2-F COMMON POLICY PROVISIONS

Question 1

Common Policy Provisions

Answer 1

● Insurance policies are standardized forms, most of which are created by ISO or AAIS
● Provisions within the policy establish terms of the agreement

Question 2

What are ISO and AAIS?

Answer 2

● National organizations
● Produce standardized insurance forms for insurers to use
● Collect statistical data
● Provide rating information
● Work with state regulators on behalf of subscribing insurers

Question 3

Cancellation and Nonrenewal Condition

Answer 3

● Sets rights and duties of both insurer and insured if either cancels
● Policyholder can cancel anytime with notice
● Insurer’s right to cancel is subject to state insurance laws
● Generally, insurer must provide written notice for cancellation or nonrenewal
● Insurer can cancel with fewer days’ notice for non-payment of premiums

Question 4

Unearned Premiums

Answer 4

● Policyholder pays premiums before receiving full coverage
● If policy is canceled early, insurer must pay back any money it received for
coverage it never gave
● Insurer counts unearned premiums among liabilities

Question 5

Unearned Premiums Example

Answer 5

Suppose you make an annual payment of $1,200 for your homeowners insurance. If your insurer cancels the coverage one month after you’ve paid your annual premium, they would then have to refund you $1,100 for the 11 months of coverage you paid for but never received.

Question 6

Changing a Policy

Answer 6

Policy changes added by endorsement and agreed upon by both insurer and insured

Question 7

Liberalization Clause

Answer 7

If insurer broadens policy coverage in course of business, policies already issued must include this increase if the change:

● Occurred during the policy period (or even shortly before policy period for some policies)
● Did not raise the policy premium

Question 8

Representations Condition

Answer 8

● Policy coverage is based on information the insured provided
● If insured gives false information, the insurer can void the policy

Question 9

Concealment, Misrepresentation, and Fraud

Answer 9

● Protects the insurer from the dishonesty of the insured

● Insured cannot omit or misrepresent material facts

Question 10

Concealment, Misrepresentation, and Fraud Example

Answer 10

If the insured were to hide certain facts about the services offered by his business (failing to mention that the business serves alcohol, for instance), this would count as concealment.
Similarly, if the insured were to tell his insurer that he doesn’t smoke, when in fact he does, the insurer could deny health insurance coverage if the insured were to get lung cancer from smoking.

Question 11

Policy Rescission

Answer 11

● Rescinding a policy means declaring that it was never a valid agreement
● Can only be done under certain circumstances, such as material, intentional, or
fraudulent misrepresentation

Question 12

An insurer can rescind a policy if the policyholder:

Answer 12

1. Lied or concealed information in the application
2. Made a mistake in the application that significantly affects the insurer
3. Made a fraudulent claim to get benefits

Question 13

Assignment Provision

Answer 13

Policy is non-transferable unless insurer agrees

Exception: death
If insured dies, coverage transfers to the decedent’s legal representative

Question 14

Additional Insured

Answer 14

Person or organization that is added to the policy at the First Named Insured’s request and who benefits from policy, but may not make changes

Question 15

Additional Insured

Example

Answer 15

The policyholder of a personal auto policy may add a family member to the policy by name, and the policy may also state that coverage is provided to any person using the insured vehicle with the policyholder’s permission.

Question 16

Other Insurance / Apportionment

Answer 16

● Guidelines for settling claims when more than one policy covers the damages
● Enforces principle of indemnity by keeping people from “double recovering” for
a loss

Question 17

Primary:​

Answer 17

policy pays up to the limit, regardless of presence of another policy

Question 18

Excess:

Answer 18

​policy only pays once the primary policy’s limits have been exhausted

Question 19

Contribution of Equal Shares

Answer 19

● Each policy pays an equal share of the loss up to lowest policy limit
● Process repeats until loss is paid in full or all policy limits have been reached

Question 20

Pro Rata

Answer 20

Policies split the loss, based on percentage of coverage each policy provides

Question 21

Pro Rata Example

Answer 21

Say Annie’s dwelling policy has a limit of $100,000 and her husband takes out another $50,000 policy. The total amount of insurance covering the property is $150,000.

Annie’s policy makes up 2/3 of the insurance on the property, since $100,000 is 2/3 of $150,000.

So, if a loss occurs, Annie’s policy will pay 2/3 of the loss, and the other policy will pay the other third.

