Unit 4 Basics of Property Insurance

Question 1

What are the two types of property?
Think-Real- Home or Office Building
Personal-Small things like tools and appliances

Answer 1

Property can be divided into two classes:
• Real property-permanent structures and buildings
• Personal property-furniture, appliances, clothing, tools, and other moveable property
Both individuals and businesses need coverage for their physical buildings and the contents within
those structres

Types of Property
•Real property-buildings
• Personal property–moveable contents

Question 2

Identifying Specific (Scheduled) (think detailed-what’s exactly covered) or Blanket Coverage (think -no details-single limit )

Answer 2

The declarations page of a policy describes the named insured and the location of premises among other key pieces of information. Property coverage can be specific (scheduled) or all inclusive (blanket) insurance. Coverage for a diamond ring described with a jeweler’s written appraisal is an example of scheduled insurance.

Blanket coverage, on the other hand, does not require a detailed list of all the items to be covered by a policy. It’s a single limit of coverage that applies to all items of a certain property type. All the contents (personal property) in your house are covered with blanket coverage.

Covered Property
• Specific (scheduled)-detailed list of covered items
•Blanket–no detailed list
• Single limit of coverage

Question 3

Policy Limits of coverage

Answer 3

The declarations page describes the policy limit, also known as the limit of coverage, limit of liability, or limit of insurance. These limits represent the maximum amount the insurance company will pay for a loss.

Limits of Insurance
• Maximum coverage limits
• Listed on declarations page

Question 4

What are open perils(more expensive -everything unless specified exclusions) and named perils(less expensive-only named perils are covered) ?

Answer 4

A peril is the actual cause of a loss. The insuring agreements) of a property policy identifies the method used to cover damage from perils.

An open peril policy insures against all risks of direct physical loss except those specifically excluded in the policy. This type of contract is sometimes called all risk, special, or comprehensive coverage.

Named peril or specified peril coverage lists the perils or causes of loss insured against under the contract, such as lightning, fire, windstorm, hail, vandalism and other similar natural or man made losses. A named peril policy only covers those perils that are listed in the policy.

Named vs. Open (Special)
• Named peril-covers only perils listed
• Open (special) perils- all risks of direct physical loss unless specifically excluded

Question 5

Covered Perils–Basic, Broad, and Special

Answer 5

Basic Perils(the least expensive)
• Fire
• Lightning
• Internal explosion

Broad Perils
• All of basic (fire, lightning, and internal explosion) plus extended perils (WCSHAVVER and V&MM)
• Plus BIG AFFECT:
• B- Burglary damage
• I- Ice, sleet, and snow (weight of)
• G-Glass breakage
• A-Accidental discharge of water
•F-Freezing water
• F-Falling objects
• E-Electrical current
• C- Collapse
• T- Tearing asunder

Special/Open Peril Coverage

•All risks of direct physical loss, except those specifically excluded
Common Exclusions
• Flooding
•Earthquake
• Intentional damage caused by an insured
• Losses due to enforcement of building codes
• Damage caused by a power interruption occurring off premises
• Government seizure

Question 6

Explain Basic Perils( covered -internal explosion, fire , lightning)

Answer 6

The basic cause of loss form, introduced in 1986 by the Insurance Services Office (ISO), simplified the
“fire and extended coverage” that was previously offered as a coverage option. The Extended Coverage Endorsement (EC) was a common extension that added coverage for perils beyond fire, lightning, and internal explosion.
The following perils are included with the basic coverage option.

• Fire must be hostile: intentional loss (arson) is not covered

• Lightning natural electricity

• Internal explosion any explosion inside a covered location

Question 7

What are Extended Coverage (EC) Perils? ((WCSHAVVER and V&MM)

Answer 7

These nine additional perils, known as the Extended Coverage (EC) perils, are included in most state policies:
•Wind exterior damage; damage to the interior is covered only if there is damage to the exterior first (i.e., the wind broke the window then caused damage inside)
•Civil commotion-damage caused by an assembly of individuals including striking employees (large in number)
Smoke- not from a friendly fire (fireplace)
•Hail a form of solid precipitation; hailstones are balls or lumps of ice
•Aircraft-loss caused by physical contact with part of or all of an aircraft
Vehicles damage caused by a vehicle contacting insured property
•Volcanic eruption damage from lava, ash, debris, and air shockwaves
•Explosion damage caused by an explosion away from the covered location
•Riot- damage caused by an assembly of individuals including striking employees (usually smaller in number than civil commotion)
•Vandalism and malicious mischief (V&MM) is damage caused by willful and malicious actions, and it usually involves a crime. V&MM can only be written with extended coverage.
Remember the acronyms WCSHAVVER and V&MM.

