Property and Casuality Insurance Policy Conditions

Question 1

Policy conditions set forth the rules that determine what is required to qualify for coverage by describing:

Answer 1

-Who is entitled to coverage, and when and where coverage applies.

-How and when different policy limits and related provisions apply.

-The insured’s and the insurer’s duties after a loss occurs

-How claims will be paid.

Question 2

Key point:
Policy Conditions

Answer 2

-When a policy contains more than one coverage (e.g., separate property and liability coverage sections), each coverage may have its own set of conditions.

-The policy may also contain a set of master conditions that apply to all coverages.

Question 3

Some policy conditions deal with practical issues concerning :

Answer 3

-Which parties are entitled to coverage, during what periods coverage applies, and where coverage applies.

Question 4

Parties Entitled to Coverage:

Answer 4

Those protected by a property or casualty insurance policy include not only insureds (first named insured, named insured(s), and additional insureds) but also secured creditors, such as mortgage lenders.

Question 5

Mortgage Clause:

Answer 5

-Is a financial institution that lends money to a borrower to purchase a home or other real estate. The mortgaged property serves as collateral that secures the loan.

-The mortgagee has an insurable interest in the property because it faces a loss if the property is damaged or destroyed, and for that reason, it will insist on being named in the declarations of the policy covering the property.

Question 6

The standard mortgage (mortgagee) clause in a property insurance policy gives certain rights to the mortgagee, including:

Answer 6

-Ensuring that the mortgagee is paid if the mortgaged property suffers a loss.

-Continuing coverage for the benefit of the mortgagee if the policy is voided by some act of the insured.

-Providing the mortgagee with advance written notice of policy cancellation.

Question 7

Secured loans finance the purchase of autos and other personal property. As a secured creditor with an insurable interest in the personal property:

Answer 7

The lending institution will want to be listed as a loss payee in the property owner’s policy.

Question 8

Loss Payable Clause:

Answer 8

-The loss payable clause ensures that the loss payee will be included in any claim payment.

-This is usually done by making a claim check payable to both the named insured and the loss payee as their interests may appear.

Question 9

Key point:
Loss Payable Clause

Answer 9

A loss payable clause usually is not as broad as the mortgage clause and does not give the loss payee any rights other than a right to share in a claim settlement.

Question 10

In contrast to the standard mortgage clause and the loss payable clause, both of which provide:

Answer 10

-Some coverage to outside parties, the no benefit to bailee provision makes it clear that there is no coverage for outside parties who are Bailee.

Question 11

The no benefit to bailee provision in a property owner’s property insurance policy clarifies:

Answer 11

-That the insurer is not responsible for covering property under the care of a bailee.

-There is a type of inland marine insurance (discussed in a later lesson), called bailee coverage, that will cover property held by a bailee.

Question 12

Ex:
No Benefit to Bailee Provision

Answer 12

-That the insurer is not responsible for covering property under the care of a bailee.

-There is a type of inland marine insurance (discussed in a later lesson), called bailee coverage, that will cover property held by a bailee.

Question 13

Assignment Provision:

Answer 13

-As a general rule, ownership of a property or casualty policy cannot be assignment to another party, even if that party buys the insured property from the current policyholder.

-A typical assignment provision states that any assignment of the policy will be invalid unless the insurer provides its written consent, which rarely happens.

Question 14

When Coverage Applies:

Answer 14

-Property and casualty insurance policies provide coverage only during a specific time period, known as the policy period.

-The declarations indicate the date and time when coverage begins (inception date) and ends (expiration date).

Question 15

While one-year policy periods are common with homeowner and commercial policies, auto policies typically have a six-month policy period:

Answer 15

-Property insurance policies only cover losses that occur during the policy period.

-Some liability insurance policies only cover losses that occur during the policy period, but others cover claims made during the policy period even if the related event took place prior to the policy inception.

Question 16

Cancellation and Nonrenewal:

Answer 16

-Cancellation terminates a policy before its normal expiration date.

