Property Insurance Unit 3

property & casualty

property: provides protection on belongings from perils

casualty: also known as liability and provides insurance against “the other guy”

real property vs personal property

real: buildings

personal: stuff

first party loss vs third party loss

first: when property insurer pays the insured for covered losses to the property (real or personal) (me)

third: when casualty insurance pays the other guy when the insured is found legally liable for negligent acts or omissions that cause injury or property damage damage to others (others)

policies contain several parts (DICEE)

Declarations: who, what, when and where. first page of the policy. name of the insured(s), a current address, a legal description of the insured property, the policy deductibles, and the term of the coverage are here. this info is used to help determine the premium.

Insuring agreements: describes the covered period or risks assumed by the insurer & makes reference to the contractual agreement between insurer & insured. if the policy has liability, the promise to defend the insured, if sued, is found here. it summarizes the major promises of the insurance company as well as states what is covered

Conditions: states the policy provisions, rules of conduct, duties and obligations required for coverage. ex: insured must file a claim with the police if the loss is crime related. if the insured does not adhere to the conditions, the insurer may deny coverage or a claim

Endorsements and additional supplementary coverages: add, modify or take away coverage. an endorsement is attached to the policy and is part of the legal contract

Exclusions: take coverage away from the insuring agreement by describing property, perils, hazards or losses arising from specific causes which are not covered by the policy. example: flood damage may be an exclusion

definitions section

clarifies the meanings of certain terms used in the policy

additional/supplementary coverages

payment for additional expenses not normally covered. may have separate limit of insurance. examples: the cost to pay attorneys fees for the insured if the insured is sued

insureds- named, first named & additional

named insured: the person, business or entity named in the declarations to which the policy is issued

first named insured: person listed first on the declarations page when there is more than one named insured. policy may assign a higher level of duties or rights to the first named insured. common in commercial insurance where there are multiple partners in a business

additional insured: in some circumstances, another individual or business may be added

insureds: policy may cover other persons, businesses or entities as insureds such as the name insureds resident relatives. these insureds are not listed by name but are insureds by definition.

policy period & policy territory

period: when the policy begins & ends

territory: where a loss must occur

unearned premium

premium paid in advance for future months which must be returned to insured when they cancel their policy

pro rated basis

in a case where the insurer cancels the policy, the entire unearned premium is returned on a pro rated basis. meaning that the insured will receive a portion of the premium back, depending on when the policy is cancelled.

short rated basis

there is a surcharge or penalty for early cancellation and it is applied on a short rated basis.

flat cancellation

when a policy is cancelled on the effective date, by either party, it is a flat cancellation

cancellation

occurs before the policy’s expiration date. insurer cancellation: requires advanced notice. full refund of unearned premium (pro rated) insured cancellation: no advanced notice. partial refund of unearned premium (short rated)

non renewal

occurs at the expiration date. insurer must give advance notice. no advanced notice required by insured

deductible

amount that must be paid out of pocket by the policy owner before insurance pays any expense. premiums are usually cheaper when they involve higher deductibles

example:

if you have a policy on your home with a $500 deductible and a windstorm causes $750 in damage, insurance will pay you $250 ($750-$500 deductible). if a windstorm causes $200 in damage, insurance will not pay since your deductible is more than your loss.

other insurance

there could be a situation where more than one policy covers the same loss or claim. the other insurance condition defines how reimbursement will occur when this happens and is also called other sources of recovery or insurance under two or more coverages.

non currency

result of 2 or more policies covering the same property but providing different coverage. not ideal because it can cause gaps or disputed payments

primary & excess

primary: attaches immediately upon the occurrence or loss of

excess: pays whatever is not paid by primary policy up to the amount of the loss or excess coverage limit, whichever is less

example: company x is the primary and is covered up to $10,000 and company y is the excess also covered up to $10,000. if there is a $15,000 loss, company x will pay $10,000 and company y will pay $5,000

pro rata

one method of preventing overpayment of a claim. each company will pay part of the loss according to the percentage of the total amount of insurance the policy provides. each insurer is liable for a portion of the loss.

