The Property Claims Handling Process Flashcards
(233 cards)
1
Q
3 Types of reports
A
- Preliminary
- Status (or interim)
- Summarized (or captioned)
2
Q
Preliminary reports
A
usually filed within the first twenty-four hours or up to seven days following assignment of the claim. They acknowledge receipt of the assignment, inform the insurer about initial activity on the claim, suggest reserves on certain coverages, advise the insurer of coverage questions, and request assistance and guidance from file supervisors as to the handling of coverage questions or any aspect of the claim.
3
Q
Status reports
A
inform the insurer of a claim’s progress and can be filed periodically, generally every fifteen to thirty days following assignment.
4
Q
Summarized reports
A
detailed narrative reports that follow an established format. They are usually filed within thirty days of the assignment’s date. Summarized reports are used when the loss size or settlement authority exceeds a set amount, when coverage might be denied, and where arson or insurance fraud is suspected and requires further review.
5
Q
Public adjusters are most often involved in
A
presenting fire claims to insurers
6
Q
Public adjusters fee
A
10 to 15% of the amount paid under the policy
7
Q
National Association of Public Insurance Adjusters (NAPIA
A
The association was founded in 1951 and seeks to establish ethical and professional standards for representing insureds before insurers.
8
Q
Scope
A
A list of the areas damaged that includes the type of damage, a description of the proposed action to take regarding the damaged property (such as repair, replace, remove, or demolish), and the area’s measurements.
9
Q
The statement usually follows this format:
A
1 The identity of the insured
2 The ownership of, or interest in, the property
3 The existence of other insurance
4 The existence of mortgages or encumbrances
5 The facts and cause of the loss, including the insured’s whereabouts at the time of loss, the presence of any witnesses, and the involvement of the police or the fire department
6 A description of the damaged property, including the nature and extent of the loss or damage to personal and real property, plus information regarding other losses that the policy might cover, such as loss of rent or business income loss
7 The establishment of a basis for subrogation, including identifying individuals or organizations who might be responsible for the damage
10
Q
obtaining a statement might waive
A
In some jurisdictions, obtaining a statement might waive the insurer’s rights to an examination of the insured under oath; it might also waive the requirement that the insured file a sworn statement in a proof of loss.
This waiver is based on the theory that the insurer has been fully informed of all the information that would normally be supplied by an insured’s compliance with these conditions. Using a nonwaiver agreement avoids the problem of waiving any conditions.
11
Q
A witness canvass involves
A
contacting residents of the neighborhood, people living around the insured’s residence, or people or businesses near the loss location
12
Q
A preliminary scope is normally provided to the insurer with initial reports, and
A
it’s also commonly provided to the contractors that have been asked to submit repair or reconstruction bids
13
Q
When the claim is small or uncomplicated
A
insured’s statement typically would be waived
14
Q
Origin and cause experts
A
Experts who independently determine how and where a fire began
15
Q
Salvors
A
Specialists who separate damaged merchandise from undamaged merchandise, prepare inventories of damaged and destroyed property, and establish values of damaged or destroyed business property.
rarely used on homeowners claims except when the amount of loss is large
16
Q
conducting EUOs in these circumstances:
A
Coverage might be in question
The amount of loss payable is in dispute
Insurance fraud is suspected
17
Q
Which one of the following statements is true regarding subrogation?
A
The insurer has a right to recover only the amount that it has paid.
18
Q
Transfer of Rights of Recovery Against Others to Us clause in the Insurance Services Office, Inc. (ISO) Commercial Property Conditions reads:
A
If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:
- Prior to a loss to your Covered Property or Covered Income.
- After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following:
a. Someone insured by this insurance;
b. A business firm;
(1) Owned or controlled by you; or,
(2) That owns or controls you; or
c. Your tenant.
This will not restrict your insurance.
19
Q
insurer has a right of subrogation implied in law
A
regardless of whether the policy expresses such a provision
20
Q
subrogation agreement
A
require the insured to cooperate with the insurer by executing assignment of rights to the insurer
21
Q
waivers of liability or subrogation
A
Lease agreements between landlords and tenants
construction contracts
etc.
22
Q
waivers of liability or subrogation
A
If the insurer has not permitted a release of liability by the insured before a loss and the insured has executed a release or waiver before a loss, the insurer will not be liable for the loss claimed under the policy
23
Q
Amount of Subrogation
A
The insurer has the right to receive only the amount that it has paid.
24
Q
When insureds retain only a deductible amount
A
insurers commonly pursue recovery of that deductible amount on their behalf
25
The insurer would have no right of recovery for
losses that the insured retains because of lack of coverage, exclusions, or limitations of coverage under the policy. Thus, both the insurer and insured might have rights to recover damages against a responsible third party.
26
Property Subrogation Arbitration Agreement
insurers would have a means of resolving subrogation matters without resorting to litigation
27
reinsurer needs to be given notice of a potential claim
Many insurers set a threshold of 50 percent of the retention as the point at which the reinsurer needs to be given notice of a potential claim
28
specified perils policy
the claimant has the obligation to determine which peril applies to the damaged property
29
open perils policy
causes of loss to the property are covered unless they are specifically excluded. Therefore, if the insurer wishes to deny coverage for a claim, it must prove that the policy excludes the loss.