-Either the insurer or the insured may initiate a cancellation.

-Policy provisions describe when, how, and by whom the insurance contract may be canceled and for what reasons.

Question 17

Before an insurance policy expires, the insurer and the insured usually agree to renew it for another term. In some cases:

Answer 17

The insurer may decide not to renew the policy and then sends a nonrenewal notice to the named insured.

Question 18

Both cancellation and nonrenewal provisions are subject to:

Answer 18

State-mandated endorsements that dictate when cancellation or nonrenewal notices must be provided and the reasons for which an insurer may cancel a policy.

Question 19

A pro rata cancellation occurs:

Answer 19

-When the insurer voids the policy and returns the unearned premium for the unexpired term of the policy, without charging any penalty to the insured for the interim cancellation.

Question 20

A short rate cancellation is when:

Answer 20

-The insured voids the policy before its expiration date.

-This entitles the insurer to keep a larger portion of the unearned premium than would normally occur with a pro rata cancellation.

Question 21

A flat rate cancellation occurs when:

Answer 21

-Either the insured or the insurer voids the policy as of its effective date.

-Neither party has any obligations to the other, but the insurer must refund the premium to the insured.

Question 22

Liberalization Clause:

Answer 22

-Insurers often revise their standard policy forms to deal with court decisions, new exposures, or a need to clarify the insurer’s intentions.

-If the change expands coverage, a policy’s liberalization clause applies these changes to the policy when it is renewed.

Question 23

A policyowner who cancels her auto policy before the end of the policy period is entitled to what kind of refund, if any, of any premiums paid?

Answer 23

-Short ratat refund.

-If the insured cancels a policy before the end of the policy period, the insurer is entitled to keep a larger portion of the unearned premium than would normally occur if the insurer canceled it. This is called a short rate cancellation.

Question 24

Insurance policies usually include a policy territory provision that indicates where coverage applies. A typical coverage territory provision:

Answer 24

Specifies that coverage applies only to losses within the United States and its possessions, Puerto Rico, and Canada. (Coverage in Mexico typically requires an endorsement.)

Question 25

How much an insurer will pay for a loss is obviously important to policyholders. The answer depends on:

Answer 25

The type of policy.

Question 26

Several provisions in a property insurance policy affect the amount the insurer must pay for a covered loss. These include:

Answer 26

-Policy limits and any sublimits.

-Deductibles.

-Coinsurance provisions.

-Restoration of limits provisions.

Question 27

Limit of insurance (Limit of liability):

Answer 27

A policy limit is the maximum amount an insurer will pay for a covered loss.

-Usually based on the amount requested by the applicant, the policy limit should reflect the insurable value of the covered property, whether based on its replacement cost coverage, actual cash value (ACV), or other valuation basis.

Question 28

Property insurance policies usually contain sublimit that apply to specific types of property, such as:

Answer 28

-Money.

-Jwelry.

-Trees.

-A sublimit is the maximum amount the insurer will pay for a loss to that type of property.

Question 29

Deductibles:

Answer 29

-A deductible is the up-front part of a covered loss that the insurer does not pay.

-A policy’s deductible amount is selected by the applicant.

Question 30

Deductibles serve two purposes:

Answer 30

-They encourage insureds to exercise care (e.g., reduce hazards) by making them share in losses.

-They help keep premiums low by not covering small losses while protecting the insured against larger ones.

Question 31

Coinsurance:

Answer 31

-Encourages policyholders to purchase policy limits that adequately reflect the insurable value of their property.

-It does this by reducing the amount that an insurer will pay for a covered loss if property is underinsured.

Question 32

The coinsurance provision requires:

Answer 32

-the insured to buy a limit of insurance at least equal to a specified percentage (e.g., 80 or 90 percent) of the actual cash value (ACV) of the covered property.

-“Actual cash value” is often defined as the building’s fair market value.

