Insurance
The transfer of the possibility of a loss (risk) from an individual or business to an insurance company, which in turn spreads the costs of unexpected losses to many individuals
Law of Large Numbers
The larger the number of people with a similar exposure to loss, the more predictable actual losses will be
Law of Large Numbers Example
When issuing a policy on a 35 year old male, the insurance company has no way of knowing or accurately predicting when he will die. Instead, they will look at a large group of similar risks - 35 year old males of similar lifestyles/health - and make some
Insurable Interest
When the insured would incur a financial or other type of benefit loss if the insured object was damaged/lost
3 Elements of Insurable Risk
1. Financial (monetary interest)
2. Blood (relative)
3. Business (a business partner)
Risk
The uncertainty or chance of a loss occurring
Two Types of Risk
1. Pure risk
2. Speculative risk
Pure Risk
Situations that can only result in a loss or no change, there is no opportunity for financial gain
Speculative Risk
Situations that have the opportunity for either loss or gain
Which type of risk are insurance companies willing to accept?
Pure risk situations
Peril
The causes of loss insured against in an insurance policy
Perils of Life Insurance
The financial loss caused by the premature death of the insured
Perils of Health Insurance
The medical expenses and/or loss of income caused by the insured's sickness or accidental injury
Perils of Property Insurance
The loss of physical property or the loss of its income-producing abilities
Perils of Casualty Insurance
The loss and/or damage of property and resulting liabilities
Hazard
Conditions or situations that increase the probability of an insured loss occurring
3 Classifications of Hazards
1. Physical hazards
2. Moral hazards
3. Morale hazards
Physical Hazards
Hazards arising from the material, structural, or operational features of the risk, apart from the persons owning or managing it
Moral Hazards
Applicants that may lie on an application for insurance, or in the past have submitted fraudulent claims against an insurer
Morale Hazards
Increase in the hazard presented by a risk, arising from the insured's indifference to loss because of the existence of insurance
Conditions
The section of an insurance policy that indicates the general rules that the insurer and insured agree to follow under the terms of the policy
Loss
The reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril
Hazards lead to...
Perils
Perils lead to...
Loss
Loss leads to...
Insurance
Indemnity
A provision in an insurance policy that states that in the event of loss, an insured or beneficiary is permitted to collect only to the extent of the financial loss, and is not allowed to gain financially because of the existence of an insurance contract
Indemnity is sometimes referred to as...
Reimbursement
Subrogation
The insurer's legal right to seek damages from third parties, after it has reimbursed the insured for the loss
Accident
A sudden, unplanned and unexpected event, not under the control of the insured, resulting in injury or damage that is neither expected nor intended
Occurrence
Continuous or repeated exposure to conditions resulting in injury to persons or damage to property that is neither intended nor expected
Two Types of Property Losses
1. Direct
2. Indirect
Property insurance covers what kind of losses?
Direct losses
Direct Loss
Direct, physical damage to buildings and/or personal property, as well as any other damage where the insured peril was the proximate cause of the loss
Indirect Loss
Losses considered a result of direct loss, known as consequential losses
Ex: extra living expenses that incur while a home is being repaired
Named Peril
A term used in property insurance to describe the breadth of coverage provided under an insurance policy form that lists specific covered perils
Open (Special) Peril
A term used in property insurance to describe the breadth of coverage provided under an insurance policy form that insures against any risk of loss that is not specifically excluded
Property Damage
Measured by the actual monetary loss the injured party suffered, which is measured by the value of the property damaged or destroyed and the loss of use of that asset
Bodily Injury
May lead to claims by the injured party not only for medical expenses and lost wages, but also for disfigurement, pain and suffering, mental anguish, and loss of consortium, so they are broken into two types of damages
Two Types of Bodily Injury Damages
1. Special damages
2. General damages
Special Damages
Compensation for specific out-of-pocket expenses for medical, miscellaneous expenses, and loss of wages
General Damages
Compensate the injured person for pain and suffering, mental anguish, disfigurement, and other similar types of losses
Punitive Damage
A form of punishment for extreme outrageous behavior, gross negligence or willful intent
Negligence
The failure to use the care that a reasonable, prudent person would have taken under the same or similar circumstances
Burglary
The crime of forced entry into or out of the premises of another by a person or persons with felonious intent
Burglary Insurance
Insurance covering the peril of burglary require that, following a loss, there are visible signs of forced entry or exit from the premises
Robbery
The taking of property from the care and custody of a person by one who has caused or threatened to cause that person bodily harm, or committed an obviously unlawful act witnessed by that person
Theft
Any act of stealing and encompasses both burglary and robbery
Mysterious Disappearance
The disappearance of property without knowledge as to the location, time, or how the property was lost (excluded from most insurance policies)
Vacancy
An insured structure in which no people have been living or working, and no property has been stored for the period of tie required as stated in the policy
Unoccupancy
An insured structure in which no people have been living or working within the required period of time, but some property is stored
Blanket Insurance
A single property insurance that provides coverage for multiple classes of property at one location, or for one or more classes of property at multiple locations. All insured properties are written for one total amount of insurance, and no single insured
Specific Insurance
A property insurance policy that covers a specific kind or unit of property for a specific amount of insurance
Loss Valuation
At the time a property insurance policy is written, the insured has several options as to how a loss to the insured property will be valued at the time of a loss. This factors in determining the premium charged and the amount of insurance required
Actual Cash Value
Recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence
Current Replacement Cost - Depreciation = Actual Cash Value
Replacement Cost
The cost to replace damaged property with like kind and quality at today's price, without any deduction for depreciation
Depreciation
The lessening of value of real and personal property due to age and wear and tear
Market Value
Valuing a loss based upon the amount a willing buyer would pay a willing seller for the property prior to the loss, which takes into consideration the value of land and location, rather than just the cost of rebuilding the structure itself
Agreed Value
Policy with a provision agreed upon by the insurer and insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is written and suspends in coinsurance or other contribution clauses in the policy
Stated Value
An amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the event of a covered loss
Salvage Value
The estimated value an asset will realize upon its sale at the end of its useful life
Two Types of Liability
1. Absolute liability
2. Strict liability
Absolute Liability
Imposed on defendants engaged in hazardous activities, such as harboring wild animals, using explosives, etc.
