Chapter 8 Flashcards
(86 cards)
1
Q
Define insurable interest.
A
An interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred.
2
Q
Factual Expectancy
A
A situation in which a party experiences an economic advantage if an insured event does not occur or, conversely, economic harm if the event does occur.
3
Q
Describe the difference between insurable interest in a property-casualty policy and in life insurance.
A
In life insurance, the beneficiary must have an insurable interest in the life of the insured when the policy is purchased, but not necessarily at the time of the Insured’s death.
In property-casualty insurance, insurable interest must be present at the time of loss.
4
Q
What are the three reasons insurance policies have an insurable interest requirement for?
A
- It supports the principle of indemnity.
- It prevents the use or insurance as a wagering mechanism.
- It reduces the moral hazard incentive that insurance may create for the insured.
5
Q
What are the five legal bases for Insurable Interest?
A
(FORCE)
- Ownership interest in property
- Contractual obligations
- Exposure to legal liability
- Factual expectancy
- Representation of another party
6
Q
Define agent
A
In the agency relationship, the party that is authorized by the principal to act on the principal’s behalf.
7
Q
Define trustee.
A
Someone who has the legal title to a property but is responsible that it be used, handled, and transferred solely for the benefit of the beneficiary.
8
Q
Define bailee.
A
The party temporarily possessing the personal property in a bailment.
9
Q
Define bailor.
A
The owner of the personal property in a bailment.
10
Q
Define insurance to value.
A
Insurance written for an amount approximating the full value of the asset(s) insured.
11
Q
Define loss frequency.
A
The number of losses that occur within a specified period.
12
Q
Define loss severity
A
The amount of loss, typically measured in dollars, for a loss that has occurred.
13
Q
Define the insurance-to-value provision.
A
A provision in property insurance policies that encourages insureds to purchase an amount of insurance that is equal to, or close to, the value of the covered property.
14
Q
Define coinsurance clause.
A
A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property’s value.
15
Q
Define agreed value optional coverage.
A
Optional coverage that suspends the Coinsurance condition if the insured carries the amount of insurance agreed to by the insurer and insured.
16
Q
Define inflation guard protection.
A
A method of protecting against inflation by increasing the applicable limit for covered property by a specified percentage over the policy period.
17
Q
Define peak season endorsement.
A
Endorsement that covers the fluctuating values of business personal property by providing differing amounts of insurance for certain time periods during the policy period.
18
Q
Define actual cash value.
A
Cost to replace property with new property of like kind and quality less depreciation.
19
Q
Define replacement cost.
A
The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.
20
Q
Define market value.
A
The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller.
21
Q
Define agreed value method.
A
A method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss.
22
Q
Define functional valuation method.
A
A valuation method in which the insurer is required to pay no more than the cost to repair or replace the damaged or destroyed property with property that is its functional equivalent.
23
Q
Define damages.
A
Money claimed by, or a monetary award to, a party who has suffered bodily injury or property damage for which another party is legally responsible.
24
Q
Define broad evidence rule.
A
A court ruling explicitly requiring that all relevant factors be considered in determining actual cash value.
25
Define dollar trading.
An insurance premium and loss exchange in which the insured pays the insurer premiums for low value losses, and the insurer pays the same dollars back to the insured, after subtracting expenses.
26
Define self-insured retention (SIR)
A dollar amount specified in an insurance policy that the insured must pay before the insurer will make any payment for a claim.
27
What are the two categories of contractual rights and related insurable interests. Describe both.
Contractual right regarding people: a contract may give one party the right to bring claim against a second party without entitling the first party to any specific property that belongs to the second party. Ex. First party (individual) owes money to a second party (credit card company), the credit card company does not have a right to repossess property. This is an unsecured lender.
Contractual rights regarding property: One party can bring a claim against specific property held by a second party. Example: foreclosure. There is an insurable interest held by the other party.
28
Why is insurance to value beneficial for both the insurer and the insured?
If insureds don't purchase adequate coverage limits, the rate that an insurer develops can be adversely affected, resulting in inadequate premiums.
29
How does the insurer benefit from insurance to value?