Question 33

If the actual limit of insurance is less than the required limit, the insured will not collect the full amount on a loss. The difference is called:

Answer 33

-The coinsurance penalty. Instead, loss recovery will be limited to the ratio of the actual limit to the required limit.

Question 34

The coinsurance clause reduces:

Answer 34

-The amount of recovery only in partial loss situations.

-For a total loss, the policy would pay the dwelling coverage limit of insurance applicable to that property.

Question 35

After insured property is destroyed, and an insurer indemnifies the insured, what happens to the insurance?

Answer 35

-In some cases, after the insurer pays a total loss, coverage ceases, and the insurer returns any unearned premium.

-Not so with a policy containing a restoration of limits provision.

Question 36

Depending on the exact type of provision, the restoration of limits provision:

Answer 36

-Restores either the full or reduced policy limits after payment of a loss.

-For policyholders looking to rebuild after a loss, this is generally preferable to going through the process of applying for a new policy.

Question 37

Most property policies contain a vacancy provision that reduces or eliminates coverage if covered premises have been vacant or unoccupied for a designated period of time (e.g., 45 or 60 days):

Answer 37

-A vacant building has no occupants and no furniture or other personal property (e.g., a deserted building).

-An unoccupied building is one that currently has no occupants but could be occupied (e.g., rental property).

Question 38

The liability limits in a liability (casualty) insurance policy may be stated in various ways:

Answer 38

-Some policy limits apply to each occurrence.

-Some policy limits apply to each person injured in a given occurrence.

-Policies with split limits have both per-occurrence and per-person limits for bodily injury liability and another limit for property damage liability.

-Policies with a combined single limit apply a single dollar limit to bodily injury and property damage liability claims.

-Commercial general liability (CGL) insurance policies have both per occurrence limits and aggregate limits.

-A general aggregate limit may apply separately to each off-premises project of the named insured (per project limit).

-A general aggregate limit may apply separately to each of the locations that the named insured owns or rents (per location limit).

Question 39

An “occurrence” is either an:

Answer 39

-Accident or an event that occurs over a longer period of time and results in covered injury or damage to another person or property.

-A per occurrence limitation of liability provision establishes the maximum amount the insurer will pay for all claims resulting from a single occurrence, no matter how many people are injured, how much property is damaged, or how many different claimants may make claims.

Question 40

Ex:
Per Occurrence

Answer 40

-A per person limit is the maximum amount the insurer will pay for one person’s injuries.

-If a policy has a $100,000 per occurrence limit, the insurer will pay no more than $100,000 for a single occurrence, even if the claimants are entitled to a much larger amount of damages.

Question 41

Auto insurance policies typically use the split limits approach, which combines the per person and the per occurrence approach. With split limits, three separate dollar amounts apply to each accident:

Answer 41

-The first limit is a per person limit: the maximum amount that will be paid to any one injured person.

-The second limit is a per occurrence limit: the maximum total amount that will be paid to all injured persons.

-The third limit is a per occurrence limit that applies to property damage claims; this is the maximum amount that the insurer will pay for damage to other cars or property resulting from the accident.

Question 42

Ex:
Split Limits

Answer 42

-Jim’s auto policy has split limits of $50,000/$100,000/$50,000 (referred to as 50/100/50 limits).

-Jim causes an auto accident involving two other vehicles, and each car’s driver is injured:

-The first person’s bodily injury is valued at $25,000
the second person’s bodily injury is valued at $75,000
the two cars’ damages are valued at $65,000
The first injured claimant will receive $25,000. The second will receive $50,000, because of the $50,000 per person limit.

-The insurer will pay a total of $75,000 for bodily injury, which is less than the $100,000 maximum per occurrence limit.

-The insurer will pay $50,000 (the third limit) for the damage to other vehicles.

-Damages total $165,000, but Jim’s insurer is obligated to pay only $125,000. Jim is responsible for paying the remaining $40,000 from his own resources.

Question 43

Combined Single Limits:

Answer 43

-Simply states a single dollar limit that applies to any combination of bodily injury and property damage liability claims.

