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Insurance

Transfer risk from an individual to a group

1

Law of Large Numbers

The larger the number of separate risks of a like nature combined in one group, the more predictable the number of future losses of that group within a given time period

2

What does the Law of Large Numbers need to operate?

A large number of exposure units be combined.

In P&C, it's the car, home, or other item to be insured.

3

Insurance companies can only predict the number of losses expected for a group but..

not for each individual.

4

Insurable Interest is required

at the time of loss in order to recover on a policy.

5

Risk

chance or uncertainty of loss

Example: when you are driving a car, you may become involved in an accident.

6

Pure Risk

No chance of gain, only chance of loss.

Pure Risk can be insured.

7

Speculative Risk

You have a chance of gain or loss.

Example: Stock Market

8

Hazard

Something that increases the risk.
Example: Drinking while driving

There are 3 types of hazards: physical, moral, and morale.

9

Physical Hazard

Something you can see or touch.

Examples: ice on road, parking a car over a bed of dry leaves, and an oily rag left by the furnace

10

Moral Hazard

Circumstances of morals or habits that increase the probability of a loss from an insured peril.

Examples: An insured previously convicted of arson, and a dishonest person not paying their credit card bills timely.

11

Morale Hazard

Increase in the hazards presented by a risk arising from the insured's indifference to loss because of the existence of insurance.

Example: Insured won't fix faulty wiring because he believes it's less expensive to pay insurance premiums than to pay an electrician. A careless person is a morale hazard.

12

Peril

Cause of Loss.

Example: Wind may damage your roof.

13

SFP

Standard File Policy. It's a 'named or specified perils' meaning if whatever happens to the structure is not named as a peril in the policy, there is no coverage

14

'All-Risk' policies like the HO-3 means that

Whatever may happen is covered unless that peril is excluded.

15

All-Risk Policies

Open Peril Policies

16

Loss

Damage resulting to the structure caused by a peril, such as fire or lightning.

17

Direct Loss

A fire burns the house down. The burnt down house is a direct loss.

18

Indirect Loss

AKA a 'consequential loss' or 'time-element loss' since they occur over a period of time.

Loss of Rental Value (aka Loss of Use) is an indirect loss that is covered on some policy forms.

19

Actual Cash Value

Replacement Cost minus Depreciation
or
Current Value minus Depreciation

AKA Actual Cash Value

20

Replacement Cost

DP-2, DP -3 and all Homeowner Policies have R/C on the dwelling.

All covered property insurance losses to the building will be paid in full if the insured carries 80% of the full replacement cost of the structure as a policy limit at the time of the loss.

21

True or False: You can never recover more than the policy limit .

True

22

Market Value

Amount of money you could get for property in the market.

It may be higher or lower than the R/C of the property depending on the location of the property and the current market conditions.

23

Stated Value

Insured chooses a limit of coverage for the property .

24

In the event of a loss regarding 'stated value', the insurer will pay one of three ways, choosing whichever is least:

The stated value, the cost to repair the property not to exceed the stated value, or ACV.

A stated value policy doesn't guarantee that the stated value will be paid in the event of a total loss.

25

Agreed Value Policy

In the event of a loss, the insurer must pay the agreed value or the cost to repair the covered property not to exceed the agreed value.

26

Salvage Value

The right to salvage belongs to both the insurer and the insured.

If the insured requests to keep the salvage, the insurer will lower the claim amount paid.

If the claim is paid in full, the salvage belongs to the insurer and it may be sold to offset their loss.

27

If a claim is paid in full and the stolen item is found,it should be returned to the insurer,

Who may then offer to sell it back to the insured.

28

Salvage Value

Amount that the insurer can get for the salvage left after a total loss.

29

Proximate Cause

Negligence term meaning that a party's negligence must be the proximate cause or reason for the resulting injury to others.

There must be a direct chain of events leading from the negligent act up to the resulting injury or property damage in order for the negligent act to be considered the proximate cause.

30

Deductible

The amount the insured must pay on every claim. Purpose of the deductible is to discourage the insured from turning in small claims to the insurance company since they are costly to process.

The higher the deductible, the lower the premium.
Hence, by having a deductible the insurance company will end up by paying less of every claim.

31

Indemnity

'Indemnify means to pay.

Property policies are contracts of indemnity, meaning that the insured may not recover more than he or she actually lost.

Example: having two policies on the same property and you were hoping to collect from both, you would be in violation of this principle.
This is prevented with the pro-rata liability clause in a property insurance contract.

32

Limits of Liability

The policy limits.

On an HO, the cost of defense (hiring a lawyer to defend you) is in addition to the limits.

On property insurance, such as SFP, the policy will pay ACV or the policy limits, whichever is less.
The policy limits are shown in the policy's declarations page.

