Insurance Licensing Unit 4: Basics of Property Insurance (Perplexity Ver.)

Real property

Permanent structures and buildings, including land and things attached to it.

Personal property

Moveable contents such as furniture, appliances, clothing, tools, and other belongings.

Types of property

The two classes of property: real property (buildings) and personal property (moveable contents).

Specific (scheduled) coverage

Property coverage that lists each covered item in detail, often with an appraisal (e.g., a diamond ring with a jeweler’s appraisal).

Scheduled property

Individually described items insured on a specific coverage basis, each with its own limit.

Blanket coverage

Single limit of insurance that applies to all items of a certain property type without a detailed item-by-item list.

Blanket personal property

Example of blanket coverage where all personal property contents in a house are insured under one limit.

Covered property

Property described in the policy as insured, which may be scheduled or covered on a blanket basis.

Policy limit

The maximum amount the insurance company will pay for a covered loss; also called limit of coverage, limit of liability, or limit of insurance.

Limits of insurance

Maximum coverage limits listed on the declarations page for each type of covered property or coverage.

Declarations page

Section of the policy that identifies the named insured, location of premises, and policy limits, among other key details.

Peril

The actual cause of a loss, such as fire, lightning, windstorm, or theft.

Named peril policy

Policy that covers only the specific perils listed in the contract; if a peril is not named, it is not covered.

Specified peril coverage

Another term for named peril coverage; insures only against perils specifically listed in the policy.

Open peril policy

Policy that insures against all risks of direct physical loss except those specifically excluded; also called all risk, special, or comprehensive coverage.

Special perils

Another name for open peril coverage in property policies, covering all risks of direct physical loss except excluded perils.

All risk coverage

Informal term for open peril coverage, meaning all perils are covered unless specifically excluded.

Comprehensive coverage (property)

Another informal term for open/special peril coverage that protects against all risks of direct physical loss except exclusions.

Levels of coverage

The three standard property coverage levels: basic, broad, and special (open).

Basic form

Least expensive property coverage form that insures a limited list of perils (basic perils and extended coverage perils).

Broad form

Intermediate property coverage form providing named peril coverage including basic, extended, and additional “broad” perils.

Special form

Most expensive coverage level; provides open-peril coverage for all risks of direct physical loss unless excluded.

Basic perils

The fundamental perils covered under basic coverage: fire, lightning, and internal explosion.

Fire (basic peril)

Hostile fire (not a friendly fire) causing damage; intentional loss (arson) is not covered.

Hostile fire

Fire that escapes its intended containment (or was never intended) and causes damage; covered under basic perils.

Friendly fire

Fire that stays where it is intended (e.g., fireplace); smoke damage from a friendly fire is not covered under the smoke peril.

Lightning (basic peril)

Natural electricity from the atmosphere causing direct damage to covered property.

Internal explosion (basic peril)

Explosion occurring inside a covered location, such as a furnace or water heater explosion.

Extended coverage (EC) perils

Nine additional perils historically added by endorsement and now commonly included: windstorm, civil commotion, smoke, hail, aircraft, vehicles, volcanic eruption, explosion, and riot.

WCSHAVVER

Acronym for extended coverage perils: Wind, Civil commotion, Smoke, Hail, Aircraft, Vehicles, Volcanic eruption, Explosion, Riot.

Windstorm peril

Extended coverage peril for exterior damage by wind; interior damage is covered only if wind first causes an opening in the building.

Civil commotion peril

Damage caused by a large assembly of individuals, including striking employees, resulting in disturbance and property damage.

Smoke peril

Extended coverage peril for smoke damage not from a friendly fire (e.g., not from a fireplace).

Hail peril

Peril involving solid precipitation in the form of balls or lumps of ice (hailstones) causing property damage.

Aircraft peril

Damage caused by physical contact with part or all of an aircraft, including falling objects from aircraft.

Vehicles peril

Damage to covered property caused by vehicles striking the property.

Volcanic eruption peril

Damage from lava, ash, debris, and air shockwaves from a volcanic eruption.

Explosion (off-premises) peril

Explosion damage occurring away from the covered location, included in extended coverage.

Riot peril

Damage caused by an assembly of individuals, including striking employees, usually smaller in number than a civil commotion.

Vandalism and malicious mischief (VMM)

Peril involving willful and malicious damage, usually associated with a crime; often available only with extended coverage.

Broad perils

All basic perils (fire, lightning, internal explosion), extended coverage perils, VMM, plus the additional broad perils remembered by BIG AFFECT.

BIG AFFECT

Acronym for broad-form additional perils: Burglary damage, Ice/sleet/snow weight, Glass breakage, Accidental discharge of water, Freezing, Falling objects, Electrical current, Collapse, Tearing asunder.

Burglary damage peril

Damage resulting from burglary (forced entry/exit), covered under broad form as one of the BIG AFFECT perils.

Ice, sleet, and snow weight peril

Broad peril for weight of ice, sleet, or snow causing damage, subject to certain exclusions.

Glass breakage peril

Broad peril covering breakage of glass that is part of a building or structure.

Accidental discharge of water peril

Accidental discharge or overflow of water or steam from plumbing, heating, air-conditioning, automatic fire sprinkler systems, or appliances at the described location.

Freezing peril

Freezing of plumbing, heating, air-conditioning, automatic fire sprinkler systems, or household appliances, if the insured uses reasonable care to maintain heat.

Falling objects peril

Broad peril for damage caused by falling objects; interior damage is covered only if the falling object first damages the roof or exterior wall.

Electrical current peril

Sudden and artificially generated electrical current damage, excluding damage to tubes, transistors, and similar components.

Collapse peril

Abrupt falling down or caving in of a building or part of a building, making it unusable; covered under broad perils, subject to conditions.

