Chapter 2 notes simplified

Insurable Interest

A financial interest in property that must exist at the time of loss for the insured to collect.

Underwriting

The process of reviewing applications for insurance and determining the risk and terms of coverage.

Loss Ratio

A formula to compare premium income to losses, calculated as (Incurred losses + Loss adjusting expense) ÷ Earned premium.

Physical Hazards

Conditions arising from the material, structural, or operational features of the risk.

Moral Hazards

Conditions where the insured may provide false information or commit fraud.

Morale Hazards

Increases in hazard resulting from the insured's indifference to loss, due to insurance coverage.

Named Peril

Insurance coverage that lists specific perils that are covered.

Open Peril

Insurance coverage that covers any risk of loss not specifically excluded.

Direct Loss

Physical damage to buildings or personal property.

Indirect Loss

Losses that result from direct loss, such as loss of profits.

Blanket Insurance

A policy covering multiple properties under one amount of insurance.

Specific Insurance

Coverage for a specific type of property with a specific insurance amount.

Actual Cash Value (ACV)

Value calculated as Current Replacement Cost minus Depreciation.

Replacement Cost

Cost to replace damaged property without subtracting depreciation.

Functional Replacement Cost

Cost to replace property with modern equivalent that is less expensive.

Agreed Value

A pre-agreed amount of insurance for property at the time the policy is written.

Declarations

The first page of an insurance policy that includes essential information like the insured's name and coverage amount.

Insuring Agreement

Section of an insurance policy that establishes the insurer's obligation to provide coverage.

Exclusions

Details of perils and property that are not covered by the insurance policy.

Endorsements

Written alterations to an insurance policy that modify its terms.

Deductible

The amount the insured must pay before the insurer covers a claim.

Coinsurance

A clause that requires the insured to maintain a minimum amount of insurance, or risk reduced claim payments.

Liberalization

A clause that extends broader coverage to current policyholders without additional premium.

Subrogation

Insurer's right to recover costs from third parties after paying a claim.

Loss Payable Clause

A provision covering the interest of secured lenders in personal property insurance.

Standard Mortgage Clause

A provision in property policies ensuring payment to the mortgagee for their insurable interest.

Michigan Property and Casualty Guaranty Association

An association that protects policyholders from insurer insolvency.

Terrorism Risk Insurance Act (TRIA)

A federal program that shares the risk of loss from terrorist acts between the government and insurers.