It ensures that premiums are adequate to cover potential losses and simplifies underwriting by reducing the need to determine exact values during underwriting. Because the determination of insurance to value is made at the time of loss.
30
How does an insured benefit from insurance to value?
Sufficient funds are available in the event of a loss.
31
Demonstrate your knowledge of why insurers seek insurance to value. #as
There is a much greater probability of there being a low value loss. If Insureds purchase a low limit policy, the premium charged would be much higher per exposure unit. I the insurer charged the same rate per exposure unit, They would lose money.
32
Do insurers seek insurance to value on liability policies?
No, because determining the mpl is impossible. They charge the appropriate rate according to the coverage layer.
33
How do insurers encourage insurance to value?
Insurance to value provisions that reduce amounts payable for partial and total losses if adequate coverage was not purchased. These include coinsurance clauses.
34
What is the simplified coinsurance formula? Give an example.
Amount payable = did/should x loss
Example: 100% clause. $10MM loss. Insured purchased $9MM. $5MM loss is incurred:
$9/$10x$5=$4.5
35
Why do some business income policies require 125% coinsurance percentages?
Some business may take over a year to resume operations and requirements are based on protected net income during the policy period.
36
How do insurance-to-value provisions in HO and BOP policies work?
The amount payable will never be less than the ACV of the damaged property, subject to the policy limits.
It would be one of three values:
1) replacement cost if they insure to value.
2) ACV, a penalty for those who don't insure to 80% of replacement cost.
3) an amount between the replacement cost and ACV, determined by the did/should x loss formula.
37
Why is maintaining insurance-to-value difficult?
- amount of insurance necessary to meet requirements is based in the property's value at the time of loss.
- when selecting limits, an insurance buyer typically estimates property values based on an informed guess.
- the insurance value at the time of loss often cannot be precisely measured until the property is actually rebuilt or replaced.
- values change over time.
38
What steps can an insurance professional take to help buyers minimize problems associated with valuation?
Hire an appraiser to determine the current replacement cost.
Review policy limits periodically.
Consider coverage options such as agreed value optional coverage, inflation guard protection, and the peak season endorsement.
39
When is market value valuation useful?
When property of like kind and quality is not available for purchase. Ex. Antiques, works of art, collectibles. Market value of similar items can determine the value.
40
When is replacement cost typically used?
In insurance policies covering buildings and in many policies covering personal property.
41
Provide an example of when the replacement cost may be less than the original purchase price.
Electronic equipment. Advances in technology make better equipment available at a cheaper price.
42
What types of property cannot be covered by replacement cost and why?
Antiques, artwork. There is no adequate replacement for this type of property.
43
How does replacement cost coverage violate the principal of indemnity and how can a carrier avoid moral hazards?
It pays out more than the value of the property prior to the loss. Morale hazards can be managed by paying the claim after the repairs have been completed or the property is replaced.
44
If the premium rate for ACV and replacement cost is the same per coverage unit, why is replacement cost more expensive?
Because replacement cost is more expensive than ACV and a higher coverage limit must be purchased.
45
Which homeowners form uses functional valuation method?
HO-8
46
What type of valuation is typically used to cover computers or electronics?
Functional valuation method.
47
What are some elements considered when evaluating bodily injury claims?
Reasonable and necessary medical expenses incurred and those expected to be incurred in the future.
Type of injury
Lost wages
Replacement services and other out-of-pocket expenses.
Current and future pain and suffering.
Extent and permanency of disability or impairment.
Disfigurement
Preexisting conditions that could have contributed to the bodily injury.
48
In addition to claimant's damages, what are some other costs an insurer may pay?
Defense costs, supplementary payments such as the cost of a surety bond that is required in connection with claims, court costs taxed against the insured, an interest on judgments.
49
In which types of policies do insurer's payments for defense costs and supplementary payments reduce the policy limits?
Directors and officers liability policies, pollution liability policies, other specialty liability policies.
50
How do deductibles reduce the insurance cost to the insured?
Encourage risk control by the insured.
Eliminate the need for the insurer to process small losses, thereby reducing the Insurer's loss costs and loss adjustment expenses.
51
How do deductibles encourage risk control?