Tearing asunder peril

Sudden and accidental tearing apart, cracking, or burning of a steam or hot-water heating, air-conditioning, automatic fire sprinkler system, or water heater.

Broad peril exclusions

Items not covered under broad perils, including weight of ice/snow/falling objects on certain outdoor items, continuous leakage, flooding, and burglary when property is vacant.

Weight of ice/snow exclusion

Exclusion for damage to awnings, fences, patios, swimming pools, docks, and retaining walls from the weight of ice, snow, or falling objects.

Continuous leakage exclusion

Broad-form exclusion for accidental discharge or overflow of water from continuous or repeated leakage or seepage.

Flooding exclusion (broad)

Exclusion for flooding from natural water sources such as rivers or lakes.

Vacancy burglary exclusion

Burglary and accidental discharge perils not covered if the building has been vacant for more than 60 consecutive days.

Vehicles coverage extension (broad)

Under broad form, vehicles peril includes damage to fences, driveways, and walks when the vehicle is not driven by a household resident.

Smoke coverage extension (broad)

Broad form expands smoke peril to include loss caused by fireplace smoke.

Special/open peril coverage

Coverage that insures against all risks of direct physical loss except specifically excluded perils such as flood, earthquake, and others.

Flooding exclusion (special)

Special form exclusion for flood-related losses.

Earthquake exclusion

Special form exclusion for damage caused by earthquake.

Intentional damage exclusion

Excludes intentional damage caused by an insured under special/open peril coverage.

Building code enforcement loss

Exclusion for losses due to enforcement of building codes requiring more expensive reconstruction than original construction.

Off-premises power interruption

Exclusion for damage caused by power interruption occurring away from the insured premises.

Government seizure

Exclusion for loss caused by governmental seizure or destruction of property.

Direct loss

Immediate damage caused by a covered peril, such as furniture burned in a fire.

Indirect (consequential) loss

Loss over time resulting from a direct loss, such as loss of income, rental car costs, or additional living expenses after a fire.

Types of loss

The two categories of loss: direct loss and indirect (consequential) loss.

Classes of construction

Six basic building construction types used in underwriting: Frame, Joisted masonry, Noncombustible, Masonry noncombustible, Modified fire resistive, Fire resistive.

Class 1 – Frame

Structure with exterior walls, roof, and floors made of wood or other combustible materials (may be covered by stucco or brick veneer).

Class 2 – Joisted masonry

Building with noncombustible masonry exterior walls and combustible wood roof and floors.

Class 3 – Noncombustible

Structure whose exterior walls, floors, and roof are built of and supported by noncombustible materials such as metal, asbestos, or gypsum.

Class 4 – Masonry noncombustible

Building with masonry exterior walls and noncombustible roof and floors (e.g., metal).

Class 5 – Modified fire resistive

Structure with masonry or fire-resistive materials having a fire-resistance rating of 2 hours or less.

Class 6 – Fire resistive

Building constructed of masonry or fire-resistive material with a fire-resistance rating of 2 hours or more.

Loss valuation

Method used by the insurer to determine the appropriate amount of loss payment under the policy.

Claims settlement

Another term for loss valuation; the process of determining how much the insured will be paid for a loss.

Deductible

Amount subtracted from the loss after valuation; the insured’s portion of the loss.

Insurable interest

Financial interest in property that would cause financial loss if the property is damaged; maximum the insured can collect.

Lesser of rule

Insured collects the lesser of insurable interest, policy limits, actual cash value, cost to repair, or replacement cost.

Actual cash value (ACV)

Replacement cost based on today’s cost minus depreciation and obsolescence.

Replacement cost

Current cost to replace property with similar kind and quality, without deduction for depreciation.

ACV formula

Replacement cost minus depreciation equals actual cash value.

Repair cost

Method where the insurer pays to repair damaged property when repair cost is less than ACV.

Functional replacement cost

Cost to replace damaged property with modern materials that perform the same function with equal efficiency, but may not be identical.

Market value

Property’s selling price in a free market, based on supply and demand; seldom used in property insurance except when lower than replacement cost.

Agreed amount

Valuation method where the insurer and insured agree on a value before the policy is issued; that value is paid if a total loss occurs.

Stated amount

Valuation method where the insured states a value and the policy is written for that amount, but the insurer pays the lesser of stated amount or ACV.

Pair and set condition

Loss settlement condition that values loss to part of a pair or set as the difference between the value of the entire set and the remaining value.

Methods of calculating value

Includes replacement cost, functional replacement cost, market value, agreed amount, stated amount, and pair and set valuation.

Appraisal condition

Policy condition allowing either party to demand appraisal when they cannot agree on the amount of loss.

Umpire (appraisal)

Neutral third party chosen by the appraisers to resolve disagreements; agreement of any two of the three sets the loss amount.

Arbitration condition

Condition similar to appraisal but used to resolve disputes other than the value of loss (e.g., coverage disputes).

Alternative dispute methods

Appraisal and arbitration processes used to settle disagreements without immediately resorting to litigation.

Coinsurance

Policy condition requiring the insured to carry a minimum percentage (usually 80%) of replacement cost; otherwise, partial losses are not paid in full.

Insurance to value

Concept of insuring property to a high percentage (e.g., 80% or more) of its replacement cost to avoid a coinsurance penalty.

Coinsurance requirement

The minimum amount of insurance (usually 80% of replacement cost) the insured must carry to receive full payment of partial losses.

Coinsurance penalty

Reduction in claim payment when the insured fails to carry the required amount of insurance under the coinsurance clause.

Coinsurance formula

Insurance carried ÷ insurance required × loss = claim payment (minus deductible).

Coinsurance steps

Step 1: Determine insurance required; Step 2: Determine whether insured carries at least that amount; Step 3: If not, apply formula.