Unit 3: Basics of Property & Casualty Insurance Flashcards
What is property insurance? What are first party losses?
Property insurance policies protect the insured from loss caused by damage from a covered peril to insured property. Property insurance pays the insured for covered losses to the property (buildings and personal belongings). These are referred to as first party losses. Insured property can be buildings (called real property), such as a house, or personal property (stuff), such as a television.
• Covers “my stuff”
• “My stuff* = buildings (real property) and personal belongings
What is casualty insurance and third party losses?
Casualty policies, often called liability insurance, protect an individual or business when it is found legally liable for negligent acts or omissions that cause injury or property damage to others. Casualty insurance never pays the insured; it pays the “other guy”” These are referred to as third party losses.
Ex. if a person is injured at your house due to your negligence, your casualty policy will pay for the expense of their injury. If you, the insured, were also injured due to your negligence, your casualty policy would not pay for your injury.
Casualty Insurance
The
“other guy”
Casualty Insurance
• Casualty = Liability
• Always pays the other guy, never
• Third party losses
• First party–me (insured)
•Second party–my insurer
• ‘Third party-other guy
What the parts of a policy? What is D.I.C.E.E. ?
•Declarations
• Insuring agreements
• Conditions
• Endorsements and additional supplementary coverages
• Exclusions
Explain DICEE
Information relative to who, what, when, and where is found on the first page of the policy-the
Declaration section.
The name of the insured(s), a current address, a legal description of the insured property, the policy deductibles, and the term of the coverage are contained in this section. This information is used to help determine the premium cost of the policy.
‘The insuring agreement describes the covered perils or risks assumed by the insurer and makes reference to the contractual agreement between the insurer and insured. I the policy provides hability coverage, the promise to defend the insured, if sued, is found here. It summarizes the major promises of
the insurance company. as wellas states whatis covered
‘The conditions section states the policy provisions, rules of conduct, duties, and obligations required for coverage. Examples of conditions could include that the insured must file a claim and notify the police if the loss is crime-related, and that the insurer has the right to inspect the property being insured. If the insured does not adhere to the conditions of the policy, the insurer may deny coverage or a claim.
Endorsements add, modify, or take away coverage. An endorsement is attached to the policy and is part of the legal contract.
Exclusions take coverage away from the insuring agreement by describing property, perils, hazards, or losses arising from specific causes which are not covered by the policy. For example, flood damage may be an exclusion in a policy.
Policy Sections (DICEE)
• Declarations–who, what, when, where, and how much
• Insuring agreements)-promise to pay and perils covered (the heart)
• Conditions–rules for the policy
• Endorsements–changes to the original policy
• Exclusions- items not covered
What is additional/supplementary coverage?
‘The definitions section clarifies the meanings of certain terms used in the policy. Definitions common to the entire policy are found in this section. Insurance contracts are legal documents, so there must be an attempt made to clearly define terms used in the contract.
Additional/supplementary coverage provides payment for certain additional expenses. Depending on the policy, this coverage may have separate limits of insurance and may be paid in addition to the maximum limit of liability. The cost to pay attorney fees for the insured if the insured is sued by another party, the cost of making temporary repairs to a damaged building, bail and appeal bonds, and other court-related costs are examples of additional/supplementary coverage.
Additional/Supplementary Coverage
• Payment for additional expenses
not normals covered
• May have separate limit of insurance.
What does insured mean?
• ‘The named insured is the person, business, or other entity named in the declarations to which the policy is issued.
• ‘The first-named insuredis the person listed first on the declarations page when there is more than one named insured. The policy may assign a higher level of duties or rights to the first-named insured. (This is used in commercial insurance when there are multiple partners in a
• In addition to the named insured, the policy may cover other persons, businesses, or entities as insureds, such as the named insured’s resident relatives. These insureds are not listed by name but are insureds by definition.
• In some circumstances, another individual or business may be listed as an additional insured
This is usually done by endorsement.
Insureds
• Named insured–listed on the declarations
• First-named insured- first on the declarations(decision maker)
• Insureds–by delination
• Additional insured added by endorsement
What is policy period (how long) and policy territory(where)?
‘The policy period is the duration of the policy. It is the date and time, including where and in what time zone, coverage begins and ends. Six months, one year, or even three years are common policy periods. The policy territory provisions state that a loss will not be covered unless it occurs within the policy territory. The territory may vary, but typically includes the United States, Canada, Puerto Rico, and other U.S. territories and possessions. Most insurance policies do not extend coverage into Mexico.
Policy Period and Territory
•Policy period–when the policy begins and ends
•Policy territory–where a loss must occur
Explain cancellation of a policy
Insurance policies have a beginning date and an ending date, also known as an inception date and an expiration date. An insurance policy can be stopped by the insured before the expiration date, which known as cancellation. The named insured can cancel the policy at any time by notifying the insurer. The insurer can not cancel at anytime
For example, Joe discovers that he can save $150 a year by switching to a different insurance company for his car insurance. He notifies his insurer and cancels his policy in order to save the money. This is a
pertect example of how insurance policies are unilateral contracts: the insured can cancel at any time
but the insurer cannot. This protects the insured
it is common that a policy is extended at the end of it term or policy period unless cancelled by insured who no longer pays the premiums
Explain unearned premium
If the insured had paid premiums in advance for future months, any unused premium- unearned premium must be returned to the insured upon cancellation of a policy.(refund)
Premiums paid in advance
Explain prorated basis
(Portion of premium back if insurer cancels before expiration)
In a case where the insurer cancels the insured’s policy, the entire unearned premium is returned on a prorated basis. A prorated basis means that the insured will receive a portion of the premium back, depending on when the policy is canceled.