30
conditions precedent
Conditions that must be met before a loss occurs
31
conditions subsequent
those that must be met after a loss occurs
32
Real property (realty)
Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land.
33
Personal property
All tangible or intangible property that is not real property.
All construction materials are considered personal property until they are incorporated into a building.
34
Fixture
Any personal property affixed to real property in such a way as to become part of the real property.
35
Trade fixtures
Fixtures and equipment that may be attached to a building during a tenant's occupancy, with the intention that they be removed when the tenant leaves.
is generally synonymous with “personal property” in insurance policies
36
Improvements and betterments
Alterations or additions made to the building at the expense of an insured who does not own the building and who cannot legally remove them.
All improvements and betterments are fixtures
37
many homeowners policies value
real property (the dwelling and other structures) at replacement cost and personal property at actual cash value
38
Adaptation
If property is incorporated into the building or structure and defines the building or structure, it becomes part of the building for insurance purposes.
39
Intent
The intent to move property from one location to another might qualify an item as personal property even though it is bolted to the structure.
40
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
41
The legal bases for insurable interest include these:
Ownership interest in property
Contractual obligations
Exposure to legal liability
Factual expectancy
Representation of another party
42
Contractual rights regarding people
For example, if Anthony does not pay his credit card debt, the credit card company can bring a claim against Anthony for the outstanding balance on the card. However, the credit card company does not have the right to repossess any of Anthony’s property as payment for the debt.
43
Contractual rights regarding property
For example, if Anthony obtains a mortgage loan in order to buy a house, the mortgageholder can repossess the house if Anthony fails to make his mortgage payments.
44
Factual expectancy
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.
45
Trustee
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.
46
Bailee
The party temporarily possessing the personal property in a bailment.
47
Bailor
The owner of the personal property in a bailment.
48
Joint Tenancy
each owner, referred to as a “tenant,” owns the entire property and has a right of survivorship.
each tenant has an insurable interest in the property’s full value
49
Tenancy by the Entirety
a joint tenancy between a husband and wife.
50
Tenancy in Common
a concurrent ownership of property, in equal or unequal shares, by two or more owners
tenants in common do not have survivorship rights
combined interests are equal to the property value
51
Tenancy in Partnership
concurrent ownership by a partnership and its individual partners of personal property used by the partnership
partnership and all partners have rights of survivorship
combined interests could be many times the actual property value because each partner, and the partnership, would have an interest worth the entire insurable amount
52
Representation of Another Party
Agents, trustees, and bailees
53
Exposure to Legal Liability
A hotelier has an insurable interest in guests’ property.
A tenant has an insurable interest in the portion of the premises the tenant occupies.
A contractor typically has an insurable interest in a building under construction.
54
the BPP, Building and Personal Property Coverage Form
The Mortgageholders condition applies to covered loss to buildings or structures only. The insurer agrees to pay mortgageholders to the extent of their financial interests in the property and “in their order of precedence, as interests may appear.” Therefore, if a property has a first mortgage and a second mortgage, the insurer will pay the holder of the first mortgage first and the holder of the second mortgage second.
55
ISO Loss Payable Provisions endorsement
The endorsement includes space to describe the property in which the loss payee has an interest and indicates which one of these four provisions applies:
The Loss Payable Clause does not provide any right to the loss payee other than the right to have payment of any loss made jointly to the loss payee and the insured.
The Lenders’ Payable Clause provides that a loss payee whose interest in the insured property is established by written agreements, such as bills of lading or financing statements, receives protection similar to that provided by the Mortgageholders condition.
The Contract of Sale Clause provides that a purchaser or seller has the right to have payment of any loss made jointly to the loss payee and the named insured as their interests may appear.
The Building Owner Loss Payable Clause provides that the owner of a building in which the insured is a tenant can be covered as a loss payee. The insurer further agrees to adjust losses to the described building with the building owner who is shown as loss payee. Any loss payment made to the loss payee will satisfy the insured’s claims against the insurer for the owner’s property. The insurer also agrees to adjust losses to tenants’ improvements directly with the insured unless the lease provides otherwise.
56
ISO Additional Insured—Building Owner endorsement
designating the building owner as an additional named insured under the building insurance purchased by the tenant, using an appropriate additional insured endorsement.
57
mortgage clause
If the insurer cancels the policy for nonpayment of premium, it must give written notice of cancellation to the mortgageholder at least ten days before the effective date of cancellation. If the insurer cancels the policy for any other reason, the mortgageholder must receive thirty days’ notice. If the insurer elects not to renew the policy, it must give the mortgageholder ten days’ notice.
58
The insurer’s right to an EUO
is not waived if the claims representative takes informal statements from the insured as long as the claims representative has issued a reservation of rights letter
59
If this occurs, and if a second chance at the EUO is not possible, the EUO may not be able to take place.
