Unit 4 Basics of Property Insurance Flashcards
What are the two types of property?
Think-Real- Home or Office Building
Personal-Small things like tools and appliances
Property can be divided into two classes:
• Real property-permanent structures and buildings
• Personal property-furniture, appliances, clothing, tools, and other moveable property
Both individuals and businesses need coverage for their physical buildings and the contents within
those structres
Types of Property
•Real property-buildings
• Personal property–moveable contents
Identifying Specific (Scheduled) (think detailed-what’s exactly covered) or Blanket Coverage (think -no details-single limit )
The declarations page of a policy describes the named insured and the location of premises among other key pieces of information. Property coverage can be specific (scheduled) or all inclusive (blanket) insurance. Coverage for a diamond ring described with a jeweler’s written appraisal is an example of scheduled insurance.
Blanket coverage, on the other hand, does not require a detailed list of all the items to be covered by a policy. It’s a single limit of coverage that applies to all items of a certain property type. All the contents (personal property) in your house are covered with blanket coverage.
Covered Property
• Specific (scheduled)-detailed list of covered items
•Blanket–no detailed list
• Single limit of coverage
Policy Limits of coverage
The declarations page describes the policy limit, also known as the limit of coverage, limit of liability, or limit of insurance. These limits represent the maximum amount the insurance company will pay for a loss.
Limits of Insurance
• Maximum coverage limits
• Listed on declarations page
What are open perils(more expensive -everything unless specified exclusions) and named perils(less expensive-only named perils are covered) ?
A peril is the actual cause of a loss. The insuring agreements) of a property policy identifies the method used to cover damage from perils.
An open peril policy insures against all risks of direct physical loss except those specifically excluded in the policy. This type of contract is sometimes called all risk, special, or comprehensive coverage.
Named peril or specified peril coverage lists the perils or causes of loss insured against under the contract, such as lightning, fire, windstorm, hail, vandalism and other similar natural or man made losses. A named peril policy only covers those perils that are listed in the policy.
Named vs. Open (Special)
• Named peril-covers only perils listed
• Open (special) perils- all risks of direct physical loss unless specifically excluded
Covered Perils–Basic, Broad, and Special
Basic Perils(the least expensive)
• Fire
• Lightning
• Internal explosion
Broad Perils
• All of basic (fire, lightning, and internal explosion) plus extended perils (WCSHAVVER and V&MM)
• Plus BIG AFFECT:
• B- Burglary damage
• I- Ice, sleet, and snow (weight of)
• G-Glass breakage
• A-Accidental discharge of water
•F-Freezing water
• F-Falling objects
• E-Electrical current
• C- Collapse
• T- Tearing asunder
Special/Open Peril Coverage
•All risks of direct physical loss, except those specifically excluded
Common Exclusions
• Flooding
•Earthquake
• Intentional damage caused by an insured
• Losses due to enforcement of building codes
• Damage caused by a power interruption occurring off premises
• Government seizure
Explain Basic Perils( covered -internal explosion, fire , lightning)
The basic cause of loss form, introduced in 1986 by the Insurance Services Office (ISO), simplified the
“fire and extended coverage” that was previously offered as a coverage option. The Extended Coverage Endorsement (EC) was a common extension that added coverage for perils beyond fire, lightning, and internal explosion.
The following perils are included with the basic coverage option.
