Chapter 1: Building a Property and Casualty Vocab

Property

For the most part, tangible items that you can possess - your stuff, like your house, your cat, your dog, your furniture - or your business stuff: building, inventory, desks, computers, and equipment; it’s all property

Property is what kind of contract?

two-party contract

Casualty or Liability

Refers to your legal responsibility to pay for damage that you do to the Other Guy’s body or property, Bodily Injury (BI) or Property Damage (PD) liability. Liability and Casualty coverage will pay for damage you do to the OTHER GUY

What kind of contract is Casualty or Liabiltiy?

third party contract

Personal Lines Insurance

P&C policies written to cover the risk exposures of an individual or family: auto, home, boat, camper and RV. Within these policies, we will find both property and casualty coverages. A single policy will cover both damage to your car and damage done to a third party by you and your car

Commercial Lines Insurance

These contracts are designed to provide for the insurance needs of a business. On the property side, insurance covers buildings, offices, warehouses, inventory, office furniture, and equipment, as well as inventory and raw materials. On the casualty side-we can provide policies to cover our clients’ professional liability, products liability, commercial auto, liability and liquor liability, among other risks

Insurance

a contract that allows for the transfer of your individual risk to a company, that will indemnify losses suffered by the insured to a predetermined limit, unless excluded by the policy language. This seemingly innocent definition is filled with wealth of important words

Insured

In Personal Lines contracts you and your resident family members are the insureds. In Commercial Lines, you and your stockholders or partners, your executives and managers and your employees acting within the scope of the business are all insureds

Named Insured

the ranking insureds in a Personal Lines policy are the Named Insureds

First Named Insured

the ranking insured in a Commercial policy is the First Named Insured

Insurance Company

the professional risk bearer, the other party to the contract. The policy will spell out the rights of the company within the guidelines of the insurance statutes, including their right to establish rates, deny or pay claims, inspect insured property, require proof of loss and to cancel or nonrenew policies

Cancellation and Nonrenewal

are strictly regulated by state law and need to be differentiated

Cancellation

is mid-term

prorata refund

proportional refund after cancellation of a contract mid term

short-term refund

(you are assessed a small penalty) Named Insureds cancel the contract

Non-renewal

on the other hand is simply the company’s decision to not renew your auto policy for another policy period

Risk

Chance of loss; uncertainty of loss; probability that will occur. In insurance, we insure only pure risk exposures; you can only lose, you cannot win

Differentiates Insurance

risk that is created - gambling or speculative risk

In gambling

there is no risk until you place a bet, like $10 on Ohio State to beat Michigan. And, you can win or lose on that bet

Loss

in insurance, we address financial loss, and there has to be a way of putting a dollar value on the loss. Insurance companies do not cover sentimental value

What are the two kinds of loss?

Direct and Indirect

EXAMPLE: Direct & Indirect

If your house burns down, you have a direct loss. Following the direct loss, there can be an indirect loss, like the additional money you will have to spend to live in a motel for 3 months while your house is rebuilt. Loss of use is a type of indirect loss

Mitigating Risk of Loss

You have several options available to offset risk

Avoid

you could avoid risk by not buying expensive jewelry

Reduce

you could reduce risk by installing an alarm system

Retain

you could retain risk by choosing a substantial deductible with your insurance policy

Transfer

Most often, as individuals and business owners, we transfer risk to all insurance company

Predetermined limit

Our definition of insurance says that the company will indemnify losses to a predetermined limit

Indemnify

to make whole: no better, no worse

Insurable Interest

the extent of your financial interest at the time of loss is our insurable interest. Insurance companies will sell you a property policy on property in which you have (or soon will have) an insurable interest. You cannot, certainly, buy a policy on my house with plans to torch it

Certificate Holder

A bank or mortgage company probably has an insurable interest in your house, but the financial institution may not actually insure the property. They simply make it a requirement of the mortgage that you name the bank as an additional insured. At your closing, you present the bank with a Certificate of Insurance. If the insurance is cancelled, the insurance company is required to notify the bank of cancellation, since the bank is the certificate holder. At that point, you can bet that the bank will buy insurance up to their level of insurable interest on your house

Exclusions

The final phrase of our definition of insurance reads, “unless excluded by the language of the contract.” P&C policies have multiple exclusions. Don’t try to memorize them. Simply notice that they invariably fall into one of three following categories

Catastrophic Losses

happen to a lot of people simultaneously: food, earthquake, war, nuclear

Predictable Losses

also happen to a lot of people, but not simultaneously: wear and tear, deterioration. If your 20-year-old furnace dies, the loss is predictable, not fortuitous. It is not covered