If the demand letter is missing key elements, or if the date, time, or place is unreasonable for the examinee, the demand might not be enforceable
60
EUO examinee must answer
any question relevant to the loss and cannot invoke the Fifth Amendment right against self-incrimination for relevant questions
61
If an examinee does not appear at the EUO’s appointed date and time, the insurer has three options:
Do nothing further. In states in which a claims representative must respond to a proof of loss within a prescribed period, rescheduling may not be an option if the insured has filed a proof of loss.
Send a letter requesting that the examinee contact the claims representative to reschedule the examination.
Send a reservation of rights letter stating that because the examinee failed to appear, coverage for the loss may be denied.
62
Before demanding individual EUO examinations
the claims representative must check the particular insurance policy and law of the applicable state
If the insureds refuse to be examined separately, which occurs sometimes when the law is unsettled, the insurer may file an action with the court for a declaration of the rights of the parties.
63
claims representative can demand an EUO from an insured who is being prosecuted
an insured may refuse to participate in the EUO until after the fraud or arson charges have been decided. When this happens, the insurer could be held liable for bad faith if it refuses to wait and denies the claim because the insured violated the EUO condition. So unless the claims representative’s investigation will be prejudiced by the delay, the claim investigation should be suspended until the insured can cooperate.
64
Detrimental reliance
A situation in which an insured relies on the words or actions of an insurer and that reliance harms the insured’s financial position.
65
Declaratory judgment action (“dec action”)
A legal action in which the insurer (or insured) presents a coverage question to the court and asks the court to declare the rights of the parties under the applicable insurance policy.
66
advance payment receipt
Because the courts have held that payment waives coverage defenses, including the insured’s failure to comply with policy conditions, the insurer must act to avoid a waiver. This is accomplished with an advance payment receipt.
67
Prejudiced (due to late notice)
When an insurer’s ability to investigate, settle, or defend a claim is adversely affected by an insured’s late notice of loss.
68
Homeowners and commercial property policies provide coverage for smoke damage
“including the emission or puffback of smoke, soot, fumes or vapors from a boiler, furnace or related equipment.”1 However, these policies don’t cover smoke, vapor, or gas damage from agricultural smudging or industrial operations.
69
determining whether the damage was caused by lightning or something else
Property policies don’t provide coverage for mechanical breakdown, latent defect, or inherent vice.
70
Commercial property policies exclude explosion of
steam boilers, steam pipes, steam engines, and steam turbines. However, they do provide coverage for damage when such explosions result in fire or when such explosions are caused by burning.
71
A specified perils policy typically includes these three perils that cause water damage:
“Accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or automatic fire protective sprinkler system or from within a household appliance”
“Sudden and accidental tearing apart, cracking, burning or bulging of a steam or hot water heating system, an air conditioning or automatic fire protective sprinkler system, or an appliance for heating water”
“Freezing of a plumbing, heating, air conditioning or automatic fire protective sprinkler system or of a household appliance”
72
exclusion of loss caused by:
(1) Freezing of a plumbing, heating, air conditioning or automatic fire protective sprinkler system or of a household appliance, or by discharge, leakage or overflow from within the system or appliance caused by freezing. This provision does not apply if you have used reasonable care to:
(a) Maintain heat in the building; or
(b) Shut off the water supply and drain all systems and appliances of water. However, if the building is protected by an automatic fire protective sprinkler system, you must use reasonable care to continue the water supply and maintain heat in the building for coverage to apply.
73
ISO Building and Personal Property Coverage Form
also referred to as the BPP, contains a Vacancy condition that may come into play in claims for damage to vacant buildings
The condition states that if the building where a loss occurs has been vacant for more than sixty consecutive days before the loss occurs, the insurer will not pay for any damage caused by sprinkler leakage unless the insured has protected the system against freezing.
74
Clean water
escapes from sources such as broken or leaking pipes, an overflowing sink or tub, or a leaky roof or window
75
gray water
include overflow from dishwashers, washing machines, or toilets; broken aquariums; leaking waterbeds; and stagnant seawater.
76
black water
include sewage, seawater, and water that has collected contaminants by flowing over organic material
77
mold exclusion
Mold is neither a covered cause of loss nor a covered peril under property policies because they have a mold exclusion.
78
Theft Claim index bureaus
National Insurance Crime Bureau (NICB)
National Equipment Register (NER)
Art Loss Register (ALR)
79
Property Claim Services (PCS) of Verisk has defined a catastrophe in the United States, Puerto Rico, and the U.S. Virgin Islands as
an event that causes $25 million or more in direct insured property losses and affects a significant number of policyholders and insurers
80
Violent Crime Control and Law Enforcement Act of 1994
makes insurance fraud a crime when it affects interstate commerce.
81
Federal Mail Fraud Statute
prohibits the use of the United States Postal Service for the purpose of defrauding or obtaining money or property by means of false or fraudulent pretenses, representations, or promises
82
The Racketeer Influenced and Corrupt Organization Act, commonly referred to as the RICO statute
specifies these acts as racketeering activities: arson, theft from interstate shipments, mail fraud, wire fraud, bank fraud, and interstate transportation of stolen vehicles or property. Prosecution under the RICO statute requires at least two acts of racketeering activity
83
Reporting statutes
outline what types of activities must be reported and to which authorities
84
Immunity statutes
grant immunity to those who provide information to public authorities investigating a suspected fraud.
