Personal Lines Exam Review

Exam review

Hazzard

Increases the probability of loss

Peril

Cause of loss

Hazzards

Physical

Moral

Morale

Morale hazzard

Carelessness

driving recklessly

not following traffic rules

Methods of handling risk

Avoidance

Retention

Sharing

Reduction

Transfer

Adverse selection

A situation where individuals with higher risk are more likely to seek insurance coverage than those with lower risk, leading to potential losses for insurers.

To protect themselves, insurance companies have an option to refuse or restrict coverage for bad risks or charge them higher premiums

Lloyd’s association

A unique insurance market in London where members join together to insure risks and share profits and losses.

Surplus lines coverage

A type of insurance coverage that is not available in the standard insurance market, typically offered by non-admitted insurers to cover unique or high-risk situations.

Reinsurance

Contract under which an insurance company transfers a portion of its risk to another insurer.

An agent represents

the insurer no the insured

Express authority

Written in the contract

A type of authority granted to an agent through a written or verbal agreement, allowing them to act on behalf of the insurer.

Implied authority

Not written in the contract, but assumed

Not expressed or written into the contract, but which the agent if assumed to have in order to transact the business

Apparent authority

The appearance of assumption of authority, based on the actions, words, or deeds of the principal.

Ex. An agent uses insurer’s stationary when soliciting coverage, an applicant may believe that the agent if authorized to transact insurance on behalf of the insurer.

Elements of a legal contract

Agreement (offer and acceptance)

Consideration

Competent parties

Legal purpose

Aleatory contract

Unequal values

Exchange of unequal values

Unilateral contractua

One sided (Only one party makes a promise)

Adhesion contract

Only one party (insurer) prepares a contract, and the other party (insured) accepts as is

Conditional contract

Requires that certain conditions be met by the policy owner and the company in order for the contract to be executed, and before each party fulfills its obligations.

Rescission

The cancellation of an insurance policy by the insurer, typically due to misrepresentation or a breach of contract by the insured, resulting in the policy being treated as if it never existed.

Estoppel

A legal process that can be used to prevent a party to a contract from re-asserting a right or privilege after that right has been waived.

What type of risk is insurable?

Pure risk that result in a loss or no change

What are the 3 types of producer authority?

Express

Implied

Apparent

Law of agency

The law of agency governs the relationships between agents and principals in the context of insurance. It establishes how agents can act on behalf of insurers and the extent of their authority.

Handling risks (STAR)

Sharing

Transferring loss to insurance company

Avoidance

Reduction (taking measurements to reduce risk)

Retentions (paying high deductibles, or copayments)

Agents represent

The insurer

What is a warranty in an insurance contract?

An absolute true statement upon which the validity of the policy depends

What is consideration on part of the insurer?

A promise to pay in the event of loss

Who represents the principal?

An agent or producer

In an insurance contract, when is offer usually made?

When the insurance application is submitted

In the agent/insurer relationship, who is considered the principal?

The insurer

If an insurer holds a certificate of authority, it is known as what type of insurer?

Authorized or admitted

In insurance contracts, when does acceptance usually occur?

When the insurer approves or prepaid application

Independent Rating services

AM Best

Fitch

Standard and Poor’s

Moody’s

Weiss

Implied warranty

A product is suitable for its independent purpose and that it fits an ordinary buyer’s expectations

Inception

The date at which the insurance policy goes into effect is

Statute

A written law passed by a legislative body or government.

Underwritting

The process of evaluating risks and determining the terms and conditions of insurance coverage for applicants.

A riskassessment conducted by an insurer to decide on policy terms.

Loss ratio

A formula used by insurance companies to compare premium income to losses, including claims paid and claim related expenses.

Loss ratio formula

(Incurred losses + Loss adjusting expense) / Earned premiums

Geographical redlining

Practice of refusing to serve a particular area solely because of its location

Class rating

A system used by insurers to categorize similar risks together, allowing for standardized pricing based on shared characteristics.

Judgement Rating

Used when credible statistics are lacking or when exposure units are so varied that it is impossible to construct a class.

It involves a skilled underwriter assessing the risk based on their expertise and experience, determining the appropriate rate for coverage.

Schedule Rating

The rates are developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure.

This method allows adjustments based on specific risk factors and individual characteristics of the insured.

Experience Rating

A method that adjusts the premium based on an insured's past loss experience compared to the expected loss experience of the group. This approach rewards good experience with lower rates and penalizes poor experience with higher rates.

