Fundamentals of insurances

List the 5 functions of insurance:

1) Spread of risk
2) Basis of credit system
3) Eliminate worry and develop entrepreneurship
4) Loss reduction and prevention (road safety, alarms, etc.)
5) Employment opportunity

5 points of insurance

1) Shift financial responsibility for a loss
2) payment made only in the event of a loss
3) Payment restricted to amount to indemnify (no more, no less)
4) Cover loss to which object of insurance may be exposed (accidental and future)
5) Indemnify in form of money or other thing of value (rebuild/repair)

3 types of property and casualty insurance

Auto, property (home and business), and liability (injury or damage to a third party)

What are the 2 major types of insurers and provide an example for each

Private (stock profit or mutual policy holder), or government (ICBC, employment insurance)

What is the difference between mutual companies and stock companies?

Stock - main purpose is to derive a profit, ownerships in the hand of the company's shareholder. Money to operate comes from private funds and public sales of stock Mutual - main purpose is to provide insurance at the lowest cost possible, corporation owned by policy holders, money made goes to policyholders

What is known as the major function of insurance?

Spread of the losses of the few among the many

Where is the definition of insurance usually found

The Insurance Act

Define peril

Cause of loss

Define risk

Chance of loss to which the object of insurance is exposed

At what point in time is indemnity calculated?

Moments before the loss

What two factors regarding losses must be present for them to be insured?

Future and accidental

Who retains the option to repair or replace damaged property rather than pay cash settlements?

Insurer

Main purpose of stock companies?

Profit maximization

Identify the two main distribution methods used by insurers for their products

Direct writers (work for one insurance company) and independent brokers (work for multiple insurance companies - can offer multiple options for insurance, not limited)

Major function of insurance is to:

Share losses of the few among the many

Does insurance allow payment to be in another form than money?

Yes, replacement or repair

There are 4 ways changes can be made to a policy. What are the 4 ways?

1) Rider (adding additional coverage)
2) Floater (provides coverage for items not on the insured premise)
3) Endorsement (acknowledges changes in the actual contract)
4) Separate policy (additional coverage, but no change in the original contract - new policy altogether)

4 ways to deal with risk

1) Avoidance (don't buy the car in the first place)
2) Controlling (car alarms)
3) Retention (increase in deductible or putting money aside)
4) Transfer (buying insurance)

3 categories of risk insurance

Personal (health, anything directly affecting you), property (house, care), and liability (3rd party)

Define contract

An agreement between two or more parties, enforceable at law

What are the 2 kinds of risk? Which one is not insurable?

Pure risk (no chance for profit gain, insurable), and speculative (chance for profit or loss, for example gambling or starting a new business, not insurable)

Identify four options people have when dealing with risk

Avoidance, risk control, retention, transfer

What type of risk control reduces loss frequency?

Loss prevention

Which method of dealing with losses and risk is most practical?

Insurance

What type of risk is insurable?

Pure risk

Identify 5 elements that must be present in all contracts

Agreement (offer and unconditional acceptance), consideration (exchange of something of value), legality of object (not illegal), legal capacity of the parties (not children, not mentally incompetent), genuine intention (no inducement, needs to be intended)

What is consideration?

Exchange of something of value

3 unique elements of insurance contracts

Insurable interest (insured person derives a financial or other kind of benefit), indemnity (no more no less), utmost good faith (honest, trust each other)

What are binders?

Temporary insurance placed by brokers on behalf of clients, written or oral commitment by the broker to provide a contract of insurance on the subject matter under discussion

How are endorsements different than riders?

Endorsements are extra sheets or slips of paper that change the terms of an existing contract. Riders add additional coverage to those already in place - to have a rider you must endorse the contract

Who would not have insurable interest? Business partner Heir or beneficiary Bailee Mortgagee

Heir or beneficiary

Property with a high degree of mobility associated with it is generally insured under a:

Floater

Chapter 3 - The Role of Government in Insurance

What is solvency, how is it different than insolvency?

Solvency is when insurers are capable of fulfilling their financial obligations. If they are unable to meet these obligations, they are insolvent

What 3 things does the basic fire policy cover?