Extended Coverage (EC) Perils
• WCSHAVVER
•Vandalism and malicious mischief
(V&MMI

Question 8

What is a broad peril? (Little more expensive-still a named peril policy) (WCSHAVVER and V&MM +BIGAFFECT)

Answer 8

Broad peril coverage is also a named peril coverage that lists what is covered. All of the basic form perils are included–fire, lightning, internal explosion, the extended coverage perils (WCSHAVVER), and vandalism and malicious mischief (V&MM)-plus the following additional perils. Be sure to remember the acronym of BIG AFFECT:
• B Burglary damage
• I- Ice, sleet, and snow (weight of)
• G–Glass breakage
• A-Accidental discharge of water- Accidental discharge of water or steam at the described location from within a plumbing, heating, air-conditioning, or automatic fire protective sprinkler
system or household appliance
• F- Freezing objects Freezing of plumbing, heating, air-conditioning, or automatic fire protective sprinkler systems and household appliances (insured must use reasonable care to maintain heat in the building or shut off the water supply and drain all systems and appliances)
• F-Falling objects
•E–Electrical current-Sudden and artificially generated electrical current (does not include
damage to a tube, transistor, or similar electrical component)
• C Collapse
• T- Tearing asunder-Sudden and accidental tearing apart, cracking, or burning of steam or hot-water heating, air-conditioning, or automatic fire protective sprinkler system and water heaters

Broad Perils
• All of basic (fire, lightning, and internal explosion) plus extended perils (WCSHAVVER and V&MM)
• Plus BIG AFFECT:
• B- Burglary damage
• I- Ice, sleet, and snow (weight of)
• G-Glass breakage
• A-Accidental discharge of water
•F-Freezing water
• F-Falling objects
• E-Electrical current
• C- Collapse
• T- Tearing asunder

Question 9

What are broad peril exclusions? (Flood is NOT covered)

Answer 9

The weight of ice, snow, or sleet peril that causes damage to awnings, fences, patios, pavement, swimming pools, foundations, retaining walls, bulkheads, piers, wharves, or docks is NOT included with broad peril coverage.

The falling objects peril does not include damage to awnings, fences, outdoor equipment, or outdoor radio and television antennas, including their lead in wires, masts, and towers. Damage to a buildings interior or its contents is covered only if the falling object first damages the roof or an exterior wall.
The accidental discharge or overflow peril does not include continuous or repeated leakage or seepage, freezing, or damage to the system or appliance itself. It also does not cover flooding from a natural water source (lake, river, etc.).

The burglary and accidental discharge perils are not covered if the building has been vacant for more
than 60 consecutive days.

The broad form also expands coverage for two perils.

• The vehicles peril covers damage to fences, driveways, and walks when the vehicle is driven by someone who is not a resident of the insured’s household. It also covers damage to other types of property when the vehicle is driven by an insured or a resident of the insured’s household.

• The smoke peril includes loss caused by fireplace smoke.

Broad Peril Exclusions
• Weight of ice, snow, or falling objects on awnings, fences, patios, swimming pools, docks, and retaining walls
• Accidental discharge of water from continuous leaking
• Flooding from river or lake
• Burglary if property vacant more than 60 consecutive days

Question 10

What are special perils (open)? (Think everything is covered except a few exclusion like flooding , earthquakes, building code violations power outages off premises and government seizures )

Answer 10

The special perils coverage insures against all risks of direct physical loss unless they are specifically excluded.

The following are some examples of perils commonly excluded from special (open) peril coverage:
• Flooding
• Earthquake
• Intentional damage caused by an insured
• Losses due to enforcement of building codes
• Damage caused by a power interruption occurring off premises
• Government seizure

Special Perils
EVERYTHING!

Question 11

Direct Loss(house burning down/car totaled) vs. Indirect (Consequential) Loss( cost of staying at a hotel/using Uber)

Answer 11

In addition to identifying the property covered and the perils insured against, the insuring agreement will state how losses and claims are covered.

A direct loss is a property loss caused by an unbroken chain of events covered under an insurance policy. Living room furniture destroyed in a fire originating in the kitchen is a direct loss.