Insurer must notify the insured if cancellation (full refund)
Vice versa (half refund)
Explain short rated basis
(Think penalty for early cancellation )
When an insured cancels a policy before the expiration date, the insurer is entitled to retain a larger percentage of the unearned premium. There is a surcharge or a penalty for early cancellation, and it is applied on a short-rated basis
Explain flat cancellation
(Think times up-cancelled on effective date)
When a policy is canceled on the effective date, by either the insurer or insured, it’s called a flat
cancelation
Explain renewal process
It is common that a policy is extended at the end of its term or policy period. However. the insurer may choose to not renew a policy for another term or the insured may choose to end their coverage and not pay the premium. The nonrenewal process has mandated state rules that must be followed.
Explain Cancellation and Nonrenewal
Cancellation and Nonrenewal
• Cancellation occurs before the policy’s expiration date
• Insurer cancellation requires
advance notice
• Full refund of unearned premium–pro rata
• Insured cancellation–no
aavance nonce
• Partial refund of unearned premium- Short rate
• Nonrenewal- occurs at the
Insurer must ave savance
MOUCe
• No advance notice required by the insured
What is a deductible?
The deductible is the amount that must be paid out of pocket by the policy owner before an insurer pays any expenses. The purpose of a deductible is to prevent small insurance claims and overuse of insurance claims. Deductibles are normally provided as clauses in an insurance policy that dictate how much of an insurance-covered expense is paid by the policyholder. Insurance premiums are typically cheaper when they involve higher deductibles.
Deductible
• Amount of the loss paid by the insured
•The higher the deductible, the lower the premium
Provide an example of a deductible
Suppose Li has insurance protection for her home. Her policy has a $500 deductible. One night, a windstorm tears off part of the roof, causing $750 in damage. Li will submit the claim to her insurance company since the claim is greater than the deductible. The insurance company will pay Li $250 [$750 (claim amount) - $500 (deductible)]. On the other hand, let us suppose the roof damage was only $200. Since Li’s deductible is $500, she will not turn this small claim in to her insurance company since
her deductible is more than her loss. Deductibles prevent insureds from making small or unnecessary claims. Li would simply for the damages out of her own pocket.
Explain the concept of indemnity and other insurance.
‘The concept of indemnity with insurance is to restore the insured to their original pre-loss condition no better and no worse. The insurance payment should not make a profit for the policyowner. There could be a situation where more than one of multiple policies covers the same loss or claim. The other
insurance condition dennes how reimbursement will occur when this happens and is also called other
sources or recovery or insurance under two or more coverages
Other Insurance
•More than one policy covers same loss or claim
• No more, no less!
What is nonconcurrency?
Nonconcurrency is the result of two or more policies covering the same property but providing different or non-identical coverage. This situation is not ideal because it can cause gaps or disputed payments.
Nonconcurrency is most commonly seen in commercial insurance policies.
Non-identical
What is primary insurance and excess coverage?
More than one policy can cover the same property. Primary insurance attaches immediately upon the occurrence or loss. Excess coverage, by definition, pays whatever is not paid by the primary policy up to the amount of the loss or excess coverage limit, whichever is less.
Ex. Company X has the insured property covered up to $10,000 and Company Y also has it covered for up to $10,000. Company X is the primary insurer and Company Y is the excess insurer. Assuming a $15,000 loss, Company X pays $10,000 and Company Y pays $5,000 for the loss.
Think first and back up insurance
Excess pays what is not covered by primary
Explain pro rata
Pro rata is one method of preventing overpayment of a claim. In using this method, each company will pay part of the loss according to the percentage of the total amount of insurance the policy provides.
To calculate pro rata responsibility, determine the percentage each policy contributes to the total amount of insurance.
Ex. if you have two homeowners policies totaling $400,000-one for $100,000 and one for $300,000-the first policy will cover 25% of an actual paid loss and the second policy will cover 75%
Here is the formula for calculating the pro rata method:
policy limit of one company divide by(/)
policy limit of all companies x loss
Company A (or B) limit /Both Companies Limit x Loss
Pro Rata Calculation Example
Policy A coverage limit = $100,000
Policy B coverage limit = $300,000
Claim/loss amount = $50,000
Total amount of insurance coverage from A and B = $400,000
Policy A calculation:
$100,000 / $400,000= .25 (or 25%)
.25 (25 %) × $50,000 loss = $12,500 (Policy A responsibility)
Policy B calculation:
$300,000/$400,00 =.75 (or 75%)
.75 (75%) × $50,000 loss = $37,500 (Policy B responsibility)
Insured claim payment: $12,500 (A) + $37,500 (B) = $50,000