formula for calculating:

policy limit of one company

---

policy limit of all companies

x loss

example:

policy a limit = $100,000

policy b limit = $300,000

claim/loss amount = $50,000

total insurance from a & b: $400,000

policy a calculation:

.25 (25%) x $50,000 = $12,500

policy b calculation:

.75 (75%) x $50,000 = $37,500

a + b = $50,000

contribution by equal shares provision

all insurers pay equal amounts, up to the limit of the policy with the smallest limit. when that company pays its policy limit, it stops paying and the other companies share in the remainder. this continues until each company has paid its policy limit or the loss is paid in full.

example:

$24,000 liability loss covered by 2 policies

company XYZ = $5,000 policy limit

company PDQ = $25,000 policy limit

XYZ would pay $5,000 (smallest limit)

PDQ would pay $19,000 ($5,000 smallest limit & $14,000 of its own share)

provisions & loss provisions

provisions: the conditions section of a property insurance policy lists the duties and rights of both the named insured & the insurer. these are known as provisions

loss provisions: most contracts include conditions that specify what the named insured and insurer must do when a loss occurs. together, they are referred to as loss provisions

duties after loss condition

lists the named insureds responsibilities after a property insurance loss. this includes:

PPC + MSC

Prompt: notice of claim to the insurer or agent

Protect: the property from further damage

Complete: detailed proof of loss (an official inventory of the damages)

Make: the property available for inspection by the company

Submit: to examination under oath if required

Cooperate: with the insurer as required during the claim investigation

assignment condition

the assignment condition specifies that a policy may not be transferred to anyone else without written consent of the insurer.

if the named insured dies, the rights & duties under the policy are transferred to the insured’s legal representative and they remain insured up to the policy renewal date. sometimes called transfer of rights

abandonment condition

states that the insured may not abandon property to the insurance company & ask for reimbursement for full value

example:

if you hit a deer with your car and it is repairable, this provision prohibits the insured from abandoning the car & demanding payment for the full loss. the insurer has the option to repair, rebuild or replace the vehicle with the kind and quality

salvage condition

states that the insurer can take possession of damaged property after payment of a total loss.

insurer has the right of salvage - not the insured.

example: car accident that causes damage to the body of the car, but none to the engine or tires. insurance will pay a total loss and then have the right to sell the tires & engine to reduce the cost of the claim

liberalization condition

states that if the insurer broadens coverage coverage under a policy form or endorsement without requiring additional premium, then all existing similar policies or endorsements will be construed to contain the broadened coverage.

extended coverage to insured

no additional premium

no action required by insured

ex: insurer deciding to include in their policy $1,000 coverage for electronic items stolen from a covered auto

subrogation

transfer to the insurer of the insured’s right of recovery against others.

example: an insured suffers a loss which they are not at fault for & the party that caused it has no insurance or refuses to pay. the insured’s insurance may step in & pay for the damages and then bring a suit or file a claim against the negligent party or the other party’s insurance company on the insured’s behalf.

insurable interest

defined as legitimate risk of financial loss in the person or thing being insured.

obviously, the owner of the home has an insurable interest in the home. however, the mortgage company that has a mortgage on the home also has an insurable interest in the home. they could lose money if the house burned down in a fire.

in property insurance, insurable interest may be present at the time of application but must be present at the time of loss. if someone sells a home and it is later damaged, that individual cannot claim a loss even if their policy is ongoing because they forgot to cancel it when they sold the home

underwriting

the process of evaluating the risk & exposures of potential clients. during the underwriting process, the premium amount and coverage amount of the applicant is determined.

field underwriting is performed by the agent

underwriters ultimately decide whether to accept or reject the applications sent in by agents on the basis of company underwriting standards

using sources such as:

client’s application

inspections

credit scores

gov. bureaus such as bureau of motor vehicles

previous insurers

application

primary source of underwriting information

binder

temporary oral or written statement made by the agent giving the insured immediate coverage for a specified time. does not guarantee a policy will be issued (underwriter decides) but gives temporary coverage that is identical to the policy.