Indirect loss -comes as a result, or consequence, of the original loss. It is also known as consequential loss. A loss of business income caused by a fire (a direct loss) is an example of an indirect loss.

Question 12

What are the types of loss?

Answer 12

‘Types of Loss

• Direct–the immediate damage caused by the peril
• Indirect-loss over time as a result of the direct loss
• Loss of income a business suffers when the building burns
• Cost of a rental car because someone ran into your car
• Additional living expenses while your home is being repaired

Question 13

What are the classes of construction?

Answer 13

Classes of Construction(highest to lowest risk )
• Class 1-Frame(wood, roof, floors)
• Class 2-Joisted Masonry (non combustible masonry meaning brick or concrete)
• Class 3-Noncombustible(walls and floor supported by metal, asbestos or gypsum)
• Class 4-Masonry
Noncombustible( constructed, made of metal-roof or walls)
• Class 5-Modified Fire Resistive(modified resistance rating of 2 hours or less)
• Class 6-Fire Resistive(resistive rating of 2 hour or more)

Question 14

Explain the Classes of Construction
(Think -determined by the materials used for the roof)

Answer 14

For property risks, a building’s construction type is considered when underwriting and rating a policy.
The construction of the building is determined by the types of materials used in the building and roof of the insured structure.
Most underwriters recognize six construction classifications or types.

• Class 1-Frame: Frame structures have outside support walls, a roof, and floors constructed of wood or other combustible materials. The exterior walls may be covered with stucco or brick veneer.
• Class 2-Joisted Masonry: Joisted masonry structures have outside support walls made of noncombustible masonry materials (such as concrete, brick, hollow concrete block, stone, or tile) and a roof and floor made of combustible materials (such as wood).
• Class 3-Noncombustible: A noncombustible structure is one whose exterior walls, floors, and roof are constructed of and supported by noncombustible materials such as metal, asbestos, or gypsum.
• Class 4-Masonry Noncombustible: Structures in this construction class have exterior walls constructed of masonry materials and a roof and floor made of metal or other noncombustible materials.
•Class 5-Modified Fire Resistive: Buildings that are modified fire resistive have exterior walls, floors, and a roof constructed of masonry or fire resistive material with a fire resistance rating of 2 hours or less.
• Class 6- Fire Resistive: These structures are constructed of masonry or fire resistive material with a fire resistance rating of 2 hours or more.

Question 15

What is loss valuation?

Answer 15

In the event of a loss, the insurance company has a legal duty to determine the appropriate amount of claim payment according to the terms of policy. These duties are sometimes contained in the valuation or how losses will be paid condition. Loss valuation and claims settlement are synonymous terms.

In general, the insured can collect the lesser of:
• insurable interest (If the insured burns down his house and is found guilty of an intentional criminal act like arson, the mortgage company would be made whole by the insurer up to its insurable interest in that property.);
• policy limits;
• actual cash value;
• cost to repair; or
• replacement cost.
A deductible will reduce any amount after the loss has been valued.

Loss Valuation
• How the insurance company determines appropriate amount of loss to be paid
• Deductible reduces any amount after loss has been valued
• Insured to collect lesser of:
• insurable interest
• policy limits
• actual cash value (ACV)
• cost to repair; or
• replacement cost

Question 16

What is actual cash value(ACV)?
(Think ‘today’s dollars’ . Replacement(-)Depreciation) (what it’s actually worth)

Answer 16

Many losses are reimbursed on an actual cash value (AC) basis. Actual cash value is the current cost of replacing an asset that is damaged or destroyed property with an identical or comparable asset minus
accumulated depreciation and obsolescence.

For example, a man purchased a television for $2,000 five years ago and it was destroyed in a hurricane.
His insurance company says that all televisions have a useful life of 10 years. A similar television today costs $2,500. The destroyed television had 50% (5 years) of its life remaining. The ACV is $1,250 (S2,500 [replacement cost] minus $1,250 [depreciation] equals $1,250).

Replacement cost based on today’s cost–NOT what was originally paid for item
•Cost to replace it now!
• ACV = replacement - depreciation

Question 17

What are repair costs? (Think when less than ACV)

Answer 17

Although actual cash value is the most common method for reimbursing a loss, the insured may be reimbursed on the basis of the item’s repair cost when this amount is less than actual cash value.

