Property Insurance Basics

Question 1

There are two types of insurable property:

Answer 1

-real property, which includes land and the buildings and other items (e.g., trees, shrubs and patios) attached to it.

-personal property, which is any tangible item other than real property.

Question 2

When discussing homeowners insurance, insurance practitioners commonly use the terms:

Answer 2

“Building” and “contents” to distinguish between real and personal property.

Question 3

While personal property certainly includes an insured building’s contents (including appliances), it includes

Answer 3

-Items that can be transported in and out of the building as well as unattached items on the land.

-Jewelry worn by the insured outside the home, cameras brought on vacations, and outdoor patio furniture are examples of insurable personal property not contained in a building.

Question 4

Key point:
Personal Property

Answer 4

-Not all personal property can be covered under a homeowners policy.

-For example, while automobiles are personal property, they are insurable only through an auto policy.

Question 5

From an insurance perspective, real property is:

Answer 5

-All about the building and how it is constructed.

-“Building” includes all attached components, such as doors, windows, sinks, toilets, etc.

-How the building is constructed is the biggest factor in determining its insurable value and fire risk.

Question 6

There are four basic types of building construction:

Answer 6

-frame

-masonry veneer

-masonry

-superior (noncombustible or fire-resistive)

Question 7

A home with frame construction is one with interior and exterior walls of combustible material, including:

Answer 7

-wood.

-stucco or plaster on wood.

-aluminum or plastic siding.

Question 8

Frame construction is common with houses

Answer 8

Because it is all combustible material, it has the greatest risk of fire.

Question 9

Masonry Veneer Construction:

Answer 9

-Which has a combustible frame and interior walls but an outside veneer (layer) of brick or stone.

-Is cosmetic and does not support the building (though it does add some fire protection).

-Both frame and masonry veneer buildings are normally framed with wood studs and joists.

-Both frame and masonry veneer buildings are normally framed with wood studs and joists.

Question 10

Masonry Construction:

Answer 10

-The walls support the house and are constructed of masonry materials, including adobe, brick, concrete, gypsum block, hollow concrete block, stone, tile, or similar noncombustible materials.

• (Floors and roof are generally made of combustible material.)

-Masonry construction is also referred to as solid masonry, solid brick, or double brick construction.

Question 11

Key point:
Masonry Construction

Answer 11

-Due to its greatest vulnerability to fire, frame construction is charged a higher fire insurance premium than a masonry veneer or solid masonry building.

-While masonry veneer does offer some fire protection, its combustible interior walls still make it a higher fire risk than solid masonry, reflected in a premium that is less than frame but higher than solid masonry.

-On the other hand, a solid masonry home is more susceptible to earth movement damage than a frame or masonry veneer building (which can “flex”) and may suffer greater damage during an earthquake.

-For this reason, solid masonry buildings may have a higher premium for earthquake coverage than a frame building.

Question 12

Superior Construction:

Answer 12

-Is the most durable (and fire-resistant) of all construction types.

-There are three types.

-Most structures with superior construction are commercial buildings.

-Very few homes use this type of construction.

Question 13

Noncombustible Superior Construction:

Answer 13

-The exterior walls, floors, and roof are constructed of, and supported by, metal, cement, or other noncombustible materials.

Question 14

Masonry Noncombustible Superior Construction:

Answer 14

The exterior walls are constructed of masonry materials, and the floors and roof are constructed of metal or other noncombustible products.

Question 15

Fire Resistive Superior Construction:

Answer 15

The exterior walls, floors, and roof are constructed of other fire-resistive materials, such as steel.

Question 16

A loss to real property or personal property can be either:

Answer 16

-Direct or indirect.

Question 17

A loss to real property or personal property can be either:

Answer 17

-Direct.

-Indirect.

Question 18

Direct Loss:

Answer 18

-A loss to the insured property.

-If a home is severely damaged by fire, the damage to the building and its contents is a direct loss that can be measured in terms of the amount it will cost to repair the building and replace the damaged contents.

Question 19

Indirect Loss:

Answer 19

-Refers to losses that are related to a direct loss.

-For example, when a home has been damaged, the homeowner may incur additional living expenses to stay somewhere else until the home has been repaired.

-These additional living expenses are an indirect loss related to the direct loss of the home.

-Businesses suffer indirect losses when they lose income because they cannot operate after damage to their property and when they have to rent temporary facilities.

Question 20

Indirect Loss:

Answer 20

-Refers to losses that are related to a direct loss. For example, when a home has been damaged, the homeowner may incur additional living expenses to stay somewhere else until the home has been repaired.

-These additional living expenses are an indirect loss related to the direct loss of the home.

-Businesses suffer indirect losses when they lose income because they cannot operate after damage to their property and when they have to rent temporary facilities.

Consequential loss: which refers to losses related to equipment failure, such as food that spoils because a refrigeration system is out of operation.

Question 21

When a circuit breaker fire forced a grocery store to shut down its electricity for three days, the food in its freezer section perished. This is an example of a(n):

Answer 21

-Losses related to equipment failure, such as food that spoils because a refrigeration system is out of operation, is a consequential loss.

-The fire-damaged circuit breaker is a direct loss, and any loss of revenue while the store is closed is an indirect loss.

Question 22

Insurable Interest:

Answer 22

-Policyholders must always have an insurable interest (i.e., financial interest) in the property they insure.

-If the insured property is sold or given to a new owner, the original owner loses the insurable interest in that property and can no longer own a policy covering it.