Covered Elsewhere

Your auto is not covered by your Homeowners policy (even if it is in the attached garage when the house catches fire). your auto is covered under your Auto policy

Endorsements

Since your policy has exclusions and limitations, it has coverage gaps or holes. Some are of little concern. If your Homeowners policy excludes serious boats, you don’t worry about your canoe or the exclusion. But, if your Homeowners policy limits jewelry to $1,500 in the even of theft and you have $10,000 worth of jewelry, you may be a bit more concerned

Stock Companies

An insurance company known as a stock company is structured like most US corporations. It is in business to earn money for its stockholders. if it makes money, it pays a dividend to the stockholders and they pay tax on that dividend since it is a return on their investments. A stock company normally does not return any surplus monies to policyowners and as such is sometimes referred to as a nonparticipating company issuing nonparticipating policies

Mutual Companies

have no stockholders. The policyowners elect the board of directors of the company. The company still attempts to make money, but its earnings are considered a surplus, and this surplus is distributed to the policyowner as a dividend.

Risk Retention Groups

Many states allow this form of group self insurance for business liability risks. For Example, if the costs of Liability insurance for day care centers skyrockets in a specific state, all the day care centers might stop buying insurance they can no longer afford. They would then band together and pay money into a common pool.

Lloyd’s Associations

While Lloyds is the best-known insurance provider on planet Earth, most people are unaware that Lloyds is not truly a company. It is simply a place where several hundred insurance syndicates or associations meet to underwrite risks. Though famous for assuming highly unusual risks, most Lloyds associations function as they have for decades. They primarily are engaged in insuring property in transit - Marine Insurance

Reinsurance

is a complete mystery to most consumers and more than a few producers, but the actual concept is really quite simple. If a relatively small P&C Company writes a $100,000,000 policy on, say the Willis Tower, they probably have too many eggs in one basket. They could pass some of the risk, and, of course, some of the premium to a reinsurer. In the event of a loss, the insuring company and the reinsurer would share in the loss proportionately

Facultative reinsurance

when directed at a single risk as in the above example, the agreement between the insuring company and the reinsurer is called Facultative reinsurance

Reinsurance treaty

if a P&C company wished to reinsure all of its Homeowners contracts, however, it would reach an agreement with the reinsurer for the percentage of risk to be transferred and the fees involved for this entire class of business

Domestic company

A company chartered in Michigan would be considered a Michigan domestic company

Foreign Company

Within Michigan, a company chartered in another state, territorial possession or Washington D.C. would be considered a foreign company.

Alien Company

Within the U.S., a company chartered in another country would be considered an alien company

Admitted or Authorized

A TX company wants to expand its business to OKC, it must first mee the OKC requirements to become “Admitted or Authorized”.

It is almost always true that a foreign or alien company must become admitted to do business in another state before it can sell in that state

Surplus Lines Transaction

Almost always pertains to a situation that occurs in P&C insurance

4 main channels of policy distribution

• Direct Writers

• Exclusive Agency

• Independent Agency

• Direct Response Companies

Direct Writers

are exclusive (captive) producers or employees of the company they represent

Exclusive Agency

contracts with one company that it wishes to represent

Independent Agency

contracts with many companies on a non-exclusive basis

Direct Response Companies

greatly reduce the importance of the Producer/agent. These companies solicit clients on television and the internet and then hire licensed telemarketers to respond to the inquiries

Insurer as principal

for many years, those of us representing insurance companies in sales to the public were called agents. In fact, most people still call us insurance agents. Despite the fact that most governing state law now refers to us as insurance Producers, under the laws of agency, we are, in fact, agents serving the companies we represent by contract, and the company in this arrangement is known as the principal

Agent/Principal

While the law spells out many legal responsibilities you owe to your clients, you are legally an agent serving a principal - The Company

Expressed Authority

These are the powers specifically expressed in your agency contract, the power to collect the premium for example

Implied Authority

There are certain duties that may not be specified in your agency agreement but are implied by that contract. For instance, if a certain policy requires an inspection, you have the power to schedule an inspection, even if scheduling an inspection is never mentioned in the agency contract

Apparent Authority

This is the one that can get you into trouble. If you, as a producing agent for your company, do something disallowed by your agency contract, your company may be legally bound by your actions if the client can reasonably assume that you have such authority. If, for example, you are only given binding authority for personal lines coverage, but you take a call from Cal’s hardware store and loudly pronounce that he is now covered, your company might be liable because Cal could reasonably assume that you have the authority to bind coverage immediately