INTRODUCTION TO COMMERCIAL PROPERTY INSURANCE (551-1)

Question 1

4 Types of Loss Exposure

Answer 1

1. Property loss exposure: the possibility of damage to property which the firm has a financial interest
2. Liability loss exposure: the possibility that a claim will be made against the firm by someone seeking money damage or some other legal remedy
3. Personnel loss exposure: the possibility that a key person in the firm will die, retire, resign or become disabled, depriving the firm of hard to replace skills and knowledge
4. Net income loss exposure: the possibility of a reduction in net income

Question 2

Firms manage loss exposures by applying the 6 step risk management process. Explain the 6 steps

Answer 2

1. Identify loss exposures: identify loss exposures in all four loss exposure categories
2. Analyze loss exposures: estimate the frequency and severity of loss for each exposure
3. Examine the available risk management techniques: consider the cost of each risk management technique that could be used to manage each loss exposure.
4. Choose the best technique(s): Select the most effective and economical technique(s)
5. Implement the technique(s): Put the chosen technique(s) into action
6. Monitor the results: Monitor the results of those techniques and revise the risk management program as needed

Question 3

6 Risk Control Techniques

Answer 3

1. Exposure avoidance: abandon or avoid the loss situation, thus eliminating all possibility of loss (don’t preform operations with a high risk of fire, such as welding or spray painting ) A firm that avoids ever incurring a particular loss exposure is practicing proactive avoidance. A firm that eliminates an existing loss exposure is practicing abandonment.
2. Loss prevention: reduces loss frequency. (Build a masonry home, not a wood frame home.)
3. Loss reduction: reduces loss severity. (Install a sprinkler system.)
4. Separation: disperses resources over two or more locations
5. Duplication: creates copies or spares of important items and stores them at separate locations (Photocopy contracts)
6. Diversification: spreads loss exposures over several projects, products , markets, and/or regions. (Create more than one product. Buy stocks from companies in different industries.)

Question 4

2 Risk Financing Techniques

Answer 4

1. Retention: generates funds from within the firm to pay for losses.
2. Transfer: generates funds from outside the firm to pay for losses, through either insurance or noninsurance transfer

Question 5

Fire exposures

Answer 5

Fire consists of three elements: a heat source, oxygen and fuel. A fourth element, an uninterrupted chain reaction allows a fire to grow and spread. Fire prevention focuses on removing one of those four elements, often through fire-resistant building construction. Pre-loss fire control techniques include: controlling heat sources from fuels, using fire stops, fire walls, and fire divisions to help stop fires from spreading. Internal fire extinguishment methods include sprinkler systems, guard services and fire brigades. External fire extinguishment methods include public fire departments.

Question 6

Burglary, robbery and employee theft exposures

Answer 6

Burglary: theft with forcible entry

Robbery: theft by threat or use of bodily violence

Employee theft: theft committed by an employee against his employer.

To control theft losses: prevent or delay the criminal’s access, detect him, and/or identify him

Methods to control employee theft include accounting controls, access controls, background checks and separation of duties

Question 7

Explosion exposures

Answer 7

Fire type explosion loss control measures include fire control measures, suppression equipment with rapidly reacts to a pressure increase, and venting that directs pressure to open air or a solid barrier. Pressure vessel explosion loss control measures include inspection, maintenance, proper operation, and safety release valves

Question 8

Windstorm exposures

Answer 8

Use wind-resistant construction, install shutter and blinds, maintain roofs and walls, secure outside property, and keep trees and utility poles away from buildings.

Question 9

Flood exposures

Answer 9

Avoid high water and low ground, build dams, build channels and open areas to direct and hold flood waters, sandbags during floods. install pumps to remove water, use equipment that resists dampness and flood water pressure and develop plans to move property to higher ground.

Question 10

Earthquake exposures

Answer 10

Avoid earthquake-prone areas and use earthquake resistant construction, which can be either a rigid design that will resist earthquake forces or a flexible design that will move with and absorb earthquake forces.

Question 11

Commercial property insurance

Answer 11

Covers property loss exposures for business and nonprofit organizations

Question 12

Multiline (package) policy

Answer 12

Covers two or more lines of business.