85
Industry resources that are useful in identifying and investigating potentially fraudulent claims include
index systems (or index databases), investigative support organizations, and educational organizations.
86
The Art Loss Register
A private online database of stolen artwork that can aid in its identification and recovery.
87
The National Equipment Register (NER)
A national online database that contains information on heavy equipment, construction equipment, and agricultural equipment. Insureds are encouraged to register their equipment online so that if a piece is stolen, the ownership can be traced. NER also provides a used-equipment search in case the claims rep is trying to find a replacement for a stolen or damaged piece of equipment.
88
The NICB
An organization that works with law enforcement to fight all types of insurance crime, including arson. The NICB’s full-time field agents investigate potential criminal activity in insurance claims. The NICB sponsors a Special Investigations Academy to educate claims personnel in all aspects of fighting fraudulent claims.
89
The Insurance Committee for Arson Control (ICAC)
An organization composed of multiple leading insurers that includes participation from organizations such as the NICB and the Independent Insurance Agents & Brokers of America, Inc. ICAC is an educational and communications organization dedicated to fighting arson. It sponsors an annual national arson investigation training seminar, a training program for claims reps that focuses on the law, investigative techniques, and scientific principles related to fighting arson.
90
The International Association of Arson Investigators (IAAI)
A professional association that grants the Certified Fire Investigator (IAAI-CFI) designation to those dedicated to investigating fire origin and cause and who meet education and experience requirements. It also publishes the quarterly Fire & Arson Investigator journal, which includes articles on the law and investigation of arson, as well as listings for educational programs on arson.
91
Fraud
is a general term that encompasses all types of acts intended to deceive another person
It is an intentional deception, by word, deed, or concealment, meant to cause another to part with something of value or to surrender a legal right
92
Misrepresentation
is representing something that is false as a fact, including statements that are only partially true. For example, an insured could misrepresent his or her loss history by revealing only one loss when several have actually occurred.
93
Incendiary fire
An intentionally set fire.
94
Trailer
Fuel configured in a manner to spread a fire.
95
Signs that a fire was incendiary include
multiple fires; trailers; lack of fuel load; lack of ignition sources; incendiary or delay devices; absence, removal, or replacement of contents prior to the fire; or sabotaged fire protection systems
96
The Building and Personal Property Coverage Form’s Duties in The Event Of Loss condition
“As often as may be reasonably required, permit us to … examine your books and records. Also permit us to … make copies from your books and records.”
97
Functional valuation approach
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.
98
Straight-line depreciation method
An accounting method of calculating depreciation by taking an equal amount of an asset's cost as an expense for each year of the asset's expected useful life.
99
Accelerated depreciation
Depreciation that occurs more rapidly when an item is first purchased and then more slowly in subsequent years.
100
Decelerated depreciation
Depreciation that occurs slightly for a given time period and then increases rapidly.
101
Obsolescence
The loss of value caused by changes in technology or fashion.
102
Market value
The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller.
103
Broad evidence rule
A court ruling explicitly requiring that all relevant factors be considered in determining actual cash value.
104
Betterment
In insurance terminology, a common way to explain depreciation is with the word(s)
105
Agreed Value
requires the insurer to pay a previously agreed-upon amount for a total loss of property that is subject to this method
106
Buyback of Surrendered Property provision
stating that the insurer will, at the insured’s request, sell the damaged property back to the insured for a price that the insured and the insurer agree on.
107
pair or set clause
the value of property is severely diminished when part of a set is damaged or lost
108
Selling Price
The BPP states that the value of “stock” the insured has sold but not delivered is its “selling price less discounts and expenses you otherwise would have had.”
109
Annual transit policy
Policy that covers all shipments made or received by the insured throughout a one-year policy period.
110
Trip transit policy
Policy that covers a particular shipment of goods specified in the policy.
111
Improvements and betterments
Alterations or additions made to the building at the expense of an insured who does not own the building and who cannot legally remove them.
If the tenant does not repair or replace the improvements promptly, the tenant’s insurer is obligated to pay only a pro rata portion of the original cost, and the ACV or replacement cost is not relevant to loss settlement.
112
Blanket insurance
Insurance that covers either of the following with one limit of insurance: (1) one type of property in one or more separately rated buildings or (2) two or more types of property in one or more separately rated buildings.
113
Flat policy
A property insurance policy without a coinsurance clause.
114
Agreed Value optional coverage
Optional coverage that suspends the Coinsurance condition if the insured carries the amount of insurance agreed to by the insurer and insured.
115
Businessowners Coverage Form (BCF)
The BCF provision applies only to property insured on a replacement cost basis.
The BCF provision does not apply if the insured chooses to receive an ACV settlement on property that is otherwise covered for replacement cost.