• Fire must be hostile: intentional loss (arson) is not covered
• Lightning natural electricity
• Internal explosion any explosion inside a covered location
What are Extended Coverage (EC) Perils? ((WCSHAVVER and V&MM)
These nine additional perils, known as the Extended Coverage (EC) perils, are included in most state policies:
•Wind exterior damage; damage to the interior is covered only if there is damage to the exterior first (i.e., the wind broke the window then caused damage inside)
•Civil commotion-damage caused by an assembly of individuals including striking employees (large in number)
Smoke- not from a friendly fire (fireplace)
•Hail a form of solid precipitation; hailstones are balls or lumps of ice
•Aircraft-loss caused by physical contact with part of or all of an aircraft
Vehicles damage caused by a vehicle contacting insured property
•Volcanic eruption damage from lava, ash, debris, and air shockwaves
•Explosion damage caused by an explosion away from the covered location
•Riot- damage caused by an assembly of individuals including striking employees (usually smaller in number than civil commotion)
•Vandalism and malicious mischief (V&MM) is damage caused by willful and malicious actions, and it usually involves a crime. V&MM can only be written with extended coverage.
Remember the acronyms WCSHAVVER and V&MM.
Extended Coverage (EC) Perils
• WCSHAVVER
•Vandalism and malicious mischief
(V&MMI
What is a broad peril? (Little more expensive-still a named peril policy) (WCSHAVVER and V&MM +BIGAFFECT)
Broad peril coverage is also a named peril coverage that lists what is covered. All of the basic form perils are included–fire, lightning, internal explosion, the extended coverage perils (WCSHAVVER), and vandalism and malicious mischief (V&MM)-plus the following additional perils. Be sure to remember the acronym of BIG AFFECT:
• B Burglary damage
• I- Ice, sleet, and snow (weight of)
• G–Glass breakage
• A-Accidental discharge of water- Accidental discharge of water or steam at the described location from within a plumbing, heating, air-conditioning, or automatic fire protective sprinkler
system or household appliance
• F- Freezing objects Freezing of plumbing, heating, air-conditioning, or automatic fire protective sprinkler systems and household appliances (insured must use reasonable care to maintain heat in the building or shut off the water supply and drain all systems and appliances)
• F-Falling objects
•E–Electrical current-Sudden and artificially generated electrical current (does not include
damage to a tube, transistor, or similar electrical component)
• C Collapse
• T- Tearing asunder-Sudden and accidental tearing apart, cracking, or burning of steam or hot-water heating, air-conditioning, or automatic fire protective sprinkler system and water heaters
Broad Perils
• All of basic (fire, lightning, and internal explosion) plus extended perils (WCSHAVVER and V&MM)
• Plus BIG AFFECT:
• B- Burglary damage
• I- Ice, sleet, and snow (weight of)
• G-Glass breakage
• A-Accidental discharge of water
•F-Freezing water
• F-Falling objects
• E-Electrical current
• C- Collapse
• T- Tearing asunder
What are broad peril exclusions? (Flood is NOT covered)
The weight of ice, snow, or sleet peril that causes damage to awnings, fences, patios, pavement, swimming pools, foundations, retaining walls, bulkheads, piers, wharves, or docks is NOT included with broad peril coverage.
The falling objects peril does not include damage to awnings, fences, outdoor equipment, or outdoor radio and television antennas, including their lead in wires, masts, and towers. Damage to a buildings interior or its contents is covered only if the falling object first damages the roof or an exterior wall.
The accidental discharge or overflow peril does not include continuous or repeated leakage or seepage, freezing, or damage to the system or appliance itself. It also does not cover flooding from a natural water source (lake, river, etc.).
The burglary and accidental discharge perils are not covered if the building has been vacant for more
than 60 consecutive days.
The broad form also expands coverage for two perils.
• The vehicles peril covers damage to fences, driveways, and walks when the vehicle is driven by someone who is not a resident of the insured’s household. It also covers damage to other types of property when the vehicle is driven by an insured or a resident of the insured’s household.
• The smoke peril includes loss caused by fireplace smoke.
Broad Peril Exclusions
• Weight of ice, snow, or falling objects on awnings, fences, patios, swimming pools, docks, and retaining walls
• Accidental discharge of water from continuous leaking
• Flooding from river or lake
• Burglary if property vacant more than 60 consecutive days
What are special perils (open)? (Think everything is covered except a few exclusion like flooding , earthquakes, building code violations power outages off premises and government seizures )
The special perils coverage insures against all risks of direct physical loss unless they are specifically excluded.
