Chapter 7 Flashcards
(120 cards)
1
Q
What are the distinguishing characteristics of insurance policies?
A
- Indemnity
- Utmost good faith
- Fortuitous losses
- Contract of adhesion
- Exchange of unequal amounts
- Conditional
- Nontransferable
2
Q
Define the Principle of Indemnity.
A
The principle that insurance policies should provide a benefit no greater than the loss suffered by an insured.
3
Q
What is a Contract of Indemnity?
A
A contract in which the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amount of the loss.
4
Q
Give an example of when an insurance carrier might violate the principle of indemnity.
A
Under a valued policy, the insurer agrees to pay a pre-established dollar amount in the event of a future loss. The amount could be more than the value of the loss.
5
Q
What should insurance companies NOT do if they want to reduce or avoid moral hazards.
A
- Overindemnify the insured
- Indemnify Insureds more than one per loss.
6
Q
How can an insurer reduce moral hazard (and over indemnification)?
A
By clearly defining the extend of a covered loss in the policy provisions and by carefully setting policy limits. They can also include a clause called “other insurance provisions” to prevent double-dipping.
7
Q
Provide two example of when duplicate recovery might be justified.
A
1) When an insured has multiple policies (auto, health). If there is overlapping coverage it may be unfair to deny coverage because the insured has both policies.
2) When a plaintiff is awarded a settlement, the defendant still must pay some or all damages, even if he/she has an insurance policy. (collateral source rule)
8
Q
Define collateral source rule.
A
A legal doctrine that provides that the damages owed to a victim should not be reduced because the victim is entitled to recover money from other sources, such as an insurance policy.
9
Q
Why are insurance policies more vulnerable to abuses such as misrepresentation or opportunism than other contracts?
A
Information asymmetry and costly verification.
10
Q
Define information asymmetry
A
When one party to a contract has information important to the contract that the other party does not.
11
Q
How does an insurer overcome information asymmetry?
A
By gathering as much relevant information as possible during the underwriting process. This is costly, however.
12
Q
Define utmost good faith
A
Utmost good faith is an obligation to act with complete honesty and to disclose all relevant facts.
13
Q
List two common violations of utmost good faith.
A
Fraud (misrepresentation of key facts of a claim) and buildup (overstating injuries)
14
Q
How can an insurer minimize the effect of adverse selection?
A
By sound underwriting. One particular method is to preclude coverage for losses that are not fortuitous.
15
Q
Is there a way to obtain coverage for losses that have occurred but haven’t been settled?
A
Yes, many finite risk contracts cover this. Uncertainty exists about final settlement values. The premiums are extremely high.
16
Q
What is a contract of adhesion
A
A contract in which one party must either accept the agreement as written by the other party or reject it.
17
Q
Who would a court favor in the case of coverage ambiguity?
A
The insured (because the insurer drafted the policy and had a chance to get the wording clear - note: in rare cases the insured might draft the policy)
18
Q
Provide an example of when an insurance policy is not a contract of adhesion.
A
Manuscript policies or policies that contain manuscript forms, since the insured contributes to the precise working.
19
Q
Define reasonable expectations doctrine.
A
A legal doctrine that provides for an ambiguous policy clause to be interpreted in the way that an insured would reasonably expect.
20
Q
Provide an example of when the reasonable expectations doctrine would apply.
A
When a policy renews there may be changes from the original policy. Unless a written notification and explanation accompanies the renewal policy, the insured can reasonably expect that the renewal policy is the same as the expiring policy.
21
Q
Define consideration.
A
Something of value or bargained for and exchanged by the parties to a contract.
22
Q
What is the consideration in terms of an insurance policy.
A
For an insured, premium paid. For an insurer, the promise to indemnify the insured in the event of a covered loss
23
Q
Although amounts exchanged in an insurance policy are not equal, are they equitable?
A
Generally, they are equitable. The premium charged is proportional to the Insured’s expected losses on an actuarially sound basis.
24
Q
Which type of insurance policy involves amounts closest in value?
A
Finite risk policies.
25
Define conditional contract
A contract that one or more parties must perform only under certain conditions.
26
Why are insurance policies conditional contracts.
Because the insurer is obligated to pay for losses incurred by the insured only if the insured has fulfilled all of the policy conditions.
27
What is the most common exception to the "conditional nature of an insurance policy?"