Fire (hostile), lightning, and explosion due to natural gas, coal and manufactured gas

Define fiduciary

One who handles other people's money insurers and brokers are both fiduciaries

3 conditions (rules) of removal coverage change - 3 conditions when someone needs to move their insured property

1) Removed to protect from future or further loss
2) Amount of coverage is whatever is left over
3) Up to 7 days of coverage maximum (or expiry of policy, whichever is first)

What are the 6 contents of insurance policies legislated? (first page of policy - declaration)

1) Parties to the contract
2) Policy period (policy takes effect art 12:01Am local time at the address of the name insured)
3) Loss payable (mortgagee)
4) Type of coverage and amount
5) Rate and premium
6) Subject matter (what is being insured)

What is the fiduciary responsibility of insurers? When is the full premium earned?

To clients. Premium not fully earned until expiry of policy

What is the role of the property and casualty insurance compensation corporation (PACICC) what up to what monetary value will they pay out if required?

PACICC provides insurers protection in case of insolvency (bankruptcy). They will pay up to $250,000 for single claim or 70% in premiums

Why must unearned premiums be held in trust by the insurance company?

In order to refund to the clients when they cancel prior to expiry (pro rata)

3 components of the removal clause:

1) Coverage provided when property is removed to protect it from further loss
2) Coverage amounts are the remaining coverage after loss at named location
3) Coverage provided for 7 days or the unexpired term of policy, whichever is less

Right of subrogation

Right of insurer to go after 3rd parties for damage they had to pay to client in claim

What are 2 kinds of fires and which type is insurable?

Friendly and hostile, only hostile is insurable

Is what situations may a new party benefit from a policy of insurance? ie. not named on the policy itself (4)

Authorized assignment in the bankruptcy act, change in title due to succession (inheritance), operation of law, or death

What methods may insurers use to cancel fire policies? (to provide notice)

15 days notice by registered letter, 5 days notice when personally delivered

Solvency refers to

Ability of an insurer to pay insured losses

What is a major fiduciary responsibility placed on brokers by law?

Unearned commissions must be held in trust to refund to the insured in the event the policy is cancelled prior to expiry date

When does insurance coverage commence?

12:01 am standard time at the address of name insured

Policy of fire insurance covers smoke? T/F?

False

What are reasons for an insurer to void the contract?

Fraud or misrepresentation

What is material change

Any substantial and continuing change to the property - must be reported

What is salvage?

Any attempt to save items as long as it does not endanger life,required by insurers of insureds

If fraud is proven, only that portion of the claim is invalid? T/F?

False - entire contract can be terminated

What are the 7 components of the standard property policy regarding the peril of fire?

1) contents of policy (declaration) - 6 things
2) removal coverage (3 rules)
3) limitation of liability clause (if pay less then indemnified, must state on contract)
4) right of subrogation
5) waiver of term or condition (must be agreed on and signed by insured)
6) effect of delivery of policy (if policy is delivered but not paid for, must still be treated as if it was paid for - promise to pay)
7) policies of insurance with fire peril (covered, exclusions, and statutory conditions)

what perils are covered in a basic fire peril policy?

fire, lightning, explosion due to natural gas, manufactured gas, or coal

what perils are excluded in a basic firepolicy

applied heat, lightning damage to electrical device, electrical currents, contamination by radioactive material

there are 15 statutory conditions. list them all

1) misrepresentation - false description, insurer can void
2) property of others - covered if stated in contract
3) change of interest - change of primary policy holder, can be due to 4 reasons: bankruptcy law, succession, death, or law (mental incompetency)
4) material change - any change within knowledge of insured, can cause loss, and is substantial must be reported
5) termination - must give 15 days notice in mail to 5 in person, if contract is terminated by client they receive any unearned premium as refund
6) requirements after loss - must provide notice, proof of loss, inventory count, etc.
7) fraud
8) who may give notice and proof - if insured is unable, any agent of insured can give proof of loss (friends, family, lawyer)
9) salvage
10) entry, control and abandonment - insured is entitled to see loss
11) appraisal - if disagreement on value, outside expert brought in
12) when is loss payable? - 60 days after proof
13) replacement - must give notice of intention to replace within 30 days of proof, and begin process within 40 days of proof
14) action - recovery of any claim done within a year of loss
15) notice - establishes rules of how insured and insurer communicate during policy period

Chapter 4 - Insurance Process

What is the broker's primary duty? (to client and to insurer)

To clients - ensure they receive the right insurance advice and coverage, and exercise reasonable skill, care and diligence. To insurers - follow legal standards and tell the truth

What is the most common cause of errors and omissions?

Inadequate coverage

What is a broker and their duties?