Retrospective Rating

A premium rating approach where the final premium is determined by the insured's loss experience over the policy period. It allows for adjustments to the premium based on actual losses incurred, often resulting in a refund or additional charge.

Merit rating

Commonly used in personal auto insurance. The insured’s premium is based not on the actual loss record, but on other factors that indicate the probability that a loss will occur.

Loss costs

The portions of the premium that represent the expected costs of claims and loss adjustments, excluding expenses and profits.

Components

Factors that determine rates including loss reserves, expenses, and profit margin.

Elements of a negligent act

Legal duty

Standard of care

Unbroken chain of events (proximate cause)

Actual loss or damage

Comparative negligence

A legal doctrine allowing damages to be reduced based on the degree of fault of each party involved in an accident, thereby assessing liability in proportion to the parties' respective negligence.

The fault is shared between the parties involved.

Contributory negligence

A legal doctrine that prevents a party from recovering damages if they are found to be at all responsible for the accident, meaning their own negligence contributed to the harm they suffered.

“The last clear chance rule” is a legal doctrine that may allow recovery for a party who was negligent if they can prove that the other party had a final opportunity to avoid the accident.

Intervening cause

Any event in an accident that happened after the insured’s negligent act and contributed to or enhanced an injury of another person or property damage

General damages

Compensatory damages awarded for non-economic losses, such as pain and suffering, emotional distress, and loss of companionship, that result from an injury.

Punitive damages

Form of punishment for extreme outrageous behavior, gross negligence, or willful intent.

Absolute liability

A legal doctrine that holds an individual or entity liable for their actions or products regardless of fault or negligence, often applied in cases involving inherently dangerous activities.

ex. owning a swimming pool, harboring wild animals, or selling explosives.

Strict liability

Commonly applied in product liability cases. A person of business that manufactures or sells a product can be held liable for any injuries caused by the product, even if they were not negligent.

Vicarious liability

A legal concept where one party is held liable for the actions of another party, typically in employer-employee relationships, even if the employer was not directly at fault.

Peril

specific cause of loss

Blanket insurance

a type of insurance coverage that applies to multiple properties or types of insurance, providing a single limit for all properties within the policy. This insurance simplifies management by covering various assets under one policy, often leading to easier premium calculations and claims.

Specific insurance

Covers a specific kind or unit of property for a specific amount of insurance.

Types of construction

Fire-resistive (2 or more hours)

Modified fire-resistive (1-2 hours)

Masonry noncombustible (non-combustible or slow burning)
Noncombustible (material that will not ignite or burn)

Joisted masonry (masonry and combustible floors and roof)

Frame (combustible material)

Loss valuation

Factor in determining the premium charge and the amount of insurance required based on the value of the property at the time of loss or damage, considering factors such as depreciation.

Actual Cash Value (ACV)

Reinforces the principal of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence

Current replacement cost minus depreciation.

Replacement cost

The amount needed to replace a damaged property with a new one of similar kind and quality, without deducting for depreciation. It accounts for current market prices of materials and labor.

Guaranteed replacement cost

A coverage option that pays for the full cost of replacing a damaged property with a new one, regardless of the policy limit, ensuring that insured can fully restore their property without depreciation deductions. However, Insurers usually limit the amount they will pay to replace or rebuild the property to up to 20% above the amount of insurance

Functional replacement cost

A valuation method that determines the cost to replace damaged property with a functional equivalent, rather than a new, identical item. This approach is often used for older structures or unique properties where exact replacements may not be feasible.

Market value

The price a property would sell for in a competitive market, considering its condition and location. It reflects factors such as recent sales of similar properties and economic conditions.

Takes into consideration the value of land and location, rather than just the cost of replacement or construction.

Agreed value

A valuation method where the insured and insurer agree on a specific amount of coverage for a property at the time the policy is written. This amount is paid in the event of a total loss, without depreciation being applied.

stated amount

A valuation method where the insured specifies a dollar amount for coverage, typically used for unique items or properties. In the event of a loss, the insurer pays this stated amount with no depreciation applied.

Declarations

Contains basic underwriting information:

Insured’s name, address, amount of coverage and premiums, and description of insured locations. It also contains any supplemental representations by the insured. This is usually the 1st page of the policy.

Definitions

The sections of an insurance policy that outline the terms, coverages, and responsibilities of the insurer and the insured.

Clarifies terms used in the policy. Typically, words that are printed in bold, italics, or quotations have a definition as to their meaning in that contract.