Question 22

Nonconcurrency

Answer 22

The situation in which two or more policies covering the same risk have different inception and expiration dates

Question 23

Overinsurance

Answer 23

The amount of insurance covering a risk which exceeds the insurable value of that risk

● Insurer will only pay up to the insurable value
● Fraudulent intent voids the contract

Question 24

Restoration / Non-reduction of Limits

Common options:

Answer 24

● Restore limits to original level
● Loss does not reduce limits at all
● Total loss payout ends policy coverage and excess premiums returned to insured

Question 25

Legal Action Against an Insurer Sets requirements the insured must meet before suing the insurer:

Answer 25

● Insured must comply with all policy obligations | ● Insurer is not liable for damages above policy limit

Question 26

Legal Action Against an Insurer Liability Policies:

Answer 26

● No one can join the insurer in lawsuit against insured | ● No one can sue insurer until insurer’s obligation is determined

Question 27

Insured’s Duties in the Event of a Loss:

Answer 27

● Notify the ​police i​f the loss may have involved a crime ● Notify the ​insurer​ about what property was involved, and the circumstances surrounding the loss ● Submit a ​description o​ f how, where, and when the loss occurred ● Try to ​prevent further damages, a​ nd keep track of expenses incurred doing this ● Give insurer a ​list of damaged property (Commercial policies may ask for a list of damaged and undamaged inventory, too) ● Submit to examination under oath ● Sign a sworn​ proof of loss f​or the insurer, if requested ● Let the insurer ​appraise damages to covered properties ​by​ inspecting them (including any company records or books when dealing with commercial policies) ● Cooperate in all investigations and settlement procedures

Question 28

Exclusions serve many purposes:

Answer 28

● Remove coverage for uninsurable losses ● Manage moral and morale hazards ● Eliminate duplication of coverages ● Remove coverages that typical consumers don’t need ● Remove coverages that need special treatment ● Lower premiums