Question 18

What are Replacement & functional replacement costs? (Another functional item in place of the original) “it works”

Answer 18

**INSURANCE AGREES TO PAY FOR REPLACEMENT WITH NO ALLOWANCE FOR DEPRECIATION ** -Replacement

A 32 inch tv cannot be replaced with a 90 inch tv

Functional replacement cost is the cost of acquiring another item of property that will perform the same function with equal efficiency, even if it is not identical to the property being replaced. For example, if you have an older house with plaster walls that is damaged by a fire, functional replacement cost would allow repair using drywall, instead of plaster.

Question 19

Explain market value and agreed amount value.(think baseball cards-value is reset yearly )

Answer 19

Market value is the price one would pay based upon free market conditions, adjusting for supply and demand. While realtors are concerned with market value, the insurance industry is generally not.
Few insurers are willing to issue a policy limited to the market value of a property unless that value is significantly lower than the replacement cost.

Agreed amount value is what the insured and insurer will agree on a value before the policy is issued. If a loss occurs, the agreed value will be the amount the insured is guaranteed to receive. The agreed value is reset every year.

Question 20

What are some methods of calculating value?

Answer 20

Methods of Calculating Value

• Replacement cost–current replacement cost; no depreciation
• Similar kind and quality
• runctional replacement-replace
with modern constructon
• Market value-selling price;
seldom used
• Agreed amount–value of loss is determined before the policy is issued
• Stated amount- insured up to this
• Pair and set-value of the pair/set before the loss minus value of what remains

Question 21

Explain pair or set
(Think paid difference when half is lost)

Answer 21

The pair or set condition is a loss settlement condition that appears in many property contracts. It states that if part of a pair or set is lost or damaged, the loss will be valued as a fair proportion of the total value of the set, giving consideration to the importance of the damaged article to the set. The insurer is not obligated to pay for the loss of the whole set when only one part has been damaged.

Suppose the insured owns a pair of diamond earrings appraised for $30,000. One of the earrings is stolen. The one remaining is appraised for $8,000. The insured will be paid $22,000: value of the pair ($30,000) - the value of what remains ($8,000).

Question 22

Appraisal ( a disagreement or dispute over the loss and value of that loss , agreement of any 2 or 3 determines value) and Arbitration
(Not limited to disputes over the value of loss but also resolve other issues)

Answer 22

There are times when the insured and the insurer cannot agree on the amount of claim payment. The appraisal condition provides that either party may demand an appraisal of a loss. In this event, each party chooses an appraiser. The two appraisers then select an umpire. If the appraisers fail to agree on an amount, they submit their differences to the umpire. The decision agreed to by any two of the three is the final amount of claim payment. Each party pays its own appraiser and shares the cost of the umpire.

Suppose an insured owned an antique organ that was destroyed in a fire. The insurance company says it will pay the insured $500. The insured believes it is worth at least $800. Two appraisers and an umpire are called in. One appraiser calculates the loss at $400, and the other calculates it at $700. The umpire agrees that reimbursement should be $700. This is the amount the insured will be paid.

The arbitration condition is worded similarly, but it is not limited to disputes over the value of the loss. It may also be used to resolve other areas of disagreement between the insured and the insurance company such as a coverage dispute between the company and a third party in the case of liability insurance, or between two insurers. This is typically used before an insured turns to legal action.

Question 23

What are Alternative Dispute Methods?

Answer 23

Alternative Dispute Methods

• Appraisal-disagreement on the
amount of the loss
• Company and insured pay their
Own appraiser
• Appraisers get an umpire if they can’t agree (cost shared)
• Agreement of any two of the three determines the amount
• Arbitration-disagreement about other areas of the loss

Question 24

What is coinsurance?

Answer 24

Coinsurance requires the insured to carry a minimum amount of insurance (called insurance to value).

The coinsurance requirement is normally 80% of the replacement cost. If the minimum required amount is carried, then claims are paid in full up to policy limits . If the minimum is not carried, partial losses are not paid in full. The amount not paid by the company is referred to as the coinsurance penalty.

Step 1: Determine insurance required (replacement cost × 80%).
Step 2: Does the insured carry at least this amount?
Step 3: If no, apply the following formula.