Strict Liability
If a product causes injury and the claimant can prove the defect, the defendant will be held strictly liable for the damage
Per Occurrence
A sublimit in a liability policy that puts a ceiling on the payment for all claims that arise from a single accident/occurrence
Per Person
The maximum amount available for payment of bodily injury to a single person in an accident, regardless of the policy limit stated in the policy for bodily injury claims
Aggregate Limit
The maximum limit of coverage available under a liability policy during a policy year, regardless of the number of claims made or the number of accidents that occur
Split Limits
Separately stated limits of liability for different coverages - may be stated on a per person, per occurrence, or per policy period basis, or can be split between bodily injury and property damage
Combined Single
A single dollar limit of liability applying to the total of damages for bodily injury and property damage combined, resulting from one accident or occurrence
Proximate Cause
An act or event considered a natural and reasonably foreseeable cause of the damage or event that occurs and damages property or injures a plaintiff. Negligence must have been the proximate cause
Deductible
A dollar amount an insured must pay on a claim before the insurance policy provides coverage
4 Essential Elements of Contracts
1. Agreement
2. Consideration
3. Competent parties
4. Legal purpose
Consideration
Something of value that each party gives to the other
Representations
Statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true
Warranty
An absolutely true statement upon which the validity of the insurance policy depends
Concealment
The intentional withholding of information of a material fact that is crucial in making a decision
Binder
A temporary agreement issued by an agent or insurer providing temporary coverage until a policy can be issued (usually in writing, may be oral)
Major Components of Policy
1. Declarations
2. Definitions
3. Insuring agreement
4. Additional coverage
5. Conditions
6. Endorsements
7. Exclusions and policy limits
Declarations
Section of an insurance policy containing the basic underwriting information, such as the insured's name, address, amount of coverage and premiums, and a description of insured locations (usually first page)
Definitons
Section of an insurance policy that clarifies terms used in the policy
Insuring Agreement
Section of an insurance policy that establishes the obligation of the insurance company to provide the insurance coverages as stated in the policy, also including the parties to the contract, effective and renewal dates, description of coverage provided,
Additional/Supplementary Coverage
A provision in an insurance policy that provides an additional amount of coverage for specific loss expense, at no additional premium
Endorsements
Printed addendums to a contract that are used to change the policy's original terms, conditions, or coverages
Exclusions
Section of an insurance policy that details the perils that are not insured against and what persons are not insured
Policy Limits
The maximum amount an insured may collect, or for which an insured is protected under the terms of the policy
Assignment
The transfer of a legal right or interest in an insurance policy
Appraisal
If there is a disagreement between the insured and insurer on the value of any property loss, either party can make a written demand for an _____________
Arbitration
A method of casualty claim settlement used when the insured and insurer cannot agree on how to settle a claim
Other Insurance
A provision in an insurance policy that defines how the policy will respond if there is other valid insurance written on the same risk
Pro Rata
A provision found in some property insurance policies that provides for the sharing of loss with other insurance that may be written on the same risk in the same proportion as their limits of insurance pear to the total of coverage of all policies coverin
Notice of Claim
A form or statement from an insured to an insurer, informing the insurer that events leading to a possible claim have occurred (includes info as to how, when, and where the loss took place)
Proof of Loss
A sworn statement that must usually be furnished by the insured to an insurer before any loss under a policy can be paid
Cancellation
The termination of an in-force insurance policy, by either the insured or the insurer, prior to the expiration date shown in the policy (may be voluntary, involuntary, or in mutual accordance with provisions in the policy)
Nonrenewal
The termination of an insurance policy at its expiration date by not offering a continuation of the existing policy or a replacement policy
Sources of Insurability Information
1. Application form
2. Motor vehicle records
3. Interviews with neighbors, friends and employers
4. Inspection of property
5. Inspection of insurance history
Policy Application
A printed form that includes questions about how a prospective insured and the desired insurance coverage and limits
Fair Credit Reporting Act
Established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used - also protects consumers against the circulation of inaccurate or obsolete personal or financial i
Consumer Reports
Written and/or oral statements regarding a consumer's credit, character, reputation, or habits collected by a reporting agency from employment records, credit reports, and other public sources
Gramm-Leach-Billey Act
An insurance company may not disclose nonpublic personal information to a nonaffiliated third party, and also requires two disclosures to a customer
Exceptions to the Gramm-Leach-Billey Act
1. The insurance company clearly and conspicuously discloses to the consumer in writing that information may be disclosed to a third party
2. The consumer is given the opportunity, before the time that information is initially disclosed, to direct that in
Two Required Disclosures (GLB Act)
1. When the customer relationship is established
2. Before disclosing protected information
Terrorism Risk Insurance Act (TRIA)
Creates a temporary federal program that would share the risk of loss from future terrorist attacks with the insurance industry by requiring that all commercial insurers offer insurance coverage for acts of terrorism and then the federal government would
Terrorism Risk Insurance Program Reauthorization Act
Amendment to the TRIA which extends through the end of 2020
Provisions of the Terrorism Risk Insurance Program Reauthorization Act
1. The insurer deductible was set at 20% of an insurer's direct earned premium of the preceding calendar year and the federal share of compensation was set at 85% of insured losses that exceed insurer deductibles until Jan. 1, 2016. After that, the federa