Question 29

Common Exclusions

Answer 29

``` ● Intentional acts ● Neglect ● Normal wear and tear, or deterioration ● Ordinance or law (laws regulating the use, construction, repair, or demolition of a structure) ● Government or civil confiscation ● Off-premises power failure ● War ● Nuclear events ```

Question 30

Covered in auto policies, but excluded in other property policies

Answer 30

● Earth movement (earthquakes, mudslides, landslides, etc.) ● Flood or water damage from water below the ground, above ground, or back up through sewers or drains

Question 31

Vacancy Condition

Answer 31

● Defines “vacancy” for the purpose of coverage ● Specifies a time period (typically 60 days) and a condition, such as a dwelling that is unoccupied or a company that is not open for business ● Commercial buildings may be deemed vacant if less than 31% of the available square footage is occupied for the set time period.

Question 32

Vacancy Condition Example

Answer 32

Vacant buildings are at a greater risk of damage caused by water leaks, freezing, vandalism, and theft-damages that may have been mitigated or avoided if someone had been around to take care of the property

Question 33

Recovered Property If one party recovers damaged property after the claimant was indemnified, that party must notify the other party

Answer 33

● If the insured wishes to keep the property, she must return the money to the insurer ● If the insured wishes to keep the money, she must forfeit her right to the property to the insurer

Question 34

Salvage

Answer 34

The portion or value of property that remains after a loss

Question 35

Ways to handle salvage

Answer 35

● Insurer deducts salvage value from settlement amount ● Insurer takes ownership of damaged property after paying for the full value of the damaged property

Question 36

Abandonment Clause

Answer 36

Insured may not force the insurer to take possession of damaged property for the purpose of repair or disposal Different than salvage, where the insurer chooses to take possession of the damaged property after paying to replace it

Question 37

Pair & Set Provision

Answer 37

Applies when part of a set or an instrumental part of a whole is lost or destroyed

Question 38

Pair & Set Provision

Answer 38

Pays ​either: ● To replace, restore, or repair the set, or ● The difference in actual cash value resulting from the loss

Question 39

Premium Audit

Answer 39

● Insurer accepts a deposit premium, based on estimate of risk ● Then at end of policy term, insurer audits actual exposure and calculates actual premium

Question 40

Inspection and Surveys

Answer 40

Insurer may inspect premises any time and recommend changes

Question 41

Examination of Books and Records

Answer 41

Insurer has right to inspect business records up to three years after policy expires

Question 42

Loss Payment Provision Claims will be paid:

Answer 42

To Whom? How? When?

Question 43

To Whom?

Answer 43

● The policyholder(s), up to the amount of his insurable interest ● Loss payees listed in declarations

Question 44

How?

Answer 44

● The actual cash value (ACV) ● The cost of repairing or replacing (RC) ● The agreed or appraised value ● The cost of repairing or replacing with “like kind and quality”

Question 45

When?

Answer 45

Deadline for payment is regulated by state law and varies from state to state

Question 46

Company’s Options (Standard Fire Policy)

Answer 46

● Provision listing the insurer’s claim settlement options | ● Insurer must notify claimant of its choices within 30 days of proof of loss

Question 47

Loss Payable Clause (or Loss Payee Clause)

Answer 47

● Lender listed as loss payee if a loss occurs ● Protects lender’s interest in insured property ● Allows insurers to compensate a lender if a property, in which the lender has a financial interest, is damaged

Question 48

Mortgage Clause (a.k.a. Mortgageholders Condition)

Answer 48

States the mortgagee’s rights in relation to the insurance contract

Question 49

Mortgagee:​

Answer 49

the bank or lender that holds the insured’s mortgage

Question 50

The mortgagee has the right to:

Answer 50

● Receive a portion of claims payments, based on their insurable interest in the property ● Be notified if the policyholder fails to adhere to, or pay premiums on, the insurance contract ● Pay premiums to keep the policy active without the insured’s consent in order to continue protection The lender can still be indemnified, even if the insured intentionally damages the property (the insured would not get any money in this case).

Question 51

Recoverable Depreciation

Answer 51

● Applies to Replacement Cost policies ● Insurer pays claim based on ACV ● Once repairs are complete, claimant submits proof to insurer ● Insurer pays remainder, based on actual replacement cost minus what it already paid ● Insured typically must notify insurer of plans to repair or replace within 180 days of when the loss occurred

Question 52

Recoverable Depreciation Example

Answer 52

Jim’s house experienced $100,000 of damage from Hurricane Andy. Jim is fully insured. The adjuster estimates that depreciation, based on age and condition of the home, is 30%, therefore the ACV of the loss is $70,000 (less the deductible). But the policy insures the dwelling for Replacement Cost. The 30% depreciation is called “Recoverable Depreciation” which Jim can collect once repairs are complete and he has submitted proof to the insurer. So Jim’s insurer will only pay $70,000 for his $100,000 loss at first. Then, once Jim has completed the repairs, the insurer will pay the remaining difference, up to $30,000.

Question 53

Control of Property

Answer 53

● Protects property from damage caused by the negligent acts of persons other than the named insured ● Protects property from damage caused on purpose by a non-policyholder ● A breach in policy conditions only affects the property where the actual breach occurred

Question 54

Control of Property Example

Answer 54

A business owner has purchased an insurance policy to cover his office space, and one of his employees commits a negligent act that results in the destruction of covered business property. Under the Control of Property condition, insurance coverage would still apply

Question 55

No Benefit to Bailee

Answer 55

States that coverage does not benefit a third party that has custody or control of the insured’s property

Question 56

Bailee:

Answer 56

A business that holds the property of others for the purpose of storage, repair, or servicing

Question 57

No Benefit to Bailee Example

Answer 57

Acme & Co. contracts ABC Trucking to deliver some products to a customer. If the product is damaged in transit, Acme & Co.’s insurance policy will not cover the loss. Such a loss would be the responsibility of ABC Trucking’s insurance policy. Similarly, if Amanda’s car is damaged while being serviced in Greg’s auto repair shop, Greg’s insurance policy would be responsible for covering the damage, not Amanda’s.

Question 58

Separation of Insureds

Answer 58

● Each insured is covered separately, even against other insureds ● Also called “severability of interests” ● Limits of policy still apply collectively

Question 59

Separation of Insureds Example

Answer 59

Two people on a policy does not mean double the indemnity for a single occurrence.

Question 60

Duties of the Claimant

Answer 60

● Cooperate with insurer’s investigation ● Report claim promptly ● Allow physical examinations

Question 61

Duties of Injured Person

Answer 61

● Give insurer proof ● Authorize access to medical records ● Have a physical exam

Question 62

Bankruptcy of the Insured

Answer 62

Bankruptcy of insured does not relieve insurer of its obligations

Question 63

Cancellation and Nonrenewal

Answer 63

Insured may cancel at any time, but insurer is much more restricted

Question 64

Liberalization

Answer 64

Insureds benefit automatically, at no extra cost, when an insurer expands coverage

Question 65

Concealment, Misrepresentation, and Fraud

Answer 65

can invalidate coverage and lead to | policy rescission​.

Question 66

Assignment

Answer 66

Insureds cannot transfer policy coverage to someone else without insurer’s approval

Question 67

Apportionment

Answer 67

Defines how policy will respond when more than one policy covers the same risk

Question 68

Restoration of Limits

Answer 68

Defines how limits are affected after a loss

Question 69

Insureds must fulfill several ​duties after a_______.

Answer 69

loss

Question 70

Some of the ​common exclusions you’ll find in insurance policies are ​_______ ____, wear and tear, war, and nuclear events

Answer 70

intentional | acts

Question 71

_____ ​refers to the value remaining after a loss.

Answer 71

Salvage

Question 72

Insureds are prohibited from​ abandoning_______ to the insurer.

Answer 72

property​

Question 73

______ ______ ​is the amount​ ​an insured can be paid under a replacement cost policy after making repairs to damaged property.

Answer 73

Recoverable Depreciation

Question 74

_____ and Mortgagee​ clauses protect lender’s interest.

Answer 74

Loss Payee

Question 75

Control of _____​ protects insured’s property from negligent actions committed by other people.

Answer 75

Property

Question 76

Insurer has the​ right to _____a company’s insured premises,​ ​as well as​ ​company books and records.

Answer 76

inspect​

Question 77

Severability of Insurance​ means that, if more than one person is insured under same _____, each is covered separately, though the same policy limit applies to all insureds put togethe

Answer 77

policy

Question 78

An ​______ third party ​must also cooperate with the insurer’s investigation (not just the policyholder).

Answer 78

injured

Question 79

An insured’s ______​ does not relieve the insurer from its obligation to pay covered claims.

Answer 79

​bankruptcy