Question 44

Insurance policies include conditions that describe the duties of the insured and the insurer when a covered loss occurs. If the insured fails to comply with its duties, and this failure makes it difficult for the insurer to handle the claim properly, the insurer can deny coverage.

The duties of both parties are somewhat different with property insurance than with liability insurance because of some fundamental differences between these two types of coverage:

Answer 44

-Property insurance covers accidental losses to the insured’s own property. If a loss is covered by the insurance policy, the insurer makes its claim payment directly to the insured.

-Liability insurance covers accidental losses when the insured is legally responsible (liable) for injury to someone else or damage to another’s property. If the loss is covered, the insurer’s payment is made directly to the claimant who suffered the loss.

Question 45

The named insured must fulfill certain duties after a property insurance loss occurs, including:

Answer 45

-Provide prompt notice of any potential claim to the insurer or its agent.

-Notify the police if a theft is involved or another law might have been violated.

-Protect the property from further harm.

-Cooperate with the insurer in the investigation.

-Provide a proof of loss to the insurer or agent within

-60 days after the insurer requests it.

Question 46

Insureds who are facing a liability loss are also required to promptly notify the insurer or their agent of the claim and to cooperate with the insurer. In addition, the insured is expected to:

Answer 46

-Promptly forward to the insurer any loss notice, demand, summons, or other legal process.

-Assist the insurer in making a settlement, attend the trial or other proceedings, provide witness information.

-Assume no obligation and make no payment directly to claimants.

Question 47

Assuming that the named insured has fulfilled its duties in reporting a loss and complied with the policy’s other conditions, the insurer is obligated to honor the promises made in the policy.

The insurer meets these obligations by:

Answer 47

-Verifying coverage.

-Investigating and evaluating the claim.

-Closing the claim by paying the claim or explaining to the insured why the claim was denied.

Question 48

Conditions that may affect the claims handling process include:

Answer 48

-Abandonment.

-Salvage.

-Subrogation.

-Appraisal clause.

-The insurer’s settlement options.

Question 49

Abandonment Provision:

Answer 49

-Makes it clear that the insured cannot simply walk away from damaged property.

-The insured is responsible for repairing or disposing of the property unless the insurer agrees to handle it. The insurer is not required to accept any property that an insured has abandoned.

Question 50

Salvage:

Answer 50

-If an insurance company pays for a total loss to covered property, it has a right to recover, sell, or dispose of the damaged property.

-For example, when a covered auto is so badly damaged that it would cost more to repair the auto than to buy a similar one, the auto is considered a constructive total loss.

-After paying the auto’s actual cash value, the insurer can recover some of its payment by selling the salvage to an auto junkyard that will sell some of its usable parts.

Question 51

Subrogation:

Answer 51

-Refers to the insurer’s right to recover its claim payment from the party that was responsible for the loss.

-Insurance policies make it clear that an insurer that pays an insured for a loss has the right to collect damages from the responsible third party.

Question 52

Ex:
Subrogation

Answer 52

-Jane’s car was damaged in an auto accident caused by Frank.

-Because she has collision coverage, Jane’s insurance company paid her claim for collision damage.

-Through subrogation, the insurer then attempted to recover what it has paid from Frank or his insurance company.

Question 53

Ex:
Subrogation

Answer 53

-Jane’s car was damaged in an auto accident caused by Frank.

-Because she has collision coverage, Jane’s insurance company paid her claim for collision damage.

-Through subrogation, the insurer then attempted to recover what it has paid from Frank or his insurance company.

Question 54

Appraisal Clause:

Answer 54

-In property insurance policies applies when the insurer and the insured agree that covered property has been damaged by a covered cause but do not agree on the damaged property’s value.

-In this situation, the insured and the insurer each choose an appraiser, and the two appraisers select an appraiser umpire.

-An agreement by any two of these three parties establishes the value of the loss.

Question 55

Settlement Options:

Answer 55

-Once all conditions are met following a loss, the last step is for the insurer to pay the claim.

