P&C Insurance Basics

Risk

The chance of loss or the uncertainty of loss.

Speculative Risk

The chance of loss one accepts in the hope of realizing a gain. Not covered by insurance.

Pure Risk

The chance of experiencing a loss without the possibility of gain. (ex: car accident, house fire) The essence of the insurance industry.

Insurance 1

A contract whereby an Insurer agrees to protect an Insured against injury, damage, or liability arising from some future event.

Insurance 2

The transfer of risk.

Insurance 3

A social device through which individuals, by paying a premium fee, transfer a defined and limited portion of their risk to an insurance company.

Indemnification

The concept that an insurance policy is meant to make the Insured, after suffering a loss, whole.

Law of Large Numbers

Mathematical concept that says it is easier to predict losses based on historical data if we have a large number of Insureds.

Stock Companies

Insurance companies owned by stockholders. A stockholder (shareholder) may or may not hold an insurance policy. Policy holders do not participate in company profits. (Non-participating)

Mutual Companies

Insurance companies owned by the policy holders. Surplus of profits distributed to policy holders as a dividend. (Participating)

Reciprocal Companies (Cooperative)

A group of affiliated policy holders who have a reciprocal agreement of indemnification. Managed by the attorney-in-fact.

Fraternal Benefit Societies

Companies formed to sell insurance to policyholders with a common ethnic, religious, or charitable heritage.

Government Insurers

Insurance provided by the government. Medicare and Medicaid. Flood Insurance. Crop Insurance, worker's com, savings insurance, Social Security.

National Association of Insurance Commissioners (NAIC)

Association formed by state regulators to provide uniformity in insurance laws and regulation throughout the country. Makes state legislatures and advises state commissioner. Also serves as a champion of the people by attempting to ensure that all Insurer

Peril

Cause of the loss

Underwriting

The selection and classification of risk.
Job is to: identify hazards, assess the risk of a particular peril occurring, and determine the premium.

Hazards

Any factor that increases the chance of a loss occurring.

Physical hazard

A tangible condition that makes the occurrence of a peril more likely.

Morale Hazard

Carelessness or sloppiness.

Moral Hazard

The Insured's deliberate act or disregard that either causes the loss or makes a loss more likely to occur.

Insurable Interest

Required at the time of loss, not at the policy issue date.

Limit of liability

The maximum the policy will pay for a loss.

Deductible

Portion of the loss that the Insured must absorb before the insurance company begins to pay.
Reduces morale and moral hazards, small claims, and administrative expenses.

Other Insurance Clause

If multiple policies, each with cover only a portion to uphold indemnification.
Property shares pro rata.
Liability shares equally.

Endorsement

Rider, extension. An addition to the policy. May add or subtract coverage.

Assignment

Transfer of a policy to a new policy owner. Must be agreed to by assignor(old owner), assignee(new owner), and insurance company in writing.

Nonrenewal

Termination of insurance coverage at end of policy. Neither party needs a reason.
Refund: Short-rate

Cancellation

Termination of insurance before the end of the policy.
Insured: Written, no reason, no notice.
Insurer: Written, reason required, advanced notice (typically 10 days)
Refund: Pro rata

Causes of loss form

Form that determines the degree of peril coverage.
Basic
Broad
All-risk (Special)

Liberalization Clause

If the Insurer has a new policy with better coverage and THE SAME premium, this automatically updates the old policy.

Coinsurance Clause

Requires property to be insured to a certain amount, usually 80%.
In the event of a total loss, Insurer will always pay up to the limit of liability.
If under percentage and partial loss: Did carry / required coverage x amount of loss = claim paid.

Consideration

Something of value - money (premium, claim payment), information (application).
Necessary for a contract.

Legal purpose

If a contract is to be valid, its purpose must be legal.

Policy Sections

Declarations
Insuring Agreements
Conditions
Exclusions

Declarations

Dec sheet"
Lists all the information unique to the Insured's policy.
-Name of the Insurer
-Name of the Insured(s)
-a description of the property being covered
-the time period the policy will be in force
-the amount of the premium
-the amount of the dedu

Insuring Agreements

Section of policy containing the Insurer's promises and obligations.
-Lists the perils covered
-determines the type of coverage(basic, broad, special)
-describes the type of coverage that will be provided by listing the covered perils

Conditions

Section of policy that defines the Insured's obligations.
-Immediate notice of loss
-Submit proof of loss form within 60 days
-Show damage if requested and other evidence.
-Protect the property from further damage
-Notify police if there was crime involve

Exclusions

Part of policy that defines what is not covered. (ex: war, earthquakes, flood)

Representation

A statement made to the best of the applicant's knowledge and belief.

Warranties

Statements made of an application form that the applicant guarantees to be absolutely and literally true. If false, may void the policy. A promise to do or not do something of importance to the Insurer.

Concealment

Intentionally hiding the truth or intentionally telling only a partial truth regarding a material fact.

Misrepresentation

An intentional lie.

Contract of adhesion

Taking an insurance policy as-is. Legal to use, but courts bend over backwards to interpret them in favor of the customer.

