property Insurance
Section 1 - Personal Property Insurance
People purchase homeowners insurance (HO) to protect some of their most substantial assets: their home and its contents. The Insurance Services Office (ISO) Homeowners Policy incorporates property insurance, comprehensive personal liability insurance, additional living expense coverage, replacement-cost coverage, and medical expense coverage for others in one convenient package.
To ensure that you have an understanding of personal property insurance, the following topics will be covered in this lesson:
* Basic Property and Liability Contract Provisions
* Property Coverage
* Exclusions
* Conditions
After completing this lesson, you should be able to:
* Explain the basic provisions of property and liability policies,
* Detail the coverage for various types of property,
* List the exclusions for loss settlement, and
* Outline the conditions for settlement of covered property losses.
List the ISO Forms and their Coverages
- HO-2 Broad Dwelling and structures: Named peril; Contents coverage up to 50% of dwelling coverage.
- HO-3 Special Losses are covered unless specifically excluded. Dwelling and structures: Open peril; Contents coverage up to 50% of dwelling coverage.
- HO-4 Contents Broad Covers contents and personal liability of renters. No coverage on dwelling and other structures.
- HO-5 Comprehensive Losses are covered unless specifically excluded. Open perils coverage on dwelling, structures, and contents.
- HO-6 Unit Owners Property interest, contents, and personal liability of people owning a unit in a condominium or co-op.
- HO-8 Modified Homes having a replacement cost greater than FMV. Typically, historic homes.
Exam Tip: Work toward memorizing the type of residence that is covered by each homeowners form and the extent of the included coverage. For example, single-family, residential homes are covered by HO-2, HO-3, and HO-5 forms. The higher the number of these forms, the greater the extent of the coverage.
Audio:
6 types of homeowner’s or residential types of insurance
* HO-2, HO-3, and HO-5 forms - covers traditional single-family, residential homes
* HO-3 - open perils coverage for the dwelling, but** broad form coverage for contents**
* HO-5 - open perils coverage for the dwelling and the contents
* HO-4 - for renter’s personal belongings; the contents and some liability coverage
* HO-6 - for condominium owners, wall studs in, contents and liability
* HO-8 - historic homes (150yo home), replacement value would be so high that no insurer would be comfortable insuring it on a replacement basis
Describe Sections One and Two of HO insurance
Section One (Property) of the HO consists of the following parts:
* Coverage A: Dwelling
* Coverage B: Other Structures (typically limited to 10% of Coverage A)
* Coverage C: Personal Property (typically limited to 50% of Coverage A)
* Coverage D: Loss of Use (typically limited to 20% of Coverage A)
Section Two (Liability) of the HO consists of the following parts:
* Coverage E: Personal Liability
* Coverage F: Medical Payments to others
* Homeowner Insurance
Exam Tip: Homeowners insurance policies are split into two major sections, Section 1, which provides insurance protection on the homeowners property, and Section 2, which provides liability coverage. Listen in for important exam-related information on the separate coverages within each Section.
Audio:
* Important to know which section coverages what
* A - for “address” - dwelling itself
* B - for the barn out back, “backyard”, shed, fence (10% of A)
* C - “contents - clothing, couch, curtains” personal property (50% of A)
* D - “displacement”, fire in the home and uninhabitable while being (20% of A) replaced/repairs
* Notice for B, C and D - all have maximum limits that pertain to Coverage A Dwelling.
* Section 2
* E - personal liability “exposure to legal damages”
* F - “funding for medical fees for others that might have been hurt on property”
Describe Dwelling Insurance
Dwelling comes under Coverage A of Section 1 that provides property insurance protection. Coverage A insures the dwelling and all attached structures (such as an attached carport or deck) of the insured person.
Coverage A applies to the insured’s residence premises shown on the declarations. A second home or summer cottage, which might be considered a temporary residence, is not covered because it does not appear in the declarations and should be covered under a policy specific to that property.
Practitioner Advice: The rule of property insurance is that if you can get insurance for the property on its own, it isn’t going to be covered under another property’s policy. What this means is, if you own a rental property, which is separate from your primary residence, it is not covered under your homeowner’s policy. This is because specific policies exist for non-owner occupied dwellings (Dwelling Fire Policies), which are more suitable for covering that type of risk. The same goes for your car. Since it should be insured under an auto policy, it is not covered under your homeowner’s policy even if destroyed while in your garage.
The limits of coverage for the various insuring agreements found in Section 1 are determined as a percentage of Coverage A. If an insured needs additional protection, coverages B, C, or D may be increased. Coverage may not be reduced below the specified percentages. The insured must pay an additional charge for increased coverage.