When an insurer is willing to make a payment despite the conditions. They basically waive conditions.
28
Why is an insurance policy sometimes called a "personal contract?"
To indicate their non-transferable or nonassignable nature.
29
Are insurers allows to transfer a policy to another insurer?
Yes, as long as the insured is notified.
30
Provide an example of a situation where an insurance policy could be transferred to a new property owner.
Some policies contain an exception. One example is that ocean marine hull insurance policies make an exception and the policy will not terminate if a change of ownership occurs while the insured vessel is at sea.
31
What are the two general rules of policy interpretation.
A endorsement takes precedence over any conflicting terms in the policy to which it is attached.
A handwritten endorsement supersedes a computer-printed or typewritten one. Handwritten alterations tend to reflect true intent more accurately than preprinted policy terms.
32
What are some documents commonly attached to a policy?
Endorsements, the application, the insurer's bylaws, the rating manual, premium notes, inspection reports, operating manuals or spec sheets for equipment to show agreed upon procedures.
33
What is a policy provision?
A contractual term included in an insurance policy that specifies requirements or clarifies intended meaning.
34
List the six categories of policy provisions.
Declarations, insuring agreements, conditions, exclusions, definitions, miscellaneous provisions.
35
What type of information does the declarations contain?
Unique information on the insured and a list of forms included in the policy.
36
What effect does a dec page have on coverage?
It outlines who or what is covered, and where and when coverage applies.
37
What does the definitions section of the policy contain?
Words with special meanings in the policy.
38
What effect do definitions have in coverage?
They may limit or expand coverage based on definitions of terms.
39
What information does the insuring agreement contain?
The promise to make payment.
40
What effect on coverage does the insuring agreement have?
It outlines he circumstances under which the insurer agrees to pay.
41
Way information do the conditions contain?
The qualifications on promise to make payment.
42
What effect on coverage do conditions have?
Conditions outline the seps an insured needs to take to enforce the policy.
43
What information do the exclusions contain?
Limitations on promise to make payment.
44
What effect on coverage to the exclusions have?
Exclusions limit the insurer's payment based on excluded persons, places, things, or actions.
45
What do the miscellaneous provisions contain?
A wide variety of provision that may alter the policy.
46
What effect coverage do miscellaneous provisions have?
Miscellaneous provisions deal with the relationship between the insured and the insurer or establish procedures for implementing the policy.
47
How are undefined words in an insurance policy interpreted?
Everyday words are given their ordinary meanings
Technical words are given their technical meanings.
Words with an established legal meaning are given their legal meaning.
Consideration is also given to the local, cultural, and trade-usage-meanings of words, if applicable.
48
Define insuring agreement.
A statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service. A separate agreement is listed for each coverage on a package policy.
49
What is a self-contained policy?
A single document that contains all the agreements between the insured and insurer and that forms a complete insurance policy.
50
When are self-contained policies appropriate?
For insuring loss exposures that are similar among many insureds, for example automobile policies.
51
what is a modular policy?
Consists of several different documents, none of which by itself forms a complete policy.
52
Provide an example of a modular monoline policy.
A commercial property policy that contains a commercial property coverage form, a cause of losses form, a commercial property conditions form, and a common policy conditions form.
53
Provide an example of a modular package policy.
A commercial package policy that consists of multiple forms for providing commercial property coverage, cgl, commercial auto, and commercial crime coverage.
54
List six advantages modular policies have over self-contained policies.
1) carefully designed and coordinated provisions in the various forms minimize the possibility of gaps and overlaps that might exist when several monoline policies are used.
2) consistent terminology, definitions, and policy language make coverage interpretation easier for the insured.
3) fewer forms are required to meet a wide range of needs.
4) underwriting is simplified because much of the basics information that must be analyzed applies to all lines of insurance.
5) adverse selection problems can be reduced when the same insurer providers several lines of insurance for an individual
insured.
6) insurers often give a package discount when several coverages are included in the same policy.
55
What are the benefits of using preprinted forms?
Reduces paperwork and the insurer and producer don't have to keep a copy of each individual policy on file.
56
Are preprinted forms contracts of adhesion?
Yes, because they are drafted by the insurer.
57
What is a manuscript form?
An insurance form that is drafted according to the terms negotiated between a specific insured (or group of insureds) and an insurer.
58
List the two general rules of policy interpretation with regard to endorsements.