Having one's own funds at stake gives risk control effective. A deductible would have to have a noticeable effect on the in the insured to be effective
52
How do deductibles reduce an insurer's costs?
It eliminates the insurer's involvement in low value losses (a.k.a. dollar trading) They also provide the insured with risk control incentives and reduce moral and morale hazards.
53
With regard to deductibles, how do premium credits influence selection of a deductible?
Premium credits tend to encourage the use of medium-sized deductibles that eliminate dollar trading for small losses but provide a reliable source of recovery for large losses.
54
Why are deductibles not commonly used with with liability insurance?
An insured might not report a seemingly minor incident until the situation has escalated.
Deductibles would not noticeably reduce premiums. Relatively few liability claims involve small amounts.
55
How does a deductible work in liability insurance?
The insurer pays the claimant in full and then must recover the deductible from the insured.
56
What types of policies are liability deductibles commonly used in?
Specialty liability policies (ex. professional liability, directors or officers liability), Bailee legal liability (warehouse & auto service). Deductibles encourage risk control.
57
What are the differences between a deductible and a self-insured retention (SIR)?
With a liability insurance deductible, the insurer defends on a first-dollar basis, pays all covered loss, and then bills the insured for the amount of the losses up to the deductible.
With a SIR, the insurer pays only the losses that exceed the SIR amount. The insurer does not defend claims below the SIR amount. Consequently, the organization is responsible for adjusting and paying its own losses up to the SIR amount.
With a SIR, the full policy limit is payable on top of the SIR, while a liability policy deductible may reduce the policy limit.
58
When are SIRs commonly used?
Professional liability policies and other specialty policies, and drop-down coverage on an umbrella policy.
59
Provide four examples of non-insurance agreements that may overlap with insurance coverage.
Lease agreement could make a tenant responsible for damage to the leased property.
A credit card protection plan may cover a rental vehicle.
A credit card protection plan might protect purchased property against theft or accidental damage.
An extended auto warranty, home warrant, appliance service agreement, or other plan could be a contractually enforceable source of recovery.
60
How do many homeowners policies address overlapping coverage provided by noninsurance agreements?
They have a provision indicating that coverage provided by the homeowners policy is in excess over any recovery that the insured may be able to get from a service agreement provider.
61
What does a subrogation provision state?
Even though a third party may be eligible to recover from a responsible party's insurer and his or her own insurance, he/she must reimburse his/her insurer.
62
Provide three examples of losses for which insurance is provided by more than one coverage.
A scheduled property endorsement may cover items that are covered by in scheduled personal property.
Personal property used to maintain or service a building (fire extinguishers, outdoor furniture, etc. ) is usually covered under building coverage but may also be covered as personal property.
A passenger may have medical payments coverage, PIP, and may be able to bring a bodily injury claim against the driver.
63
Provide an example of someone having other insurance in a similar policy.
Somebody moving to a new home may have overlapping homeowners policies.
64
Provide example of losses that may be covered by dissimilar policies.
Liability claims with a utility trailer may be covered by homeowners and auto.
A restaurants valet parking may be covered by commercial general liability and commercial auto policies.
A person injured in an auto accident while performing work-related activity may be able to recover under their own personal auto, under individual or group medical expense or disability insurance, or the employer's workers comp.
65
Define joint tenancy
```
Joint tenancy is a way
in which two or more
persons may hold title
to property in equal,
undivided shares. When one owner dies, his or her share of the property is not passed on according to a will, but automatically becomes the property of the surviving joint tenant(s). The last survivor becomes the sole owner of the property and can dispose of it as he or she wishes.
```
66
Define tenancy in common
A concurrent ownership of property, in equal or unequal shares, by two or more joint tenants who lack survivor ship rights (can pass their share onto their dependents)
67
Define tenancy in partnership
Concurrent ownership by a partnership and its individual partners of personal property used by the partnership
68
How do coinsurance clauses encourage commercial property insureds to insure to value?
Insured is responsible for retaining part of any loss if property is underinsured.
69
Why is it difficult to maintain appropriate policy limits?
- Amount necessary under coinsurance agreements is based on value at time of loss but policy limit is chosen when writing policy.