If the limit of insurance on the damaged property at the time of loss is 80 percent or more of the property’s full replacement cost immediately before the loss, the insurer will pay the cost to repair or replace the property, after application of the deductible and without deduction for depreciation, but it will not pay more than the lowest of these three amounts:
The limit of insurance that applies to the lost or damaged property.
The cost to replace, on the same premises, the lost or damaged property with property of comparable material and quality and used for the same purpose. This provision does not require the insured to rebuild on the same premises. But if the insured rebuilds at a new location, the cost is limited to the cost that would have been incurred if the building had been rebuilt at the original location.
The amount that the insured actually spends to repair or replace the lost or damaged property.
If the limit of insurance on the damaged property at the time of loss is less than 80 percent of the property’s full replacement cost immediately before the loss, the insurer will pay the greater of these two amounts, but not more than the limit of insurance that applies to the property:
The ACV of the damaged property.
A proportion of the cost to repair or replace the damaged property, after application of the deductible and without deduction for depreciation. The proportion is the applicable limit of insurance divided by 80 percent of the property’s replacement cost.
116
Building and Personal Property Coverage Form, also referred to as the BPP
Loss payment = ((Amount of Insurance carried/Amount of Insurance required) x Loss) - Deductible
NOTE: "Amount of Insurance required" is usually 80%
117
The insurance-to-value provision contained in homeowners policies
Loss payment =
Limit of insurance/
80% x Replacement Cost x replacement cost of the loss
118
Inflation guard optional coverage
which automatically increases one or more limits shown in the policy declarations by an annual percentage shown in the declarations.
119
A peak season endorsement
that increases the business personal property limit to an amount shown in the endorsement during the period described in the endorsement.
120
A homeowners policy endorsement that increases the policy limits
when there is a total loss to the dwelling and the limit shown in the declarations is insufficient to replace the dwelling. Similar endorsements may be attached to commercial property policies.
121
An additional coverage
such as increased cost of construction, that applies in addition to the policy limit.
122
Valued policy laws
which exist in less than half the states, require insurers to pay the policy limit for a total loss to a covered building.
123
In both commercial and homeowners policies, no deductible applies to
the Fire Department service charge additional coverage.
124
in homeowners policies, no deductible applies to
the credit card, fund transfer card, forgery, or counterfeit money additional coverage.
125
Absorbing Deductible
When the amount of a loss exceeds an applicable limit, the excess amount of the loss that’s not covered can reduce (or “absorb”) some or all of the deductible that would otherwise apply.
126
Special limits of liability
Internal dollar limits on certain specified classes of property that apply regardless of the overall policy limit.
127
Flat deductible
A deductible stated in a specified dollar amount.
128
Percentage deductible
A deductible expressed as a percentage of some other amount, such as the amount of insurance, the covered property's value, or the amount of the loss.
129
Split deductible
A deductible provision that applies one deductible for most causes of loss but a different, higher deductible for other specified causes of loss.
130
proportional-share method, the pro-rata-share method, or contribution by limits
In addition to loss payment, policy deductibles are proportionally split in cases of overlapping coverage when the two (or more) policies have the same deductible.
If a loss covered by this policy is also covered by:
1. Other insurance, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss
131
primary/excess method
When a policy calls for the primary/excess method to be used and both insurers covering the loss agree which insurer is excess and which is primary, the primary insurer pays first, up to its applicable limit of insurance, and the excess insurer pays the remaining amount of loss, not to exceed its applicable limit of insurance.
If a loss covered by this policy is also covered by:
2. A service agreement, this insurance is excess over any amounts payable under such agreement. Service agreement means a service plan, property restoration plan, home warranty or other similar service warranty agreement, even if it is characterized as insurance.
132
With primary/excess sharing between two insurers, the excess coverage can occasionally pay
the difference in the deductibles under the two policies.
Suppose that ABC Insurance Company’s policy states that its coverage is excess and has a $100 deductible. XYZ Insurance Company’s policy does not have the other-insurance condition, and its policy has a $250 deductible. For a loss, XYZ’s coverage would be primary, and its obligation would be to pay the adjusted claim minus the $250 deductible. ABC’s obligation would be to pay the difference in the deductibles, $250 minus $100, or $150. ABC would be obligated to pay only the difference in the deductibles when, as in this example, ABC’s deductible is smaller than XYZ’s. If XYZ has a smaller or an equal deductible, ABC would have no obligation to pay any part of the claim.
133
What Triggers an Appraisal
The appraisal provision states that either the insured or the insurer may demand an appraisal of the loss—so if either party demands an appraisal, the other party must participate.
However, an insurer that denies coverage altogether waives its right to appraisal.
134
Percentage damage settlements
are often advisable in loss situations where merchandise is only lightly damaged. During these settlements a properly prepared claims rep negotiates a settlement based on the value of the damaged merchandise to the insured. The insured then retains the damaged merchandise and sells it at a reduced price. The insurer benefits from not having to conduct a salvage sale.
135
brands and labels clause
When a label from a popular or prestigious brand is removed from merchandise taken by the insurer as salvage, the value of that salvage to the insurer is reduced.
