Farmers Chapter 1: Property

Exposure

Susceptibility to risk

Implied warranty

A legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyer’s expectations.

Obsolescence

Depreciation in the value of a property due to becoming outdated

Premium

Money paid to insurance company for insurance policy

Tort

Wrongful act or violation of someone’s rights leading to legal liability.

Insurance is a ________ of risk, from individual/business to Insurance Agency. This _______ the cost of unexpected losses to many individuals.

transfer, spreads

The Law of LArge numbers

The more people with a similar exposure to loss, the more predictable actual loss will be.

Insurable Interest and the 3 determinants

Insured incurs financial loss on damaged property - ensures vested interest from policy holder. MUST BE PRESENT AT TIME OF LOSS

1. Financial

2. Blood

3. Business

Two types of risk

Pure Risk: refers to situations that can only result in a loss or no change (no opportunity for financial gain). Only type of risk insurance companies accept.

Speculative Risk: involves opportunity for loss or gain, not insurable. (EX: gambling)

Peril

Specific cause of loss insured by a policy

Property vs. Casualty (liability) insurance

Insures against loss of physical property or its incoming-producing abilities. (Two party)

vs.

insures against loss, damage, and injury caused by insured party (Third party)

Hazards and the 3 types

Conditions that increase probability of loss

1. Physical hazards: from material, structural, or operational features of risk, separate from person or business who owns it.

2. Moral hazards: include applicants who may lie or submit fraudulent info on applications.

3. Morale Hazard: refers to increase in the hazard presented by a risk, arising from the insured’s indifference to loss because of the presence of insurance

Indemnity (reimbursment)

Returning insured to same position as prior to loss

(EX: 20k medical policy, but only 15k in bills that year. Only 15k will be paid out)

Subrogation — How does it work with indemnity?

Insurer’s legal right to seek damages from third parties after loss has been reimbursed.

Prevents loss from being collected on twice; once from insurer and once from faulty party.

Accident vs. Occurrence

Accident: sudden unplanned event resulting in unintended injury or damage

Occurrence: includes losses caused by repeated exposure to hazards that resulted in unintended damage.

Direct vs. Indirect Loss

Direct: Can include situations in which insured peril was proximate cause of loss (Ex: building catches fire but suffers water damage from firefighters. Though water damage is not insured peril, it is paid because fire was proximate cause)

Indirect (consequential losses): result from direct loss, like extra living expenses incurred during time of home repairs or lost profits while a business is being repaired.

Named vs. Special (open) Peril

Named Peril: term to describe one of the many specific coverages included in a policy. Unlisted items are not covered

Open Peril: term on that insures against any risk that is not specifically excluded

Contributory vs. Comparative Negligence

Contributory: injured party must be free of fault to collect. (Ex: “Clear last chance Rule” negates policy if injured party had chance to avoid loss but did not)

Comparative: Allows fault to be shared by parties and reduce payout instead of entirely negating a policy. (Adopted by most states, injured party typically only recovers damages if fault is less than defendant’s).

Vacancy vs. Unoccupancy

insured structure where no people have lived or worked in for 60 days

vs.

no living or working, but property is still stored within

Ex: (Homeowner moving vs. going on vacation)

Blanket vs. Specific Coverage

Multiple classes of coverage at one or multiple properties - all properties are written for one total amount of insurance

vs.

policy that covers specific unit of property for specific insurance amount

Replacement cost vs. ACV

Replacement cost: cost to replace using current market price

Actual cash value: - depreciation factored, reinforces indemnity

(Replacement cost - Depreciation = ACV)

stated vs. salvage value

Maximum amount insurer will pay out, not subject to coinsurance requirements

vs.

Most policies allow possession of damaged property to be taken after payment.

Absolute vs. Strict Liability

imposed upon business dealing potentially hazardous things (swimming pool, zoo, etc.); injured party need not prove negligence.

vs.

common in product liability (company liable for unsafe product guarantee defects).

Limit of liability

maximum amount insurance will pay for particular loss during particular period of time.

Per Person liability limit

maximum amount paid to a single person regardless of policy limit

Aggregate Limit

Max coverage limit during a policy year, regardless of number of claims. Limit restored at annual policy renewal.

Split

Separately stated limits for EACH type of loss (auto liability with 25/50/25 pays 25k up to one person, 50k up to two people, and 25k for property damage to others.)

Combined singles

Single dollar limit insurer will pay for ALL types of loss

Deductible

Dollar amount to be paid before insurance can enact coverage

Coinsurance

Insured agrees to maintain certain minimum on insured property. If amount of insurance maintained is less than coinsurance requirement, insurer only pays percentage of loss.

Coinsurance penalty formula

(Insurance carried / Insurance required) x Loss amount = Loss Payment

Elements of Risk

1. Random occurrence

2. Definite, measurable, and statistically predictable

3. Cannot cause catastrophic loss for insurance firm

Underwriting

Investigative risk selection process to determine applicant’s insurability.

Functional Replacement

cost to replace with modern +cheaper materials and construction

If a policy has a 50/100/30 split, how much is each coverage being paid out?

$50k - bodily injury per person

$100k - bodily injury per accident

$30k - property damage per accident

Which of the following valuation types is best for a property whose value does not fluctuate much.

A. Stated Amount

B. Market Value

C. Agreed value'

Agreed value

Representations

Statements believed to be true to the best of one’s ability

Material misrepresentation

Statement that, if discovered to be untrue, would alter the underwriting decision process.

Warranty

An absolutely true statement that a policy depends upon to be valid

Binder

Temp. agreement issued by insurer that provides temp. coverage until policy is issued.

Declarations

Contains basic underwriting info like name, address, coverage amount and locations. Where Named Insureds are listed

Endorsements

printed addendum to contract that are used to change original conditions and coverages.

Exclusions

Perils that are not insured against

First named insured vs. additional insured

Individual who’s name appears first on policy’s declaration

vs.

individuals not named but protected under policy

Duties of FIRST named insured after loss event (4)

1. protect property from further damage

2. Prepare inventory of damaged property

3. Work w insurer in settling loss

4. Submit signed sworn proof of loss to insurer

Appraisal

used upon dispute between insured and the provider on the value of a loss

Under a professional liability policy, insurer must do what before settlement can be paid?

Gain Insured’s consent

Notice of claim

written statement to insurer informing them that events leading to a possible claim have occured

Other insurance clause

defines how policy will respond if there is another insurance written on same risk

Pro rata, when does it apply?

provides for the sharing of loss with other insurance; when more than one policy covers a loss

Fair Credit Reporting Act

Protects consumer from distribution of false or obsolete personal finances.

Gamm-Leach-Billey Act

Customer’s information is protected from disclosure unless they choose to opt in to share

Terrorism Risk Insurance Act (TRIA)

Temp federal program that shares risk of loss from terrorism (insurer must still meet deductibles lol)

4 requirments of an insurance contract

Agreement, consideration, competent parties, legal purpose

What are two examples of an additional insured that may have financial interest

Lien holder or mortgage lender

Insuring agreement

clearly lists parties and obligations of insurer, and states customer agrees to pay premiums

An insurer wishes to inspect a property. As per the policy the customer must agree. This is an example of?

Conditions

When do you use an Appraiser vs. arbiter

Used in property vs. casualty disputes

Assignment

Transfer of rights by insured to someone else. Requires written consent from insurer

Cancellation vs. nonrenewal

Policy termination prior to expiration — insurer for failure to pay premium or misrepresentation, but requires advance notice

vs.

Termination at expiration, policy not replaced

If an insurance agreement states the terms and conditions of policy, what is unique about the declaration to that policy?

It personalizes the policy