-Settlement options vary between property insurance policies and liability insurance policies.

Question 56

Property Insurance: Pay, Repair, or Replace:

Answer 56

-Insurers usually settle property claims by paying an amount that reflects the insured value of repairing or replacing the covered property.

-However, paying money is not the insurer’s only option.

Question 57

Property insurance policies typically allow the insurer to repair or replace the damaged property with a similar or equivalent item. The insurer might do this, for example, because:

Answer 57

It has an arrangement to purchase the replacement item at a discount.

Question 58

Liability Insurance: Duty to Defend:

Answer 58

-Liability insurance pays when an insured is found to be legally responsible for damages to another person due to the insured’s negligence.

-The insurer may try to prove, through a civil trial, that the insured is not responsible for the loss and is not legally required to pay damages.

-It will pay all attorney fees and other defense costs regardless of the outcome.

Question 59

The insurer’s duty to defend the insured does not:

Answer 59

End until the insurer has settled the claim or used up all available insurance in paying a judgment.

Question 60

Key point:
Liability Insurance: Duty to Defend

Answer 60

-A liability insurer’s duty to defend is broader than its duty to pay damages.

-Even though a claim may be groundless or even fraudulent, the insurer is obligated to defend an insured whenever a plaintiff’s claim or suit alleges one or more facts that the policy might conceivably cover.

Question 61

Most liability policies give the insurer:

Answer 61

-The exclusive right to decide how to settle a liability claim (e.g., whether to accept the plaintiff’s demand or counteroffer with a different amount).

-Some policies, however, give the insured limited rights to approve or disapprove the insurer’s decision.

Question 62

Most property and casualty insurance policies contain an other insurance clause clause that:

Answer 62

Explains how the insurer will handle a situation in which other insurance covers the same loss

Question 63

Insurance policies generally state whether they provide primary or excess coverage if there is other insurance:

Answer 63

-A policy that provides primary coverage comes first; it pays before other applicable coverages until its limits are exhausted.

-A policy providing excess coverage pays amounts that not covered by another policy’s primary coverage.

Question 64

When two or more policies provide primary coverage:

Answer 64

They will cover the loss on a pro rata basis (i.e., in proportion to their limits).

Question 65

Contribution by Equal Shares:

Answer 65

-Some liability policies provide for contribution by equal shares when there are two policies covering the same loss.

-In this case, both policies split the loss equally. If one policy exhausts its limits, the other policy pays the remaining loss until its limits are exhausted.

Question 66

Ex:
Primary and Excess

Answer 66

Policy A provides $100,000 of primary coverage and Policy B provides $50,000 of excess coverage.

-If a $75,000 loss occurs, Policy A will pay the entire $75,000 loss. If the loss exceeds $100,000, Policy B is responsible for paying the excess above $100,000.

-Pro Rata
If Policy A provides $100,000 of primary coverage and Policy B provides $50,000 of primary coverage, the first policy will pay two-thirds of any loss.

-For a $75,000 loss, Policy A will pay $50,000, and Policy B will pay $25,000.

-Contribution by Equal Shares
If Policy A provides $100,000 of coverage and Policy B provides $50,000 of coverage, both policies will pay $37,500 for a $75,000 loss.

Question 67

When two or more insurance policies cover the same loss exposure:

Answer 67

They should be concurrent—that is, they should have the same inception and expiration dates.

Question 68

If two or more policies covering the same loss exposure do not have identical policy periods:

Answer 68

They are said to be nonconcurrent.

Question 69

Nonconcurrency is best avoided:

Answer 69

-Wherever possible. Besides complicating and slowing the claims settlement process, it can result in the insured not being fully covered for a loss.

Question 70

Ex:
Nonconcurremcy

Answer 70

Nonconcurrency of an insured’s umbrella policy and liability policy is a problem because the nonconcurrent policy terms make it possible for a loss under the liability policy’s annual aggregate limit to use up part of the umbrella policy’s limits.