Question 13

Monoline policy

Answer 13

Covers one line of business. Many firms cover most of their property and casualty loss exposures through a multiline policy, then add one or more monoline policies to provide coverage not available through the multiline policy.

Question 14

Casualty

Answer 14

An accident, mishap or disaster

Question 15

Standard form

Answer 15

Developed by the ISO (Insurance Services, Office, Inc.), the AAIS (American Association of Insurance Services), or another insurance advisory organization

Question 16

Nonstandard form

Answer 16

Developed independently by an insurer or broker

Question 17

Commercial package policy (CPP)

Answer 17

multiline policy with two or more ISO commercial likes coverage parts. Under the ISO’s Commercial Lines Manual (CLM) rules, a CPP requires one building and/or business personal property form and one commercial general liability. Each coverage part includes declaration forms, a coverage form, sometimes a general conditions form, and any applicable endorsements. Each coverage part is combined with a common declarations page and a common policy conditions form to form a policy.

Question 18

Liability

Answer 18

Any type of insurance that protects an individual or firm from the risk that they may be sued and held liable for something (ex. malpractice, injury, negligence)

Question 19

Businessowners’ policy (BOP)

Answer 19

Freestanding package policy that provides property and liability coverage for small to medium-sized businesses. Typical BOP coverage includes building and business personal property, business income and extra expenses, and the equivalent of commercial general liability. The insurer benefits from reduced adverse selection and handling costs and simpler rating. The insured benefits from convenience and lower premiums.

Question 20

Output policy

Answer 20

Combines several commercial property coverages into one policy form with associated endorsements. Compared with standard commercial package policy forms, the output policy offers extra property coverage enhancements and broader coverage.

Question 21

Common commercial policy: cancellation condition

Answer 21

The insured can cancel at any time by sending written notice to the insurer. The insurer can cancel at any time by sending written notice to the first named insured, with 10 days’ notice in cases of nonpayment of premium and 30 days’ notice for all other reasons. The insurer sends any premium refund to the first named insured. In almost all states, state law superseded the cancellation condition,

Question 22

Common commercial policy: changes condition

Answer 22

Only the first named insured has the authority to request changes. The policy can only be changed by written endorsement issued by the insurer. In practice, verbal changes not yet confirmed by written endorsement are usually binding.

Question 23

Common commercial policy: examination of books and records condition

Answer 23

The insurer has the right to audit the insured’s books and records related to the policy during the policy period and up to three years after termination

Question 24

Common commercial policy: inspections and surveys condition

Answer 24

The insurer has the right to inspect the insured’s premises and operations during the policy period.

Question 25

Common commercial policy: premiums condition

Answer 25

The first named insured is responsible for paying the premium and receives any return premium due from the insurer.

Question 26

Common commercial policy: transfer of rights and duties condition

Answer 26

The insured cannot transfer the rights or duties und the policy without the insurer’s written consent. If the named insured dies, the insured’s rights and duties and automatically transferred to the insured’s legal representatives.

Question 27

Policy condition

Answer 27

Any provision the qualifies an otherwise enforceable promise in an insurances policy.

Question 28

Commercial property: concealment, misrepresentation or fraud condition

Answer 28

Coverage is void if you commit related fraud or intentionally conceal or misrepresent any material facts related to any coverage, claim, or your insurable interest.

Question 29

Commercial property: control of property condition

Answer 29

Any act of neglect by anyone to your property when it is out of your control will not affect coverage.

Question 30

Commercial property: insurance under two or more coverages condition

Answer 30

We will not pay more than the actual amount of your loss, no matter how many coverages apply.

Question 31

Commercial property: liberalization condition

Answer 31

If we broaden coverage without additional premium within 45 days before inception or during the policy period, you have broadened coverage.

Question 32

Commercial property: no benefit to bailee condition

Answer 32

(a bailee holds the property of another (the bailor) for some purpose beneficial to one or both parties) No one else have custody of covered property benefits from this insurance. Coverage continues for you. Coverage is not voided if you are the bailee of the property that is damaged. We may seek recovery from any negligent third party.

Question 33

Commercial property: other insurance condition

Answer 33

If the other policy has the same terms, conditions, and provisions as the BPP the other insurer shares losses with us on a pro rated basis. If the other policy has different terms, conditions, and provisions, we’ll pay on an excess basis.