An endorsement takes precedence over and conflicting terms in the policy to which it is attached.
A handwritten endorsement supersedes a computer-printed or typewritten one.. Handwritten alterations tend o reflect true intent more accurately than do preprinted policy terms.
59
List some of the documents that are commonly attached to a policy.
```
Endorsements
Insurance application
Insurer's bylaws
Rating manual
Premium notes
Inspection reports
Specification sheets
Operating manuals
```
60
What are the two general rules of policy interpretation.
A endorsement takes precedence over any conflicting terms in the policy to which it is attached.
A handwritten endorsement supersedes a computer-printed or typewritten one. Handwritten alterations tend to reflect true intent more accurately than preprinted policy terms.
61
What are some documents commonly attached to a policy?
Endorsements, the application, the insurer's bylaws, the rating manual, premium notes, inspection reports, operating manuals or spec sheets for equipment to show agreed upon procedures.
62
What is a policy provision?
A contractual term included in an insurance policy that specifies requirements or clarifies intended meaning.
63
List the six categories of policy provisions.
Declarations, insuring agreements, conditions, exclusions, definitions, miscellaneous provisions.
64
What type of information does the declarations contain?
Unique information on the insured and a list of forms included in the policy.
65
What effect does a dec page have on coverage?
It outlines who or what is covered, and where and when coverage applies.
66
What does the definitions section of the policy contain?
Words with special meanings in the policy.
67
What effect do definitions have in coverage?
They may limit or expand coverage based on definitions of terms.
68
What information does the insuring agreement contain?
The promise to make payment.
69
What effect on coverage does the insuring agreement have?
It outlines he circumstances under which the insurer agrees to pay.
70
Way information do the conditions contain?
The qualifications on promise to make payment.
71
What effect on coverage do conditions have?
Conditions outline the seps an insured needs to take to enforce the policy.
72
What information do the exclusions contain?
Limitations on promise to make payment.
73
What effect on coverage to the exclusions have?
Exclusions limit the insurer's payment based on excluded persons, places, things, or actions.
74
What do the miscellaneous provisions contain?
A wide variety of provision that may alter the policy.
75
What effect coverage do miscellaneous provisions have?
Miscellaneous provisions deal with the relationship between the insured and the insurer or establish procedures for implementing the policy.
76
How are undefined words in an insurance policy interpreted?
Everyday words are given their ordinary meanings
Technical words are given their technical meanings.
Words with an established legal meaning are given their legal meaning.
Consideration is also given to the local, cultural, and trade-usage-meanings of words, if applicable.
77
Define insuring agreement.
A statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service. A separate agreement is listed for each coverage on a package policy.
78
What is a self-contained policy?
A single document that contains all the agreements between the insured and insurer and that forms a complete insurance policy.
79
When are self-contained policies appropriate?
For insuring loss exposures that are similar among many insureds, for example automobile policies.
80
what is a modular policy?
Consists of several different documents, none of which by itself forms a complete policy.
81
Provide an example of a modular monoline policy.
A commercial property policy that contains a commercial property coverage form, a cause of losses form, a commercial property conditions form, and a common policy conditions form.
82
Provide an example of a modular package policy.
A commercial package policy that consists of multiple forms for providing commercial property coverage, cgl, commercial auto, and commercial crime coverage.
83
List six advantages modular policies have over self-contained policies.
1) carefully designed and coordinated provisions in the various forms minimize the possibility of gaps and overlaps that might exist when several monoline policies are used.
2) consistent terminology, definitions, and policy language make coverage interpretation easier for the insured.
3) fewer forms are required to meet a wide range of needs.
4) underwriting is simplified because much of the basics information that must be analyzed applies to all lines of insurance.
5) adverse selection problems can be reduced when the same insurer providers several lines of insurance for an individual
insured.
6) insurers often give a package discount when several coverages are included in the same policy.
84
What are the benefits of using preprinted forms?
Reduces paperwork and the insurer and producer don't have to keep a copy of each individual policy on file.
85
Are preprinted forms contracts of adhesion?
Yes, because they are drafted by the insurer.
86
What is a manuscript form?
An insurance form that is drafted according to the terms negotiated between a specific insured (or group of insureds) and an insurer.
87
List the two general rules of policy interpretation with regard to endorsements.
An endorsement takes precedence over and conflicting terms in the policy to which it is attached.