Binder

Oral or written agreement to provide temporary insurance until a regular policy can be issued.
WA state laws - 90 days

Federal Fair Credit Reporting Act (FCRA)

Regulates Credit Reports and Investigative Reports.
Credit: applicant's permission is not needed. If denied, Insurer must give the name, address, and phone number of the consumer reporting agency and inform applicant that that was why they were denied. Co

Gramm-Leach_Bliley Act (Financial Services Modernization Act of 1999)

Imposes on Insurer's to adopt appropriate standards to:
-safeguard customer records and information
-protect against unauthorized access to such records
Encourages states to adopt uniform licensing.
Prevents companies from obtaining information using fals

Terrorism Risk Insurance Act (TRIA)

Government enacted program guaranteeing the availability of terrorism coverage after 9/11 happened. All insurers must give the option.
Government pays high amount of claim, Insurers place a surcharge of 3% on premiums to reimburse the federal government.

Property insurance three additional coverages

Debris Removal - haul destroyed property to landfill. Adds to limit of liability.
Removal/Preservation of Property - Provide coverage of removed property against all perils at its new location. Does NOT add to the limit of liability.
Fire Department Servi

Basic coverage

11 named perils.
Fire
Lightning
Rioting and civil commotion
Explosions
Wind and hail
Smoke
Sprinkler leakage from a fire sprinkler system
Sinkhole collapse
Volcanic activity
Vehicles or aircraft that damage our property through physical contact
Vandalism

Broad

Adds five more coverages to Basic.
Water damage that occurs in the first 14 days from a water system.
Weight of snow, ice, or sleet
Falling Objects
Glass coverage cause by covered perils
Collapse

Special

Covers everything but these Exclusions:
War
Nuclear Catastrophe
Sewer backup
Floods and mudslides
Earth movement
Off premises power failure
Government action
Building Ordinance
Explosion of a steam boiler, refrigeration system, or compressor, mechanical b

Replacement Cost

Full cost of buying new, similar property to replace the old destroyed or damaged property. Pays cost without deducting for depreciation.

Actual Cash Value

ACV = replacement cost - physical depreciation.
Best example of indemnification.

Valued Policy

Policy to cover a stated amount where Replacement or ACV are difficult to determine. Antiques, fine art, collectibles, etc.

Appraisal/Arbitration Provision

Either party may ask for appraisal to determine value not coverage.
Each party selects an appraiser.
If the appraisers disagree, they choose an umpire.
Each party pays their appraiser and split umpire fee.
Can be taken to court if disputed.

Subrogation

The transfer to the Insurer of the Insured's rights of recovery from a responsible third party. The Insurer who has paid a claim is able to sue the third party who caused the loss. Upholds the principle of indemnity.

Standard Mortgage Provision

Mortgagee is entitled to 10 days notice of cancellation or nonrenewal.
If the Insured does not pay premium, the mortgagee may make the payment to the Insurer and add that amount to the loan.
Additional 60 days to file proof of loss form for the mortgagee

Direct Loss

Damage to the property itself.

Indirect Loss (consequential loss)

Loss of use or income.

Tort

An injury to another or damage to another's property.
Intentional - not covered
Negligent - covered

Negligence

Failure to do what a reasonable person would do under the same circumstances.

Absolute liability

Liability one has from dangerous situations - keeping a wild animal, blasting, etc.

Strict Liability

Liability for defective or unreasonably dangerous products.

Vicarious Liability

Liability for the acts of another. (Employer/Employee)

Four elements of Negligence

Duty
Breach of duty
Damages
Proximate cause

Three coverages in a liability policy

Med Pay
Supplementary Payments
Liability Payments

Med Pay

Pays other person's medical bills without regard to fault.
Own limit of liability (Usually $5000 for commercial, $1000 for HO)
Per person limit, not per event.

Supplementary Payments

Covers Insureds defense costs.
-Lawyer fees
-Cost of private investigation and expert witnesses
-Expenses incurred by the Insured to assist the defense lawyers, including loss of income and travel costs.
-Bonds which might have to be posted as part of any

Liability Payments

Compensates the injured third party if the Insured acted negligently. Pays damages by court judgement or out of court settlement.
Limit of liability. Both an occurance and aggregate limit.

Three coverages of Liability

Bodily Injury (Always covered)
Property Damage (Always covered)
Personal Injury (Sometimes covered)

Personal Injury

False arrest
Malicious prosecution
Wrongful entry or eviction
Libel
Slander
Invasion of a person's right of privacy
Advertising injury (infringement)
Unfair competition
Excludes discrimination and employee disputes.

Compensatory Damages (Actual Damages)

Damages paid to the plaintiff as compensation for the harm the Insured caused.

Punitive Damages (Exemplary Damages)

Damages meant to punish the defendant and make an example of their misconduct. Usually excluded from coverage.

Settlement Consent

If the settlement is within the policy's limit of liability, the Insured's consent is not required. Consent is required if it is higher because the Insured will have to agree to pay the remainder.