Insurance carried/insurance required x loss =claim payment -deduction

In order to help you better understand, here are some examples:
Scenario: The insured’s building is valued at $200,000 and the insured purchases property insurance coverage for only $100,000.
Example #1 - Has total loss
• The coinsurance penalty does not apply to total losses; therefore the $100,000 policy limit will be paid.
Example #2 - Has partial loss when a fire causes $10,000 of damage
• DID 100,000
• SHOULD 200,000 × 80% = 160,000
• = 0.625 × LOSS 10,000 = $6,250 amount insurer pays
Be sure that you are dividing the amount of insurance carried by the amount of insurance required (and not the replacement cost.)

Question 25

Scenario 2-Coinsurance

Answer 25

Scenario: The insured’s building is valued at $400,000, and the insured purchases property insurance for $320.000.
Example #1 - Assuming insures 80% to value and has total loss
•Policy pays up to policy limits, which is $320,000. (While insuring at least 80% to value and meeting coinsurance requirements is ideal, insuring 100% to value is best. If the insured would have insured to its full value at $400,000, the insurer would have to pay $400,000 for a total loss.)
Example #2 - Assuming insures 80% to value and has partial loss of $20,000
• DID 320.000
• SHOULD 400,000 × 80% = 320,000
• = 1 x LOSS 20,000 = $20,000 amount insurer pays

Question 26

What is coinsurance clause?
(Think how much insurance DID you carry? How much insurance SHOULD you have carried (total value x 80%)

Answer 26

The coinsurance clause is meant to encourage property owners to purchase full or nearly full coverage and review their policy periodically to verify that their coverage is adequate.

Did/Should x Loss

Question 27

What is a vacancy(empty -no people or contents- penalized after 60days) and unoccupancy (contents remain but no people)

Answer 27

Vacant means “entirely empty” while unoccupied means “the lack of habitational presence of human beings.” A vacant house has no contents and no activity, while an unoccupied house has just no activity.
An insurance policy can penalize the insured when a property is left vacant for more than 60 days. For example, vandalism would not be covered since the insured is away and the risk is much greater to the insurer. However, a tornado would be covered regardless of if the building was vacant or not. When a “snow bird” leaves a cold climate during the winter for a few weeks of sun and warm weather, their house back home is unoccupied because all of the contents are still within that dwelling.

Vacancy and Unoccupancy
• Vacant:
• Empty building no people or
contents
• Insured penalized after 60 days
• Unoccupied:
• Contents remain but no people
• No loss of coverage

Question 28

What’s a standard mortgage clause? Loss Payee (3rd Party Provisions )

Answer 28

The standard mortgage clause specifies the rights and duties of the mortgagee under the policy. A mortgagee is a bank or mortgage company that has a mortgage on an insured property. Mortgagees may be named in the declarations if they have an insurable interest in real property.

This clause does not apply to moveable personal property.
The mortgagee’s rights and duties may include:
• filing proof of loss if the insured fails to do so; or
• paying the premium if the insured fails to do so.
Nothing the insured does, not even acts of dishonesty, can prevent a listed mortgagee from being paid (i.e., the insured commits arson and burns his own house). In the case of an illegal act by the insured, the mortgage company would become the insured on the policy because they are named as an insured lien holder.

Loss Payee
Personal property, such as cars and boats, have a lien that is owed to a lender rather than a mortgage.
The loss payable clause protects the lender and is very similar to the standard mortgage clause just discussed.

Standard Mortgage or Loss Payable
Clause
• Allows lender to pay premium
• Lender entitled to receive notice if policy is to be canceled
• Lender can file claim
• Lender protected from negligent or dishonest acts of the insured
• Lender only entitled to receive payment up to the amount of the debt

Question 29

What is No Benefit to Bailee?
(Think no benefit to dry cleaner with your property can be covered by your policy when they’re in possession of your items)

Answer 29

A bailee is a person or organization that has temporary possession of someone else’s personal property.
The no benefit to bailee condition states that the bailee is not covered under the property owner’s policy while the bailee has possession of the property. ‘The property in the bailee’s possession would be covered by their bailee policy. Examples of bailees include dry cleaners and storage facilities.

No Benefit to Bailee
•Bailee is a person or business that has temporary control of the insureds property.
•Bailee cannot benefit from the property owner’s policy.

Question 30

Stated (Value) Amount

(Think how much premium the insured will pay vs how much the insured will get paid)

Answer 30

Allows the insured to determine the value of the property. An appraisal is required before the policy is issued.

At the time of loss, the insurer will pay LESSER of the amount stated on the declarations page or actual cash value-whichever is less. IT DOES NOT GUARANTEE PAYMENT OF THE LISTED AMOUNT.