A handwritten endorsement supersedes a computer-printed or typewritten one.. Handwritten alterations tend o reflect true intent more accurately than do preprinted policy terms.
88
What are the two broad categories of insuring agreements?
Comprehensive and limited
89
What is a comprehensive insuring agreement? Provide an example.
Provide an extremely broad grant of coverage that is clarified and narrowed by exclusions, definitions, and other policy provisions.
Ex. On a commercial policy: special- form coverage (or open perils)
90
What do limited insuring agreements accomplish?
Restrict coverage to certain causes of loss or to certain situations. Additional provisions may broaden coverage.
91
Provide some examples of limited insuring agreements in commercial property insurance.
Named perils, specified perils, or specified causes of loss coverage (referred to as the basic-form or broad-form coverages.
92
List some of the documents that are commonly attached to a policy.
```
Endorsements
Insurance application
Insurer's bylaws
Rating manual
Premium notes
Inspection reports
Specification sheets
Operating manuals
```
93
Provide three examples of exclusions that eliminate coverage for uninsurable loss exposures.
War, criminal acts committed by the insured, and wear and tear.
94
How do exclusions assist In managing moral and morale hazards?
Exclusions ensure that the individual or organization remain responsible for certain types of loss.
Ex. Exclude neglect to use all reasonable means to save and preserve property at and after the time of loss.
95
How do exclusions reduce the likelihood of coverage duplications?
Exclusions exclude losses that are covered by another policy, saving the insured money an making the policy more efficient.
96
How do exclusions assist in keeping premiums reasonable?
If certain types of losses were covered, premiums would be extremely high. An example is if an auto policy covered wear and tear. This can be purchased elsewhere at a high premium.
97
Provide 3 examples of policy conditions.
Below are five:
Insured's obligation to pay premiums, report losses promptly, provide appropriate documentation for losses, cooperate with the insurer in any legal proceedings, and refrain from jeopardizing an insurer's rights to recover from third parties responsible for causing covered losses.
98
How would an insured go about determining the extent of coverage the policy provides for claims generated by a given scenario?
The primary source of information is their past loss experience. If they haven't suffered a loss before they would check with friends, family, neighbors, etc. The insurance producer or CSR can also answer coverage questions.
99
What is the primary method of post-loss policy analysis and what are the steps performed?
The DICE method.
1) Examine the declarations page to determine if the information provided by the insured precludes coverage.
2) Examine the insuring agreement. Was the premium paid?
3) Examine conditions to see if all duties were met. One breach of conditions could be the concealment of a material fact, ex. Failure to disclose primary business, furniture refinishing at Insured's residence.
4) Analyze exclusions.
100
In post-loss coverage analysis, what step does an insurer take after completing the analysis?
Determine how much is payable.
101
What are the six purposes of exclusions?
Eliminate coverage for uninsurable loss exposures.
Assist in managing moral and morale hazards.
Reduce likelihood of coverage duplications.
Eliminate coverages not needed by the typical insured.
Eliminate coverages requiring special treatment.
Assist in keeping premiums reasonable.
102
identify reasons that an insurance policy might not fully indemnify an insured after a covered loss
most insurance polices contain a dollar limit, a deductible, or other provisions or limitations on the amount to be paid
103
explain the distinction between a contract of indemnity and a valued policy
contract of indemnity= compensates the insured only for the value of the loss
valued insurance policy= the insurer agrees to pay a presstablished dollar amount in the event of an insured total loss, which may over indemnify or under indemnify the insured
104
identify 2 policy characteristics that help an insurer reduce or avoid moral hazards associated with the indemnification
1. over indemnify the insured
| 2. indemnify insureds more than once per loss
105
identify 2 reasons an insurance policy might be vulnerable to misrepresentation or opportunism and how the concept of utmost good faith helps prevent occurrences of such abuses
these situations could affect UW decisions and lead to adverse selection. the concept of utmost good faith obligates all parties to act with complete honesty and to disclose all relevant facts and therefore helps prevent these situations
1. one party to a contract has info the other party does n ot ( information asymmetry)
2. the costly verification of info may lead an insurer to fail to verify information provided by the insured
106
explain why insurance is not intended for losses that are not fortuitous
bc if the insured knows of a loss in advance the insurer does not, the insured has an info advantage over the insurer. this situation promotes adverse selection, thereby increasing the losses in the pool the insurer insurers ...