136
Small Losses
the claims rep should streamline the process by determining, without consulting outside salvors or forensic accountants, an estimate of the insured’s actual loss, and then applying policy conditions to conclude the claim fairly and efficiently.
137
The maximum, or break point, that an insurer should pay if an insured's merchandise is left with the insured is
40%
138
The maximum, or break point, that an insurer should pay if an insured's merchandise is left with the insured is
60%
139
Settlement should be made a loss figure between
40% (the least that the merchant would accept) and 60% (the most that the insurer would pay).
140
Replacement cost
The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.
141
Trade discounts and allowances
Reductions from the stated purchase price, given by the supplier, for such reasons as purchasing in bulk or paying in a timely manner.
142
Incoming freight charges
The amount that the insured pays to have goods shipped to the insured’s premises from a supplier.
143
A common policy definition of stock
“merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.”
144
the BPP, covers stock on an ACV basis unless both of these statements are true:
The insured has obtained the Replacement Cost optional coverage, which is ordinarily indicated in the policy declarations.
The Including “Stock” option is shown in the declarations.
145
stock that has been sold but not delivered
is covered for its selling price
146
When the insured’s own employees perform handling services
the costs cannot be included in the goods’ replacement cost.
which, they may prefer if they are approaching coinsurance limits
147
Loss leaders
are grocers' way of enticing customers to come into their stores to purchase temporarily marked down items as well as other goods priced at retail prices.
148
Out-of-sight merchandise
Merchandise that has been damaged beyond recognition.
149
Book value (net depreciated value)
An asset's historical cost minus accumulated depreciation.
150
Income statement
The financial statement that reports an organization's profit or loss for a specific period by comparing the revenues generated with the expenses incurred to produce those revenues.
151
Balance sheet
The financial statement that reports the assets, liabilities, and owners' equity of an organization as of a specific date.
152
Cost of goods sold
An expense representing the cost of merchandise sold to customers during the period.
Beginning inventory
+additions to inventory
=amount that could have been sold during the year
-End inventory (amount NOT sold that year)
=Cost of goods sold
153
Cost-to-sales ratio
Cost of goods sold
/
retail sales
154
Obtaining an accurate ending inventory figure requires a physical inventory, which is not possible for out-of-sight merchandise.
However, the cost of goods sold since the last physical inventory, on December 31, 20X1, can be determined using the retailer’s cost-to-sales ratio and the dollar amount of its retail sales from the date of the last physical inventory to the date of the loss. If retail sales since the last physical inventory were $84,000 and the cost-to-sales ratio is 56 percent, the cost of goods sold for this period is $84,000 × 0.56, which equals $47,040.
155
Determining Book Value
What could have been sold
-what was sold
=what remains in inventory
156
Book Value Method
```
Beginning inventory
+Additions to inventory
=Amount that could have been sold
-Cost of goods sold
=Value of inventory remaining on date of loss
```
157
Methods of Accounting for Salvage Proceeds
Sale on account of insurer
Sale on account of insured
Sale on account of whom it may concern
Sale in which insured coinsures
158
Sale on account of insurer
If the claims rep and insured agree on the merchandise’s full insured value and the insurer pays the insured the agreed amount before the salvage sale occurs, the salvage is sold on account of the insurer. This means that the insurer receives the net sale proceeds for its own account:
159
Sale on account of insured
If the claims rep and the insured agree on the merchandise’s full insured value and the salvage sale occurs before the claim is settled, the salvage is sold on account of the insured. This means that the net sales proceeds are paid directly to the insured. To settle the claim, the insurer then pays the insured the agreed upon full value of the merchandise minus the net sales proceeds that were paid directly to the insured:
160
Sale on account of whom it may concern
If the salvage sale occurs before the claims rep and the insured can agree on the value of the lost or damaged property, the salvage is sold on account of whom it may concern. This method is often used when the damaged items are perishable goods. The net proceeds of the salvage sale are held by the salvor until the claims rep and the insured agree on the merchandise’s full insured value; then the insured receives the proceeds. To settle the claim, the insurer then pays the insured the agreed upon full value of the merchandise minus the net sales proceeds that were paid directly to the insured:
161
Sale in which insured coinsures
Insureds with inadequate limits of coverage and who are required to bear a coinsurance penalty share in net proceeds of the salvage sale in the same percentage as the loss. This is the calculation, assuming a 25 percent coinsurance penalty:
The claims rep should be familiar with the law in the jurisdiction of the claim because the insured may be entitled to first-dollar recovery on salvage, regardless of coinsurance.
162
Peak Season Limit of Insurance endorsement
Endorsement that covers the fluctuating values of business personal property by providing differing amounts of insurance for certain time periods during the policy period.
163
Value Reporting Form
A commercial property form that bases the insured's premium for business personal property on the values that the insured reports to the insurer periodically during the policy period.
164
Major features of the Value Reporting Form include these:
Reporting requirement
Limit of insurance
Penalties
Treatment of specific (nonreporting) insurance
165
Penalty for Failure to Submit Required Reports on Time
the insurer will pay no more than 75 percent of the amount that would otherwise have been paid
166
If at the time a loss occurs the insured has failed to submit any required report after the first required report has been made
the insurer will pay no more than the values last reported for the location at which the loss occurred.