- Value is estimated with informed guess
- Value cannot be precisely measured until property is actually being rebuilt/replaced
- Values change over time
70
What are three methods used for determinig ACV for property?
- Replacement cost - depreciation.
- Market value
- Broad evidence rule - all relevant factors considered.
71
What factors may be considered when applying broad evidence rule to a building's ACV?
- obsolescence
- Present use and profitability
- Alternate building uses
- Present neighborhood characteristics
- Long-term community plans for the area where the building is located.
- Inflationary and deflationary trends.
72
Replacment cost policies pay more than the value of the property prior to loss. How does the carrier reduce moral hazards?
Most rc policies pay out after property is replaced or repaired. Some policies have an option where the ACV is paid and insured must submit proof of repairs/replacement within 180 days to get difference between ACV and replacement cost.
73
How is the compensable amount of a liability claim determined?
Negotiated between carrier and claimant, if settled out of court. Otherwise, goes to trial and amount is based on legal principles.
74
What are some factors that determine the extent of damages related to property damage claims?
The owner may recover the reasonable cost to repair the property or replace it, if it can't be economically repaired. When the property must be replaced, the owner is entitled to market value before damage or destruction and may also recover damages to compensate for loss of use of the property.
75
What are some factors that determine the extent of damages related to bodily injury claims?
- Reasonable and necesssary medical expense
- Type of injury
- Lost wages/lost earning capacity
- Out-of-pocket expenses, ec. household assistance
- Current and future pain and suffering
- Extent/permanency of disability or impairment.
- Disfigurement
- Pre-existing condition
76
How is the maximum amount payable for a covered claim determined in a liability policy that contains multiple policy limits?
Depends on complete analysis of the interactions among the various limits.
77
Tenancy by the entirety
Tenancy by the entirety is a type of shared ownership of property recognized in most states, available only to married couples. Much like in a joint tenancy, a husband and wife who own property as tenants by the entirety each own an undivided interest in the property, each have full rights to occupy and use it and have a right of survivorship. Tenants by the entirety also cannot transfer their interest in the property without the consent of the other spouse.
78
An insured with a CGL policy incurs a covered claim for $500k. The policy has a $1MM per occurrence limit. Prior claims during the policy term reduce the aggregate limit to $100k. How is the claim paid?
$100k
79
An insured has a directors and officers liability policy with a $1MM policy limit. The insured is held liable for a $975k judgnent and defense costs totaling $150k. Determine payment based on following scenarios:
a. The defense costs and supplementary payment reduce the policy limits.
b. The liability policy covers defense costs in addition to the policy limits.
a. Limits is reduced to $850 after deducting defense costs.
| b. The claim would be paid in full.
80
How can the size of a deductible affect the insured's risk control incentives to prevent or reduce losses?
A deductible should be large enough to have a noticeable financial effect on the insured. Small deductibles don't offer a financial incentive and large deductibles defeat the purpose of purchasing insurance.
81
How do deductibles affect premiums for insurers and insureds?
- Reduce insurer's costs
- Give insured risk control incentives
- Reduce moral and morale hazards
82
How do medium-sized deductibles affect premium credits?
Premium credits encourage use of medium-sized deductibles. These eliminate dollar trading but provide reliable source of recovery for large losses.
83
Describe the effectiveness of deductibles in liability policies.
Not as effective as with property insurance. Insurers want to control claim from outset, premium would not be reduced much with liability insurance due to the few claims that involve small amounts, the insurer has to recover the deductible and that isn't always easy.
84
How does subrogation address negligent third party rights to recovery?
An insured's recovery from a third party (or their carrier) could overlap with the insured's own property insurance coverage. Subrogation allows an injured party to collect from their own carrier, which can attempt to recover from responsible party (or their carrier)
85
Charlotte, Chloe, and Jessica have concurrent ownership in a restaurant, each owning one third. Their combined interests equal the value of the restaurant. If one of them should die, her share would pass to her heirs. This type of ownership is referred to as
Tenancy in common.
86
Spouses Ed and LeeAnn own a home. If Ed dies, LeeAnn will become the sole owner of the house. Both Ed and LeeAnn have an insurable interest in the property equal to the full value of the property. This is a
Tenancy by the entirety.