107
identify factors courts consider when determining whether to classify an insured as a sophisticated insured
1. size of the insured org
2. size of the org's risk management department
3. use of an insurance broker or legal counsel with expertise in insurance policies
4. relative bargaining power of the insured in relation to the insurer ..
108
explain how an insurer makes certain that the tangible consideration offered by the insured in an insurance contract is equitable
by charging a premium that is directly proportional to the insured's expected losses on an actuarial sound basis...
109
explain why insurance policies are conditional contracts
bc the insurer is obligated to pay for losses incurred by the insured only if the insured has fulfilled all the policy conditions
110
identify the advantages of modular policies, relative to self contained policies
1. carefully designed and corrdinated provisions in the various forms minimize the possibility of gaps and overlaps
2. consistent terminology, definitions, and policy language make coverage interpretations easier for the insured
3. fewer forms are required to meet a wide range of needs
4. UW is simplified bc much of the basic info that must be analyzed applies to all lines of insurance
5. adverse selection problems can be reduced
6. insurers often give a package discount when several coverages are included on the same policy...
111
explain why insurance and risk management professionals might find policy analysis more difficult with multiple self contained policies than with a single modular policy
1. multiple self contained policies often use inconsistent terminology and have gaps and overlaps in coverage
2. modular policies offer a better framework for policy analysis
112
differentiate between pre-printed and manuscript forms
most insurance policies are assembled from one or more preprinted forms, which are designed to be used by many insureds. the forms are not altered or customized for each insured. manuscript forms are unique forms developed through negotiation between the insurer and insured. preprinted standard forms are teh easiest forms to evaluate during policy analysis because they are widely used and more consistently interpreted by the courts and bc insurance professionals have more experiences working with these forms.
manuscript forms are the most difficult forms to interpret bc they contain wording and can vary widely in their interpretation
113
identify the types of related documents that might become part of and alter an insurance policy by being attached to or referenced within the policy
1. endorsements= are added to modify a basic form. policies in several lines of business have standard endorsements that are included inmost of the policies written in that line
2. . completed application= in some jurisdictions, statutes require that any written application be made part of the policy of certain lines of insurance
3. insurer's bylaws= with certain types of policies, such as those with mutual or reciprocal insurers, the insurer's bylaws regarding rights and duties are specified in the policy
4. insurer's rating manual= some policies incorporate the insurer's rating manual by referring to it in the policy language
5. other documents= some frequently incorporated documents include premium notes, inspection reports, and specification sheets or operating manuals relating to safety equipment or procedures
114
list 2 general policy interpretation rules that are applied when an endorsement conflicts with the policy to which it is attached
1. an endorsement takes precedence over any conflicting terms in the policy
2. handwritten endorsement supersedes a computer printed or type written one
115
describe the 6 common policy provisions contained in an insurance policy
1. declarations= contain info regarding who or what is covered and where and when cov applies
2. definitions= define terms used throughout the entire policy or form
3. insuring agreements= state for each line of insurance offered in the policy that the insurer will, under certain circumstances, makes payment or provide a service
4. exclusions= state what the insurer does not intend to cover, thereby, limiting coverage and clarifying the coverages granted by the insurer
5. conditions= qualify an otherwise enforceable promise to the insurer. ex. are the insured's obligation to pay premiums, report losses promptly, provide appropriate documentation for losses, cooperate with the insurer with any legal proceedings, and refrain from jeopardizing an insurer's rights to recover from responsible third parties
116
explain the distinction between coverage provided by named perils and that provided by special form commercial property insurance
1. a named perils policy restricts coverage to the perils ( cause of loss) identified in the policy
2. special form policy provides protection against perils that the form does not specially exclude
117
identify loss exposures typically excluded from a policy because they are considered uninsurable
1. war
2. criminal acts committed by the insured
3. normal wear and tear
118
describe the sources of information insureds may use to generate scenarios for pre loss policy analysis
past loss experience. if the insured has not experienced a loss that triggered insurance coverage, friends, neighbors, co-workers, and family members can provide information about their experiences with losses and the claim process. the insurance producer and customer service representative are also good sources of information
119
describe a limitation of scenario analysis
bc the number of possible loss scenarios is theoretically infinite, it is impossible to account for every possibility
120
describe the primary method of post loss policy analysis
the DICE method, which is a systematic review of all the categories of property-casualty policy provisions