binder coverage will end:

effective date of policy (if issued)

effective date of formal cancellation notice from insurance company

if no notice is sent, the expiration date of the binder (30, 60, 90 days)

example: if john gets a statement from his agent on july 6th that he is “bound” effective that day for 90 days and on july 14 john has a loss that would’ve been covered, but on july 21st the insurer reviews the application and decides not to issue a policy, because there is a binder, john will have coverage for his loss

loss, expense and combined ratios

loss ratio: calculated by dividing the amount of incurred losses by the amount of earned premium. compares company’s operations year over year

expense ratio: calculated by dividing underwriting expenses by the amount of written premium. indicator of the cost of doing business

combined ratio; simply the sum of the loss ratio and expense ratio

100% is considered breakeven point. a combined ratio of less than 100% indicates that the company had an underwriting profit and a ratio greater than 100% indicates an underwriting loss

earned premium

the premium the company actually earned by providing insurance protection for the designated period.

incurred losses

include amounts paid and reserved on claims for covered losses and various expenses related to handling claims

underwriting expenses

cost to acquire and to keep policies. includes expenses for advertising, commissions, salaries and other administrative costs and regulatory costs such as taxes and licensing fees

written premium

gross amount of premium income received from insureds. includes both earned & unearned premium. premiums for new business, renewals & policy endorsements make up the written premium

judgement, manual, experience, retrospective and schedule ratings

3 basic ways in which an underwriter assigns rates:

judgement rating: premium is determined by considering individual risk. no books/tables. established through judgement and experience of underwriter.

manual: uses company rates for a particular area that are contained in a manual. rates are arranged by category or class. underwriter classifies the risk according to criteria and then looks up appropriate rate. then rate per unit is multiplied by number of units. formula:

rate per unit x number of units = premium

example:

an insured purchases $60,000 of insurance at a rate of $2 per $1,000 of coverage. (to calculate units divide the amount of insurance by 1,000 - in this case it is 60)

$2 × 60 = $120 premium

experience rating: associated most commonly with workers comp. actual loss experience is compared to historical loss data for a particular rating class. experience modification factor is developed from this information that can increase or decrease the premium based on loss experience.

retrospective rating: bases the insureds premium on losses incurred during the policy period

schedule rating: applies a system of debits or credits to reflect characteristics of a particular insured

loss costs

pure claims data. no operating expenses or profits included

rate components

factors that determine premium rates: loss costs, cost of handling claims, operating expenses, and profits.

notice to applicant

must be issued to all applicants for property or casualty and life or health insurance coverage. informs the applicant that a report will be ordered concerning their credit history and any other life or health insurance for which they have previously applied.

no later than three days after a report is requested

consumer rights

consumers who feel that info in their files in inaccurate or incomplete may dispute the info, and the reporting agencies may be required to investigate and correct or delete info

penalties

violators of the fair credit reporting act may be subject to fines or imprisonment and may be required to pay any actual damages suffered by a consumer, punitive damages awarded by a court and reasonable attorney fees.

max penalty for obtaining info under false pretenses: $5,000 fine, 1 yr imprisonment or both

Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)

result of 9/11 attack

congress enacted in 2002 originally

limits exposure of insurers in case of a catastrophic event

triggering event $200 million w.

Gramm-Leach-Bliley Act (GLBA)

passed in ‘99 to allow financial holding companies to engage in act activities that are financial in nature. regulatory authority is based on what activity is occurring, not what company is engaging in the activity. example: sale of insurance is regulated by state insurance regulations even if the company making the sale is a bank.

consumer

anyone about whom a company collects information

customer

a consumer who has an ongoing relationship with the financial institution

fraud & false statements

a person who transacts in interstate commerce and intentionally makes false material statements in connection with financial reports or documents presented to insurance regulators is subject to a fine, imprisonment up to 10 yrs or both.

imprisonment may be up to 15 yrs if the false statements jeopardized the safety and soundness of an insurer and were a significant cause of the insurer being placed in conversation, rehab or liquidation by the courts.