Describe Special Limits of Liability
The special limits of liability section of an insurance policy establishes the maximum dollar amounts that an insured can recover when the specifically identified property is damaged or stolen.
In addition, some types of property, such as jewelry (limited to $1500 on homeowners), can be covered on a Scheduled Personal Property Endorsement. Its purpose is to provide open-perils coverage for specific items at higher amounts of coverage. For example, boats and their trailers are only protected up to $1500, so boats of higher value need to be insured separately. Silverware and gun collections are each limited to $2500, and the coverage is only for theft, not for loss.
Practitioner Advice: Valuable possessions like jewelry, fur, etc. that are worth more than the policy limit should be listed on a separate Scheduled Personal Property Endorsement. Other personal items such as cameras, musical instruments, fine arts and antiques, and stamp and coin collections can be covered as well, with the exception of fishing and hunting equipment. With a Scheduled Personal Property Endorsement not only can the amount of coverage be increased, but also the items are covered if they are misplaced or if the diamond falls out of a ring and is lost. There is an additional premium for this protection, and it typically requires having the items professionally appraised.
Describe Personal Liability under HO Insurance
Personal Liability comes under Coverage E of Section 2 and covers the obligations of the insured due to their negligence. The policy will pay up to the stated policy limits for legal obligations of the insured due to bodily injury or property damage.
In addition, the insurer will pay for the legal defense costs, as long as it is a type of liability covered under the homeowner’s policy.
As with all insurance policies, there are some exclusions listed in the policy. For example, professional liability and motor vehicle liability are both excluded and should be insured elsewhere, e.g. through Malpractice insurance and Auto insurance. Aircraft liability and use of watercraft powered with inboard or inboard-outdrive motors are not covered.
The standard coverage limit is $100,000, most agents recommend carrying at least $500,000.
Exam Tip: Section 2, Coverage E of a homeowners policy provides the residents of a covered abode with a minimum of $100,000 of personal liability coverage. Since one may be personally liable for large amounts as a result of litigation, this coverage serves as a baseline for protection. Listen in to find out how this coverage may coordinate with other liability insurance.
Audio:
* Coverage E of a homeowner’s policy does not pertain to damage to the household, dwelling or personal property
* It is personal liability insurance
* Would help pay expense for someone seeking damages for an injury while a guest at your home. If they file a lawsuit and seek significant damages. If awarded, personal liability section can pay up to the policy limit.
* Not uncommon to see minimum of $100k to several hundred thousand.
* Would be wise to place a personal liability umbrella on top of the HO policy
Practitioner Advice: Most people who own homes are required to carry Homeowners insurance because they have a mortgage. Renters and Condominium owners often don’t bother with insurance, thinking they don’t have much in valuable furnishings. They are unconsciously retaining the liability risks of someone getting hurt in their apartment. The Renters Coverage (HO-4), or Condominium Owners (HO-6) is one of the least expensive types of insurance, costing less than $200 a year in Massachusetts.
Mini Bite: Homeowners Insurance Coinsurance Clause
What is the formula for and describe Coinsurance clause?
https://www.youtube.com/watch?v=3XC6OHI7oMk
In this 5-minute video, Mike explains a key aspect of homeowner’s insurance, the coinsurance clause. Understanding the coinsurance clause enables the planner to assist clients with decisions regarding adequate levels of homeowner’s insurance dwelling coverage.
Coinsurance clause – dwelling coverage be maintained at a certain minimum percentage of the home’s replacement cost in order for a partial loss on the dwelling to be covered in full
Coinsurance application = ( Insurance Limit / Required % x Replacement Cost ) x Loss - Deductible
- Insurance Limit / Required % x Replacement Cost = ( DID HAVE / SHOULD HAVE)
- Health insurance: deductible comes off the top.
- In HO policy, deductible comes out the back end.
- What advice would you give client?
- At a minimum, recommend client to carry 80% of $500k
- Insurance is never going to pay more than the policy limit
- So best advice is to maintain coverage limit of the full replacement value.
- That way in the event of a total loss, it would have $500k of coverage. If only had $400k required coinsurance application, wouldn’t have full coverage.
Describe Conditions associated with replacing loss
The settlement of covered property losses is detailed below.
