P&C Ch. 3: Basics of Property Insurance

Policy Outline

created by the Standard Fire Policy consisted of four integral subdivisions: Declarations, Insuring clause, Conditions and Exclusions. DICE

Declarations

This is the section that differentiates my Homeowners policy from yours even if we buy the same contract from the same company. It is on the Dec Page, as it is often called, that your coverages, your limits, and your policy period appear

Insuring Clause

this portion of the contract spells out the company’s consideration - the something of value that the company brings to the contract. It encapsulates the basic promises of the policy, outlines the coverages, and in the most general terms addresses the conditions and limitations affecting the promise

Conditions

are rules that you and your company agree to follow in making the policy function as intended. The conditions dictate what each party is required to do following a loss, what constitutes proof of loss, how the loss is payable, how the contract can be cancelled and how disagreements concerning the value of damaged or destroyed property will be handled

Exclusions

The part of the policy that eliminates coverage for items better covered elsewhere, predictable losses and catastrophic losses

Standard Fire Policy

dealt only with property - one line of insurance. Most modern policies are multi-line contracts

Three major questions

• What do you want to insure?

• Against what dangers?

• On what basis do you get paid?

Perils or Causes of Loss

the dangers that can cause a loss to insured property

Perils

property policies can be written as named peril policies or as open peril (all risk) contracts. In a named peril policy, each peril covered is specifically named. If it is not named, it’s not covered. With open peril contracts, any loss is covered that is not excluded

hazard

is any dynamic which increases the likelihood that a peril will occur or one that magnifies the damage done by a peril

Physical hazard

slick floors, icy walks and improper storage of flammables

Moral hazards

intentional losses

Morale hazards

apathy, sloth, neglect. Who cares? it’s insured

EXAMPLE: hazard/perils

For the most part, you can think of hazards as inactive, whereas perils are active. An icy walkway is inactive until someone falls, then it gets very active

Actual Cash Value (ACV)

is essentially the default position for settling property claims; ACV is the norm, if you want something better, you have to pay for it. ACV is defined as today’s replacement cost minus the depreciation

Replacement Cost

Replacement cost today without subtracting depreciation is a far more generous method of valuation. It is, in fact, new for old.

CAUTION VALUE

“stated value” is not the same as “agreed value!”

Agreed Value

is often selected as the valuation method for fine art antiques. If you have a Picasso hanging in your living room, it would be of benefit for you and your company to have agreed to the value, and hence the value of the claim, before the loss occurs

Fair Market Value

is the standard valuation in real estate, but it is almost never used in insurance. Fair Market Value is determined in large part by location, location and location

Exclusions

are events and properties that are not covered. Some are found in named peril policies, mostly for clarification - fire insurance does not pay for the wood you use to keep your fireplace burning

Deductible

earlier in this text we pointed out that you could retain risk by selecting a deductible when insuring your property

Coinsurance

is a mechanism for rewarding policyowners who buy punishing those who do not. The coinsurance penalty in a P&C policy can be avoided altogether if you do what you are supposed to do

Coinsurance shortcut

= did/should times loss minus deductible

Policy Period and Coverage Territory

each contract will define the policy period - usually 6 months or one year - and establish the coverage territory. Found on Dec Page

Mortgage Holders

a fancy name for the financial institution holding a mortgage on your property. Bank that your financed through

Standard Mortgage Clause

appears in property policies to protect the mortgagee - the bank. It obliges the insurance company to notify the bank if the insurance should be cancelled

Pinch-hitter policyowner

if the policyowner fails to execute his responsibilities or exercise his rights, the bank may step forward in his place

Loss Payable Clause

is a variation of the Standard Mortgage Clause. It does allow benefits to be paid to someone other than the policyowner, but it does not create immunity for the mortgagee in the event of dishonest acts on the part of the policyowner

Other Insurance

while it is unusual today to have more than one property policy covering the same exposure, this provision dictates how a claim should be handled if the circumstance should arise