167
Penalty for Inaccurate Reports
Insurer's payment (not to exceed limit) =
| (value reported/actual value x loss) - deductible
168
Period of restoration
The period during which business income loss is covered under the BIC forms; it begins seventy-two hours after the physical loss occurs and ends when the property is (or should have been) restored to use with reasonable speed. (With regard to extra expense coverage, it begins immediately after the physical loss occurs.)
169
The Business Income insuring agreement in the Business Income (and Extra Expense) Coverage Form contains a definition of “business income” that has two elements
net income
| normal operating expenses, including payroll
170
The Business Income and the Extra Expense insuring agreements are subject to a
single limit of insurance
171
Civil Authority
Covers business income loss and/or extra expenses incurred by the insured caused by action of civil authority that does not allow access to the described premises when property at a location within one mile of the described premises is damaged by a covered cause of loss. The coverage time frame is limited.
172
Alterations and New Buildings
Extends business income and extra expense coverage to new buildings or structures, alterations, or additions at the described location.
173
Extended Business Income
Covers business income loss occurring for up to sixty days after the damaged property has been repaired and operations have resumed, but not beyond the date that the insured could have restored its business income to the amount that would have been earned if no direct physical loss had occurred.
174
Interruption of Computer Operations
Pays up to $2,500 in any one policy year for loss of business income resulting from interruption of computer operations under very restricted coverage provisions.
175
The Business Income (and Extra Expense) Coverage Form
| The coverage form also grants a Newly Acquired Locations coverage extension, but only if
50 percent or greater coinsurance is indicated in the policy declarations. The coverage amount is limited, and the acquisition and its value must be reported to the insurer within thirty days.
176
The Business Income (and Extra Expense) Coverage Form
The Optional Coverages section of the coverage form includes three optional coverages that the insured can purchase to omit or suspend the Coinsurance condition:
Maximum Period of Indemnity, Monthly Period of Indemnity, and Business Income Agreed Value.
177
The Business Income (and Extra Expense) Coverage Form
| A fourth optional coverage, Extended Period of Indemnity
extends the Extended Business Income additional coverage from sixty days to up to two years. A number of time periods are available in thirty-day increments.
178
Amounts of insurance stated in Interruption of Computer Operations and Newly Acquired Locations are payable in addition
to the policy limit.
179
The period of restoration for extra expense coverage under a business income and extra expense form begins
Immediately after the physical loss occurs.
180
Payments made under Civil Authority, Alterations and New Buildings, and Extended Business Income do not increase
the stated policy limit.
181
Owners’ equity (net worth)
The balance sheet value that represents the difference between total assets and total liabilities as of the balance sheet date and that represents the value of the owners’ interest in the business.
182
Cost of goods sold
An expense representing the cost of merchandise sold to customers during the period.
183
Gross profit
An income statement value that represents sales or operating revenue minus the cost of goods sold.
184
Gross margin (gross profit margin)
The percentage of sales remaining after deducting the cost of goods sold from sales, calculated by dividing gross profit by sales.
185
Mark-up
Gross profit expressed as a percentage of cost of goods sold.
186
Depreciation expense
An accounting method that spreads out the expense of a purchase over the life expectancy of the item.
187
Net income
The difference between revenues (such as money received for goods or services) and expenses (such as money paid for merchandise, rent, and insurance).
188
net assets
In a not-for-profit organization, the difference between assets and liabilities
189
Directly showing the purchase of inventory
as periodic lump sums to represent expense on the income statement would skew the income statement because the purchase of inventory and the resale of it are not perfectly timed.
190
Once an item of inventory is sold
its cost appears as an expense on the income statement by operation of the cost of goods sold formula.
191
operating expenses
Expenses must be incurred in the business’s ordinary operations to be recorded as
192
capital expenditures
Purchases of land, buildings, or equipment
| These capital expenditures appear on the balance sheet but do not appear as one-time lump sums on the income statement.
193
capital expenditures appear on the income statement gradually over time, normally as a
depreciation expense
194
Depreciation is a common
operating expense
195
Claims representatives must be careful not to confuse
net income (all operating revenue less all operating expenses) with gross profit (all operating revenue less cost of goods sold).
196
Coverage problems or limitations aside, insurance claims convert other types of assets on the balance sheet into
Cash
197
extra expenses
Expenses, in addition to ordinary expenses, that an organization incurs to mitigate the effects of a business interruption.
An extra expense may be covered under an organization's business income coverage if the extra expense reduces the business income loss, but only up to the amount that the business income loss is actually reduced.
198
Continuing expenses
Expenses that continue to be incurred during a business interruption.
199
If the organization has purchased true extra expense coverage
most extra expenses are covered regardless of whether they reduce the business income loss.