Loss of the following types of property is settled at actual cash value at the time of loss but not more than the amount required to repair or replace it based on the depreciated value at the time of loss:
* Personal property
* Awning, carpeting, household appliances, outdoor antennas and outdoor equipment, whether or not attached to buildings
* Structures that are not buildings
Practitioner Advice: For an additional cost, usually about 25% of the base premium, an insured may choose to purchase Replacement Cost coverage on their personal property. If this coverage is in place, any items will be replaced at current fair market replacement value rather than depreciated value should a covered loss occur.
Section 1 - Personal Property Insurance Summary
The ISO HO series provides a combination of fire, personal liability, and additional living expense protection.
In this lesson, we have covered the following:
* Basic Property and Liability Contract Provisions: Insurance companies use standardized contracts with common clauses.
* Homeowners Insurance: Three levels of coverage on a named-peril basis or an open-peril basis. The types of coverage are basic or standard, broad form, or special coverage.
* Property Coverage: Insures an owner’s interest in a home and its contents. It consists of the following coverages:
* Coverage A: Dwelling
* Coverage B: Other Structures
* Coverage C: Personal Property
* Coverage D: Loss of Use
* Coverage E: Personal Liability
* Coverage F: Medical Payments to others
Exclusions: The Insurance Services Office excludes insurance for loss caused by any of the following:
* Ordinance or Law
* Earth Movement
* Water Damage
* Power Failure
* Neglect
* War
* Nuclear Hazard
* Intentional Loss
Conditions: The loss settlement provision determines the amount of proceeds an insured will receive in the event of a covered loss.
* Buildings under Coverage A or B are settled at replacement cost without deduction for depreciation if the insurance is 80% or MORE of the full replacement cost of the building at the time of loss.
* Buildings under Coverage A or B are settled at actual cash value of the damaged property up to the policy’s liability limit, if the amount of the insurance is LESS than 80% of the full replacement cost of the building prior to the loss.
Which of the following are covered by homeowners property insurance?
I. The insured’s home
II. A garage that is not attached to the insured’s home
III. The insured’s summer cottage
IV. Furniture in the insured’s home
* I, II, and IV
* I only
* I and III
* I and II
I, II, and IV
* Coverage A insures the home of the insured person. Coverage B applies to a garage that is not attached to the insured’s home, while furniture in the insured’s home comes under coverage C.
* The insured’s summer cottage is not covered since it does not specify that it was included in the policy declarations. Had the cottage been included, it would have also been covered.
Match the peril with the correct description.
War
Ordinance
Earth Movement
Intentional Loss
* Any act committed at the direction of the insured
* Destruction, seizure or use for a military purpose
* Tremors before, during or after a volcanic eruption
* Enforcement of any law regulating the construction of a building
- War - Destruction, seizure or use for a military purpose
- Ordinance - Enforcement of any law regulating the construction of a building
- Earth Movement - Tremors before, during or after a volcanic eruption
- Intentional Loss - Any act committed at the direction of the insured
Household appliances, outdoor antennas and outdoor equipment are settled at actual cash value at the time of loss.
* False
* True
True
* Household appliances, outdoor antennas, and outdoor equipment are settled at actual cash value at the time of loss.
* However, this amount is restricted to that required to repair or replace this type of property at depreciated value.
Which type of policy may provide more compensation to a single victim of the insured?
* Single limit policy
* Split limit policy
Single limit policy
* The single limit policy may provide more compensation to a single victim than a split limit policy.
Section 2 - Personal Automobile Policy
Assume that Rita Jones’ auto is struck broadside by another auto driven by Rex Smith. Rita’s arm is broken (damage equals $90,000 in medical expenses and $15,000 in lost income); and her car is totaled, with damages equaling $25,000. Rex’s auto is damaged ($15,000 to the front end), and his skull is fractured. In addition, Rex expects to lose $15,000 of income he would have earned as a marriage counselor.
In the example above, the following questions are raised:
* What if the auto Rita was driving was not her own? What if it belonged to her son, neighbor, employer, an auto rental company, or a car dealership?
* What if Rita was on an errand for her employer when the accident happened?
* What if Rex had no valid insurance? What if Rex was taking people on a tour of the city and had charged a fee or if he was delivering pizzas at his part-time job?
These are a few issues dealt with in the Personal Automobile Policy (PAP).
To ensure that you have an understanding of personal auto insurance, the following topics will be covered in this lesson:
* Introduction to PAP
* Liability
* Uninsured Motorist Coverage
After completing this lesson, you should be able to:
* Describe limit of liability and its two types
* Recall four categories of insureds
* Describe part A and B of liability coverage exclusions, and
* Differentiate between uninsured and underinsured motorist insurance.