33

Co-Insurance/ Insurance to Value

In Property Insurance, a clause under which the insured shares losses to the extent that he or she is underinsured at the time of loss.

On a DP-00-02, in order to get R/C coverage, the insured must insure his building structure for at least 80% of the current replacement cost. This is the 'co-insurance' requirement aka the "80% clause". This clause is designed to ensure that the insured carries adequate policy limits.

34

Occurrence

Something occurring over a period of time, but still covered by the policy.
Ex: slow gas leak

35

Cancellation

Is done mid-term

36

If the insurer is canceling the policy mid-term,

They must have a specific reason and give written advance notice of the cancellation.

37

If the insured cancels the policy,

A short-rate refund is owed to them.

38

If the insurer cancels the policy,

A pro-rata refund is owed to the insured.

39

Non-Renewal

Occurs at the policy anniversary date.

The insurer must give the insured advance written notice that their policy will not be renewed.

No premium refund is due.

40

Vacancy

Occurs when the insured has moved out and taken his or her belongings.

Nothing inside, no belongings.

41

Unoccupancy

When the insured is on a vacation or trip. His contents are still on the premises and he will be returning.

42

Proximate Cause

Beginning of all chain of events.

Example: pipes froze

43

Proximate Loss

End result of proximate cause.

Ex: pipes burst

44

Limits of liability

The most the policy will pay

45

Co-Insurance Clause

Aka the 80% clause. If you have 80% R/C coverage, your partial losses will be paid in full.

If not, use the did/should equation.

46

Accident

Sudden and unforeseen.

Ex: car running a red light and hitting you

47

On an SFP, after 60 days of either vacancy or unoccupancy,

ALL coverage is suspended.

When a DP-1, DP-2 or DP-3 is added to the SFP, this condition is eliminated entirely, except for the limitation that says there is no coverage for vandalism if the property has been vacant beyond 60 days.

48

On a DP/HO, after 60 days of vacancy, the peril of vandalism

Is suspended.

49

Liability

Covers BI and PD to others caused by the negligent acts of the insured.

Fire Policies DO NOT contain any coverage for liability, ALL HO policies DO. The liability portion of coverage has NO Deductible!!!

50

Absolute Liability aka Strict Liability

Liability without negligence.

Ex: having a pet tiger, your dog bites a neighbor.

51

Strict Liability (generally the same as Absolute Liability)

Liability without fault.

Example in Products Liability: Manufacturers and retailers have been held strictly liable for products that have caused injuries and have been shown to be defective even though they weren't proven to be at-fault or negligent.

52

Strict or Absolute Liability

The owner of an animal is held strictly liable for injuries it may cause, even though it does not have a past history of violence.

53

Vicarious Liability

One party may be responsible for the negligent activities of another party.

Example: if you ask your secretary to drive her own car on your company's business, you can be sued if they negligently injure someone.

Example: you throw a party and serve beer to the guests. You allow the drunken guest to drive home.

Example:tavern owner may be responsible for customer who was served an excess amount of alcohol.

Example: under the Doctrine of Agency, insurers are vicariously liable for the acts of their agents.

54

Negligence

Failure to act as a reasonable person would in the same set of circumstances

55

Binder

A temporary insurance contract that may be verbal or written. A binder is deemed to include all usual terms of the policy for which it was given, plus endorsements.

56

Endorsement

Something added to a policy to modify its terms

57

Medical Payments

No fault type coverage designed to prevent lawsuits. The insurer will pay medical payments to others up to the policy limit regardless of fault.

58

The only time that medical payment is not paid to others is the medical payments coverage on a personal auto policy (PAP).

Medical payments on a PAP is a coverage for reasonable expenses incurred, within 3 years from the date of the accident, for necessary medical and funeral services because of BI caused by an accident sustained by an insured.

59

An insured under medical payment of a PAP includes

The named insured, spouse, or any family member while occupying, or as a pedestrian when struck by a motor vehicle used mainly on public roads or by a trailer and any person who is occupying a covered auto. It's no fault coverage.

60

Specific Property Insurance

Insures a specific property at a specific location for a specific amount.

61

Blanket Insurance

Provides a single amount of insurance that blankets all properties at a specific or at multiple locations.

62

Burglary

Taking of property from inside the premises by a person unlawfully entering or leaving the premises, as evidenced by marks of forcible entry or exit.

Visible marks or damage at the point of entry or exit are needed to confirm the burglary.

63

Robbery

Taking property from the care and custody of a person by someone who has caused or threatened to cause bodily harm.

64

Theft (Larceny)

Any act of stealing. Theft is a broad category. It includes the acts of stealing, such as burglary and robbery.

65

Mysterious Disappearance

Property that is gone without any apparent reason.

Mysterious disappearance is the probability of theft.