Misrepresentation, Concealment or Fraud

If you lie, you lose out on the claim and you lose the coverage

Legal Action Against the Company

to sue the company, you must have met all of your obligations under the policy, and you must act within the period of time allowed in the law of the state having jurisdiction

Vacancy and Unoccupancy

property policies often reduce benefits or even eliminate coverage for properties that are vacant, the risk is greater

Unoccupied

simply establishes that no person is present

Vacant

indicates that the furnishings, fixtures and equipment are gone as well

Liberalization

if during the coverage period of your policy, your company enhances the coverage in any respect without a commensurate adjustment of the premium, your policy will be interpreted as if it contained the more generous coverage

Additional Coverages

The policy then lists a number of additional coverages automatically provided at no additional cost. Sometimes these additions actually increase the dollar value of a claim as in the case of a Fire Department Service charge allowance

Extensions of Coverage

Like the additional coverages, the Extensions of Coverage can add dollar value or give back limited coverage that an exclusion removed, but there is one big difference. In many cases, the Extensions are not automatic or free; you must earn them

Control of Property

The negligent actions of someone not subject to your control will affect your coverage

subrogation

if someone else is legally responsible, the policy will pay you and then pursue legal action to recover from the negligent party

No Benefit to Bailee

a bailee is someone who has property in his care, custody or control, probably to do work on it. While it is in his care, he is responsible for your property

Policyowner Duties Following a Loss

• notify the company promptly and the police if a law may have been broken

• protect the property from further damage

• inventory the damage

• Allow the company to inspect and question you under oath

Loss Payment

at the time of a covered loss, the company has the following options:

• Pay full value for the loss and take the damaged property as salvage

• Pay to repair or replace the property

• Repair it themselves or replace it themselves with equivalent property

Salvage

After the company pays in full for damaged or destroyed property, they gain ownership of the item and have the right to recoup some of their outlay - salvage

SHORTCUT: Salvage/Abandonment

taking into consideration both salvage and abandonment, the company is saying that they - not you - will determine when your damaged car is totaled

Basic Cause of Loss Form

FLEW RVVVSSS

Fire

not only covers fire damage, but the resultant smoke, water and fireman damage associated with a fire. Even if your building is only endangered by the fire, fire fighter attempts to keep it from spreading which result in damages are covered as fire

Lighting

L

Explosion

except for boilers. Sometimes you will see covered explosions referred to as inherent explosions

Windstorm or Hail

no interior or contents coverage unless the wind or hail damage to the building allows the wind or hail to enter

Riot or Civil Commotion

R and C

Vandalism

is not theft coverage, but it will cover burglar damage

Volcanic Action

is the above ground damage done by a volcano

Vehicles or Aircraft

but not done by your vehicles or aircraft

Smoke

yes, the peril of fire also coveres the smoke. but what about smoke from three blocks away or smoke from an overheated furnace which never actually catches fire

Sprinkler Leakage

S

Sinkhole Collapse

is a situation where property sinks into the earth because the natural action of underground water has eroded a thin layer of the earth’s crust

Broad Causes of Loss Form

• plumbing

• falling objects

• weight of snow, ice or sleet

• Collapse

Plumbing

covers damage caused by the freezing and leaking of pipes and plumbing fixtures under the Broad Form and later the Special Cause of Loss Form

Falling Objects

no interior or contents coverage unless the falling object damage to the exterior of the building permits the interior or contents damage

Collapse

Suppose a major support beam of your roof was cracked by hidden decay, which later caused the roof to collapse. Under the Basic Cause of Loss Form, you would get a new beam. Under the Broad Form you would get a new roof

Examples of cause of Collapse

• weight of rain

• weight of people or personal property

• Hidden decay

• hidden insect or vermin damage

Special Cause of Loss Form

No perils to memorize here; the Special Form simply covers everything that is not exclude. Certainly the Special Form covers all that appears on the Broad Form list and a great deal more. To truly know if you are covered, you simply read the exclusions. If it is not excluded, you are covered