Practitioner Advice:
Describe PAP Coverage requirements
Practitioner Advice:
The insured does not have to purchase either coverage. However, if they have a car loan the lender will require both coverages within certain deductible limits until the loan is paid. This protects the collateral for the loan, which is the vehicle itself.
Lists the four categories of insureds PAP provides coverage for
The PAP provides coverage for four categories of insureds that have potential liability arising from the use of an auto.
Category 1: The named insured and resident family members are covered for the ownership, maintenance, or use of any auto, whether it is owned or borrowed, unless an exclusion applies.
Practitioner Advice: In some states, such as Massachusetts, all licensed family members living in the same home as the insured must be identified and listed on the policy, whether or not they have their own policy. If a loss occurs due to a licensed family member’s driving and the family member was not listed on the policy and does not have their own policy, the claim will be denied. This is to combat fraud, where a risky family member is unknown to the insurer, thus the premiums charged are less than what should have been assessed for the risk. Of course, if the household member is covered by another policy, merely listing them as a licensed household driver will not impact the insured’s premiums. It is only when such a household driver does not have other coverage that their driving record will impact the insured’s premiums.
Category 2: Covers any person using the named insured’s covered auto. That is, the car owner’s insurance, not the driver’s insurance, would pay a claim if the owner let somebody borrow his or her auto.
Categories 3 and 4: In some situations, people or organizations other than a driver can be sued due to a driver’s negligence. In some of these instances, the PAP will cover the liability of these people. For example, assume that the Alpha Beta Gamma Omega fraternity sends a brother, Bozo, to get some refreshments for a “party.” Assume that Bozo uses his own auto. If an accident results during the shopping trip, the PAP would cover the fraternity’s liability in this suit. The fraternity’s liability arises because Bozo was technically an agent of the fraternity while on this mission. The difference between Categories 3 and 4 is between the insured driving an owned or a nonowned vehicle.
Which of the following can be referred to as an ‘uninsured motorist’?
I. Drivers with coverage provided by insolvent insurers.
II. Hit-and-run drivers.
III. Drivers with less insurance than the minimum required by state law.
IV. Drivers without insurance.
* I and II
* I, III, and IV
* I, II, III, and IV
* IV only
I, II, III, and IV
* Each of these driver categories can be considered uninsured motorists.
Describe Auto Collision vs. Comprehensive
Collision means collision (violent striking) of an automobile with another object (a car, a tree, or even standing water). The word “object” is quite broad and includes almost anything that can be seen or felt. However, the collision must occur while the car is being operated.
Losses clearly not caused by collision include theft, vandalism, fire and windstorm. For example, an unoccupied car sitting in a driveway that has a tree fall on top of it is not involved in a collision.
As might be expected, gray areas exist. Automobile policies providing collision and non-collision coverage deal with these questions by including wording such as the following: “For the purpose of this coverage breakage of glass and loss caused by missile, falling objects, fire, theft or larceny, explosion, earthquake, windstorm, hail, water, flood, malicious mischief or vandalism, riot or civil commotion, or colliding with a bird or animal shall not be deemed to be loss caused by collision.”
It makes a difference if a loss is a collision or not. Frequently, different loss settlement provisions, such as the dollar amount deducted from the loss before the insurer must pay, make this distinction important. The distinction would also be important if one or the other but not both of the coverages were purchased.
Exam Tip: As far as Personal Automobile Policy Collision and Comprehensive coverages are concerned, on the CFP exam “know the difference, score the points!”
Practitioner Advice: While discussing the difference between collision and non-collision (comprehensive) coverage, a popular personal auto policy subject comes to mind. “Do I really need to purchase insurance when I rent a car?” The answer depends on the definition in your auto policy. For example, most auto policies extend collision coverage to a rental car. The reasoning is you can only be driving one car at a time, so while driving the rental, they aren’t covering your car against collision.
However, as for comprehensive coverage (theft or damage caused by everything but a collision), the rental car may only be covered if the insured’s vehicle is parked at the normal place of garaging. To the insurer, leaving your car at the airport parking lot while on you are on vacation creates an unfair situation. The insurer is still protecting your car from a comprehensive loss when you also seek the same coverage on the rental. The insurer doesn’t want to be covering two cars for the price of one at the same time. So, when deciding whether or not to purchase coverage for a rental car, know your policy’s definitions.
Audio:
Understand the difference between auto collision and comprehensive
Collision - when our automobile strikes another object (car, tree, light pole, typically inanimate)
Comprehensive - theft, fire, striking an animal