Question 23

Ex:
Insurable interest

Answer 23

-With property and casualty insurance, an insurable interest must exist at the time of the loss.

-Julie sold her home but did not cancel her insurance policy on that house.

-If the house later burns to the ground, Julie cannot collect under that insurance policy because she will not have suffered a financial loss from the destruction of the house.

-She no longer has an insurable interest in the house because she no longer owns it.

Question 24

Secondary Insurable Interest:

Answer 24

-Besides the property owner, other parties may have an insurable interest in property.

-A bank or other mortgage holder will insist on being named in a homeowners insurance policy.

-Likewise, car loan finance companies may insist on being listed as a lien holder on an auto insurance policy.

Question 25

Loss Valuation:

Answer 25

-To be insurable, an item’s insurable value must be measurable.

-Thus, every property insurance policy includes a valuation provision that states how the value of covered property will be determined.

Question 26

Commonly used valuation methods are:

Answer 26

-replacement cost

-functional replacement cost

-actual cash value (ACV)

-market value

-stated amount

-agreed value

Question 27

Key point:
Loss Vauation

Answer 27

-Insurance policies may be either indemnity contract or valued contract.

-Most property insurance policies are indemnity contracts that reimburse a percentage of the loss.

-Most valuation methods are geared toward indemnity contracts.

-The notable exception are policies that use the agreed value method.

-Used in determining the insurable value of works of art, jewelry, etc., these policies are valued contracts that pay the listed amount.

Question 28

Replacement Cost:

Answer 28

-Commonly used in valuing houses and commercial buildings.

-Benefits on the cost to replace the damaged or destroyed property.

-If it would cost $400,000 today to build another house just like Bob’s house, then the current replacement cost of Bob’s house is $400,000

Question 29

Functional Replacement Cost:

Answer 29

-Used with older buildings that have components no longer found in modern buildings.

-Is the amount it would cost to repair or replace a damaged building with common (and less costly) construction materials and methods that are functionally equivalent to the obsolete, antique, or custom construction materials and methods originally used.

-For example, Mary’s old Victorian home has plaster walls, but if a kitchen wall were damaged it could be replaced with wallboard.

• The wall’s functional replacement cost reflects the cost of wallboard, not the cost of a plaster wall.

Question 30

Actual Cash Value:

Answer 30

-Generally defined as replacement cost minus physical depreciation.

-It is commonly used in valuing household contents and other personal property.

-A household object that cost $1,000 ten years ago has depreciated in value and may have an actual cash value of $400 today.

Question 31

Broad Evidence Rule:

Answer 31

-Is a rule of valuation that deviates from the principle that the traditional measure of actual cash value (ACV) (replacement cost less depreciation) is the sole measure of value at the time of loss.

-The insurance company, appraiser, or adjuster examines every standard of value bearing on the property under consideration, such as the age of the property, the profit likely to accrue on the property, and the property’s tax value.

• This establishes the value at which, in the event of a total loss, the insurance will completely indemnify the insured.

Question 32

Market Value:

Answer 32

-Is used in establishing the value of cars and other personal property.

-It is not used to establish the insurable value of real property such as a house or business structure.

-A building’s market value includes the value of the land, the location, and other factors that have no direct bearing on the building’s replacement cost or its actual cash value.

Question 33

Stated Amount:

Answer 33

-The insured items and their values are listed in a schedule that is made part of the policy.

Question 34

Stated Amount:

Answer 34

-the insured items and their values are listed in a schedule that is made part of the policy.

-With this approach, the insurer agrees to pay the lowest of the following three amounts if the covered property is damaged or stolen.

Question 35

Stated Amount following three amounts if the covered property is damaged or stolen:

Answer 35

-The property’s actual cash value at the time of the loss.

-The cost to repair or replace the property with similar property.

-The dollar amount of insurance specified in the policy schedule.

Question 36

When an insurance policy uses the stated amount valuation method, there are three amounts if the covered property is damaged or stolen:

Answer 36

-The property’s actual cash value at the time of the loss.

-The cost to repair or replace the property with similar property.

-The dollar amount of insurance specified in the policy schedule.

Question 37

Agreed Value:

Answer 37

-Typically cover paintings, sculptures, antiques, and one-of-a-kind items for which it is difficult to determine a value.

-The insurer and the applicant agree on the value of the item when the policy is written.

-The insured items and their agreed values are listed in a schedule.

-If the item is stolen or destroyed, the insurer pays the listed dollar amount.

Question 38

What is the difference between the stated amount and agreed value loss valuation methods?

Answer 38

-The difference lies in the benefit amount that is actually paid out if the insured object is destroyed or stolen.

-The stated amount method pays the lesser of the listed dollar amount or the object’s cash or replacement value, while the agreed value method pays the dollar amount listed in the policy without regard for the object’s depreciated or replacement value.

Question 39

Key point:
Stated Amount

Answer 39

-The difference between the stated amount and agreed value methods lies in the benefit amount that is actually paid out if the insured object is destroyed or stolen.

-The stated amount method pays the lesser of the listed dollar amount or the object’s cash or replacement value.

-The agreed value method pays the dollar amount listed in the policy without regard for the object’s depreciated or replacement value.

Question 40

Key point:
Stated Amount

Answer 40

-The difference between the stated amount and agreed value methods lies in the benefit amount that is actually paid out if the insured object is destroyed or stolen.

-The stated amount method pays the lesser of the listed dollar amount or the object’s cash or replacement value.

-The agreed value method pays the dollar amount listed in the policy without regard for the object’s depreciated or replacement value.