200
Methods for Calculating Business Income Losses
define business income as the sum of the net income (net profit or loss before income taxes) that would have been earned or incurred plus continuing normal operating expenses incurred, including payroll. The same sum can be derived by starting with the gross profit that would have been earned and subtracting noncontinuing expenses.
201
Reconciliation
The process of matching the net income and continuing expenses projections with the actual sales made and expenses incurred during the loss period.
202
Business income insurance
defines business income as the net income that would have been earned had no physical loss occurred plus continuing normal operating expenses incurred, including payroll
Therefore, in a business income claim, continuing expenses are included in the amount of business income loss covered, and noncontinuing expenses are not.
203
Extra Expense
don’t qualify as continuing expenses because they're incurred as a result of an accidental event, so they aren't considered normal operating expenses
so they
can’t be included in the amount of business income loss payable under business income coverage.
204
Extra expenses are covered, to differing extents, under these ISO coverage forms:
```
Business Income (and Extra Expense) Coverage Form (CP 00 30)
Extra Expense Coverage Form (CP 00 50)
Business Income (Without Extra Expense) Coverage Form (CP 00 32)
```
205
The Insurance Services Office, Inc. (ISO) Business Income (Without Extra Expense) Coverage Form includes
The Expenses to Reduce Loss additional coverage.
| up to the amount of income that would have been if no loss
206
In the Insurance Services Office, Inc. (ISO) homeowners policy forms, Coverage D—Loss of Use covers, under a single limit, three types of loss that can occur when a residence can no longer be lived in because of a direct physical loss
Additional Living Expense, Fair Rental Value, and Civil Authority Prohibits Use
207
Civil Authority Prohibits Use
If a civil authority prohibits you from use of the “residence premises” as a result of direct damage to neighboring premises by a Peril Insured Against, we cover the loss as provided in 1. Additional Living Expense and 2. Fair Rental Value above for no more than two weeks.
208
Shipper
The person or organization shipping goods, often the seller of the goods.
209
Consignee
The person or organization that receives property being transported by a carrier.
210
Common carriers
Airlines, railroads, or trucking companies that furnish transportation to any member of the public seeking their offered services.
211
Contract carriers
Carriers that furnish transportation services to shippers with whom they have contracts.
212
Act of God
A natural and unavoidable catastrophe that interrupts the expected course of events.
213
Inherent vice
A quality of or condition within a particular type of property that tends to make the property destroy itself.
214
Bill of lading
A document acknowledging receipt of goods from the shipper, given by the carrier, which includes the terms of the contract of carriage for the goods.
215
Charter
A travel contract in which transportation is temporarily hired for a specific trip.
216
Generally, the party that owns the goods at the time they are damaged
bears the loss
217
A common carrier’s liability for goods shipped in foreign trade to or from the U.S. by sea is specified under the
U.S. Carriage of Goods by Sea Act (COGSA)
218
Domestic shipments over either inland waterways or the coastwise sea lanes by common carrier are subject to another U.S. law,
the Harter Act, unless the carrier and shipper agree to be subject to COGSA.
219
COGSA provides for a package limitation,
which limits the carrier’s liability to $500 for loss to a single package or customary freight unit (such as each metric ton of grain). The Harter Act does not include a package limitation.
220
The liability of air carriers engaged in international service is governed by the rules of
the international Warsaw Convention
221
The bills of lading used for international flights limit the shipper’s recovery for cargo loss to
$9.07 per pound of cargo when no value is declared to the carrier
222
Ex Point of origin
buyer takes delivery of goods at the point of origin specified in the terms
223
FOB Vessel (Free on Board)
Buyer assumes responsibility for loss as soon as the goods are placed aboard the vessel at the port named in the terms
224
FAS Vessel (Free along side)
buyer assumes responsibility for loss as soon as the goods are placed alongside the vessel at the port named in the terms
225
CIF ( Cost, insurance, freight)
seller quotes a price that include the cost of insurance and all transportation charges incurred to the named destination.
The buyer assumes responsibility for loss or damage as soon as the goods are placed into the custody of the ocean carrier or delivered on board the vessel.
226
Motor truck cargo liability policy
Policy that covers a trucker’s liability for damage to cargo of others being transported by the trucker.
227
Released value bill of lading
A bill of lading in which the carrier charges a lower freight rate (called a “released rate”) in return for the shipper’s allowing the carrier to limit its liability for cargo losses.
228
trailer spotting
an insured will leave a trailer (without the truck) at a customer’s location for loading or unloading
229
Contractors equipment floater
A policy that covers mobile equipment or tools while located anywhere in the coverage territory.
230
Constructive total loss
A loss that occurs when the cost to repair damaged property plus its remaining salvage value equals or exceeds the property's pre-loss value.
231
Builders risk policy
Policy that covers a building in the course of construction, including building materials and supplies while on or away from the building site.
232
Soft costs
Various incidental expenses that may result from physical loss or from a delay in completion of a construction project, such as interest, real estate tax, advertising, architects and engineers fees, and legal and accounting fees.
233
Clerk of the works
An employee of a contractor who has sole responsibility for the daily supervision of each project component to ensure that materials, methodology, and quality of workmanship meet engineering specifications.