A broker works in an insurance office as an intermediary between clients and insurers - primarily represent the client's interest and provide the right coverage. They can represent various companies

Difference between a company claims adjuster (staff adjuster) and an independent adjuster?

Company adjuster work for the insurer and IA's work for multiple insurers and are brought in when there are staff adjuster shortages or specific expertise is needed

What do underwriters do?

Use 4 aspects in decision making to make policies:
1) Application (positive or negative response)
2) Broker (ask for more info)
3) Loss experience data (for type of risk)
4) Inspection reports (previous claims data investigation and field reports)

2 types of hazards and 3 examples of each (property)

Physical hazards - type of building, occupancy, and housekeeping Moral hazards - financial intention, moral character, and indifference to loss

Identify the primary obligation brokers owe their customers

provide the right advice and coverage

leading cause of errors and omissions from brokers?

inadequate coverage

primary obligation brokers owe to their INSURERS

tell the truth

define hazard

a condition that may cause a peril to occur

define physical hazard

characteristics of the premises that may cause a peril to occur

define moral hazard

characteristics of the applicant that may cause a peril to occur

when are independent adjusters contacted by insurers to adjust claims?

when staff adjusters are too busy and when special skills are required

what 3 things do brokers have to the duty to provide their clients with?

1) provide with the correct info and not conceal anything
2) tell insurers the truth about the risks they submit
3) ensure client's receive the right coverage

a subjective characteristic of an applicant that could cause a peril to occur...?

a moral hazard

Chapter 5 - Property Insurance Policies Common Characteristics

What is the rationale for deductibles?

What the client has to pay when they make a claim - help to keep insurance affordable and it prevents people from claiming small incidents too often... Higher deductible \= lower premium

What is personal property? (3 things fall into this category)

Dwelling building, detached private structures, personal property

Define warranty, and why is complete compliance to policy conditions present?

A warranty is a promise by an insured that requires certain facts that were stated as true are in fact true and remain true. Breach of warranty can occur even if loss isn't related

What is ACV?

Actual cash value: replacement cost - depreciation

3 conditions found in replacement cost clauses used for buildings?

due diligence and dispatch, rebuild in same or adjacent site, begin within reasonable time

What is the standard mortgage clause used for?

Protects the interest of the mortgagee, ensures they get all their money back and have notice or termination or change

What are the 6 types of property insurance policies?

Tenants insurance, homeowner's, mobile home, condo unit owner, secondary dwelling, seasonal dwelling

Describe direct damage and indirect damage

Insured object damaged directly by insured peril (fire), indirect is insured object damaged by consequence of peril (rent loss) - not insurable

Describe "name perils" policies

list perils that are insured against

define all risk policies

insure against all risks of direct physical loss or damage, subject to policy conditions and exclusions

define warranty

promise by the client that certain facts are true and that they will remain so

3 examples of property excluded from most property insurance policies

money, cars, watercraft

3 examples of perils excluded from most property insurance policies

flood, war, nuclear accidents

3 examples that demonstrate lack of integrity

fraud, misrepresentation, taking advantage of client's inexperience

3 things considered in the indemnity act (choose which one?)

ACV, interest of client, and amount of insurance (choose the lowest)

what benefits do mortgagees receive with the standard mortgage clause?

will receive their interest when client breaches policy due to act, neglect, omission or misrepresentation, policy will not be changed or terminated without mortgagee knowing

policies for habitational or commercial property can vary in the perils they insure. the broadest policies insure

all risks of direct physical loss or damage subject to policy changes and exclusions

give an example of a direct loss vs. indirect loss

direct: destruction by windstorm indirect: loss of profit for business after an earthquake

how do you calculate ACV?

replacement cost less depreciation

list the 8 common attributes of property policies

1) no standard policy
2) must identify the property insured and location
3) only direct damage insured
4) conditions and warranties
5) exclusions
6) deductible clause
7) claims payment
8) standard mortgagee clause

list the 3 things you get covered for a) personal property, and b) commerical property

personal: dwelling, detached private structures, personal property commerical: building, stock, equipment

difference between statutory and policy conditions

statutory - used for fire, sickness and accident, and auto policy - used for property

list 6 PROPERTY exclusions under a basic property policy

securities, money, cars, aircraft, watercraft, books of account

list 8 PERIL exclusions under a basic property policy

earthquake, flood, smoke due to agricultural smudging, wear and tear, rust, corrosion, war, nuclear incident, sewer