Question 34

Commercial property: policy period, coverage territory condition

Answer 34

Policy period is shown by the dates listed on the declarations page. Coverage begins at 12:01 AM standard time at your address. Coverage territory is these US, Puerto Rico, and Canada.

Question 35

Commercial property: transfer of rights of recovery against other to us conditions

Answer 35

After we’ve paid we reserve the right to recover from a responsible third party. You can not impair our right of subrogation. You may waive your rights before a loss. After a loss, you may waive your right only against

a. another insured under this policy
b. a business that owns or controls you, and/or
c. your tenant

Question 36

Commercial property: actual cash value (ACV) valuation condition

Answer 36

Replacement cost minus depreciation. Replacement cost is determined at the time and location of loss; it is not original cost. Depreciation reflects the property’s remaining useful life; not its accounting depreciation

Question 37

Commercial property: replacement cost (RE) valuation condition

Answer 37

The cost to replace the property with new property, determined at the time and place of loss

Question 38

Commercial property: selling price valuation condition

Answer 38

Stock that you’ve sold but not yet delivered is valued at its sales price minus both discounts and unincurred expenses

Question 39

Commercial property: coinsurance condition

Answer 39

Encourages insurance-to-value by penalizing insureds who do not buy coverage to (typically) 80-100% of the property’s full value. If the amount of insurance is less than the total value of the insured property tie the coinsurance percentage, we’ll pay (the amount of insurance times the amount of loss) divided by (the property value at the loss times the coinsurance percentage).

(did/should x loss) - deductible = amount payable

(limit of insurance/(value of covered property x coinsurance percentage)) x amount of covered loss - deductible = amount payable

Premium = (value of covered property x coinsurance percentage) x (rate/per amount of insurance)

Question 40

Commercial property: duties in the event of loss or damage condition

Answer 40

You must promptly give us notice of loss, file a policy report if laws may have been broken, protect the covered property from further loss, give us complete inventories of the damaged and undamaged property including values, let us inspect the property and you records, let us question you under oath if we ask and send us a signed sworn statement of loss if we request it.

Question 41

Commercial property: appraisal condition

Answer 41

If you and we disagree on property value or loss amount, either of us can demand that we hire our own appraiser. The two apprisers can then, together, select an umpire. Values and amounts agreed on by any two of those three shall bind both you and us.

Question 42

Commercial property: loss payment condition

Answer 42

We may (it’s our decision to) pay the value of the lost property or pay the cost of repairing or replacing it.

Question 43

Commercial property: recovered property condition

Answer 43

If property is recovered after loss settlement, you can have it back if you repay us. We’ll pay recovery and repair costs.

Question 44

Commercial property: vacancy condition

Answer 44

If a tenant’s building area is vacant for 60 or more consecutive days before the loss we won’t pay for a. any loss caused by vandalism, sprinkler leakage (unless you took steps to avoid freezing), building glass breakage, water damage, theft or attempted theft.
b. We’ll pay you only 85% of what we’d otherwise pay for loss

*The Vacancy Permit endorsement brings full coverage for vacant building for additional premium

Question 45

Commercial property: mortgageholders condition

Answer 45

We’ll pay for covered loss to each mortgagee (the lender in the mortgage, typically a bank) in the order in which they appear. If we deny your claim because of you acts or omissions, the mortgagee can still collect for loss if it
a. pays the premium when you don’t
b. submits a signed, sworn proof of loss within 60 days of when we ask: and
c. has notified us of any changes in ownership, occupancy, or material risk known to it.
We’ll give the mortgagee at least 10 days’ notice if we cancel for nonpayment or do not renew the policy. If we cancel for any other reason we’ll give the mortgagee at least 30 days’ notice.

Question 46

Loss payable provisions endorsement

Answer 46

Contains four options:

1. Loss payable: the loss payee is entitled only to joint loss payment with the insured
2. Lender’s loss payable: a loss payee whose interest in the insured property is established through written agreement (receipts, bills of lading) is entitled to joint loss payment
3. Contract of sale: the buyer or seller in a contract is entitled to joint loss payment as their (both parties) interest may appear (abbreviated ATIMA)
4. Building owners loss payable: the owner of the building in which the insured is tenant is entitled to payment for losses to discribed building