The following are some examples of perils commonly excluded from special (open) peril coverage:
• Flooding
• Earthquake
• Intentional damage caused by an insured
• Losses due to enforcement of building codes
• Damage caused by a power interruption occurring off premises
• Government seizure
Special Perils
EVERYTHING!
Direct Loss(house burning down/car totaled) vs. Indirect (Consequential) Loss( cost of staying at a hotel/using Uber)
In addition to identifying the property covered and the perils insured against, the insuring agreement will state how losses and claims are covered.
A direct loss is a property loss caused by an unbroken chain of events covered under an insurance policy. Living room furniture destroyed in a fire originating in the kitchen is a direct loss.
Indirect loss -comes as a result, or consequence, of the original loss. It is also known as consequential loss. A loss of business income caused by a fire (a direct loss) is an example of an indirect loss.
What are the types of loss?
‘Types of Loss
• Direct–the immediate damage caused by the peril
• Indirect-loss over time as a result of the direct loss
• Loss of income a business suffers when the building burns
• Cost of a rental car because someone ran into your car
• Additional living expenses while your home is being repaired
What are the classes of construction?
Classes of Construction(highest to lowest risk )
• Class 1-Frame(wood, roof, floors)
• Class 2-Joisted Masonry (non combustible masonry meaning brick or concrete)
• Class 3-Noncombustible(walls and floor supported by metal, asbestos or gypsum)
• Class 4-Masonry
Noncombustible( constructed, made of metal-roof or walls)
• Class 5-Modified Fire Resistive(modified resistance rating of 2 hours or less)
• Class 6-Fire Resistive(resistive rating of 2 hour or more)
Explain the Classes of Construction
(Think -determined by the materials used for the roof)
For property risks, a building’s construction type is considered when underwriting and rating a policy.
The construction of the building is determined by the types of materials used in the building and roof of the insured structure.
Most underwriters recognize six construction classifications or types.
• Class 1-Frame: Frame structures have outside support walls, a roof, and floors constructed of wood or other combustible materials. The exterior walls may be covered with stucco or brick veneer.
• Class 2-Joisted Masonry: Joisted masonry structures have outside support walls made of noncombustible masonry materials (such as concrete, brick, hollow concrete block, stone, or tile) and a roof and floor made of combustible materials (such as wood).
• Class 3-Noncombustible: A noncombustible structure is one whose exterior walls, floors, and roof are constructed of and supported by noncombustible materials such as metal, asbestos, or gypsum.
• Class 4-Masonry Noncombustible: Structures in this construction class have exterior walls constructed of masonry materials and a roof and floor made of metal or other noncombustible materials.
•Class 5-Modified Fire Resistive: Buildings that are modified fire resistive have exterior walls, floors, and a roof constructed of masonry or fire resistive material with a fire resistance rating of 2 hours or less.
• Class 6- Fire Resistive: These structures are constructed of masonry or fire resistive material with a fire resistance rating of 2 hours or more.
What is loss valuation?
In the event of a loss, the insurance company has a legal duty to determine the appropriate amount of claim payment according to the terms of policy. These duties are sometimes contained in the valuation or how losses will be paid condition. Loss valuation and claims settlement are synonymous terms.
In general, the insured can collect the lesser of:
• insurable interest (If the insured burns down his house and is found guilty of an intentional criminal act like arson, the mortgage company would be made whole by the insurer up to its insurable interest in that property.);
• policy limits;
• actual cash value;
• cost to repair; or
• replacement cost.
A deductible will reduce any amount after the loss has been valued.
Loss Valuation
• How the insurance company determines appropriate amount of loss to be paid
• Deductible reduces any amount after loss has been valued
• Insured to collect lesser of:
• insurable interest
• policy limits
• actual cash value (ACV)
• cost to repair; or
• replacement cost