Insuring agreement or clause

The part of an insurance policy that outlines the specific coverage provided, the perils covered, and the obligations of the insurer to pay claims for losses that are included under the agreed terms.

Obligations of the insurance company to provide the insurance coverages as stated in the policy.

Parties to the contract, effective and renewal dates, description of coverage provided, and perils.

Additional or supplementary coverage

Provides an additional amount of coverage for a specific loss expense, at no additional cost to the insured.

This type of coverage addresses certain risks not included in the standard policy, offering enhanced protection. It may also cover losses that occur due to unforeseen circumstances or natural disasters, ideal for comprehensive risk management.

Conditions

The obligations and duties of the insured and insurer, detailing the requirements that must be fulfilled for coverage to apply. Conditions often include deadlines for filing claims, maintenance of property, and notifying the insurer of changes.

The right of theinsurer to inspect the property and investigate claims.

Ways in which policy may be changed

How refunds will be processed if policy is cancelled before expiration date.

ex. Inspections, notification requirements, and cooperation during investigation.

Liberalization clause

Ensures that if the insurer introduces improved coverage free of charge, the insured will get the benefit of new coverage immediately and will not have to wait for policy renewal.

Common policy provisions

Insureds - named, first named and additional

Policy period

Policy territory

Cancellation and nonrenewal

Earned premium calculation

Deductibles

Coinsurance

Self-insured retention

Other insurance

Limits of liability

Ordinance or law

These are standard terms and conditions included in insurance policies that outline the rights and responsibilities of both the insured and the insurer. They cover aspects like duration of coverage, geographical limits, cancellation procedures, and financial arrangements.

Earned premium

Portion of a premium that an insurance company earns for providing coverage for a specified period of time

(Amount of policy / term of policy) X Calculation period

short rate cancellation

applied when the insured cancels the policy prior to its renewal date.

Coinsurance formula

(Insurance carried / insurance required) x loss amount = loss payment

Self-Insured Retention (SIR)

(Usually in liability insurance policies) Sets an amount that the insured must pay before the insurance pays.

Other insurance

Provision in an insurance policy that addresses how claims will be handled when other valid insurance policies exist. This clause often establishes which policy is primary and which is excess, ensuring that the insured does not receive more than the total loss amount.

Pro Rata share

The method of distributing losses among multiple insurance policies based on each policy's coverage limits. This ensures that claims are paid proportionately according to the limits of each policy.

Split limit

A type of insurance policy limit that divides coverage into separate amounts for bodily injury and property damage. It specifies distinct maximum payouts for injuries per person, per accident, and for total property damage.

Combined single

limit is a type of insurance policy limit that combines bodily injury and property damage coverage into one total amount. This approach offers more flexibility in claims, as it allows for the total limit to cover any type of covered incident.

Assignment

the transfer of rights or benefits from one party to another in an insurance policy, allowing the assignee to claim benefits directly without affecting the terms of the policy.

Abandonment

The voluntary relinquishment of all rights and claims to a property, often leading to the loss of coverage under an insurance policy.

Liberalization

The provision in an insurance policy that allows for enhancements or improvements in coverage without an increase in premium. It ensures that policyholders receive any benefits from newly adopted policy changes automatically.

Standard mortgagee clause

A provision in insurance policies that protects the interests of mortgage lenders by ensuring they receive payment for damage to a property, even if the borrower defaults on the mortgage or the policyholder fails to pay the premium.

A clause that protects mortgage lenders' interests by guaranteeing payment for property damage, regardless of borrower default or premium non-payment.

Certificate of insurance

Any document that verifies that insurance is in effect and issued as evidence of property/casualty insurance coverage.

It may not amend, extent or alter the coverage provided.

Does not grant to any person any rights beyond those expressly provided by the policy of insurance referenced.

Terrorism Risk insurance act

A federal law enacted in 2002 that provides a mechanism for sharing the risk of loss from acts of terrorism between the federal government and private insurers. It aims to ensure the availability of coverage for terrorism risk in the insurance marketplace.

loss payment

Notice of claim

proof of loss

What sublimit puts a ceiling on the payment for all claims that arise from a single accident?

per occurrence

In property and casualty insurance, what is required to make policy assignments valid?

Prior written consent of the insurer

The property condition that precludes the insured from simply turning over damaged property to the insurer and claiming a total loss is called

Abandonment

Mandatory part of an insurance policy that varies with each individual policy?

Declarations

Declarations tells who, what, when and where, this information is different in each contract

What would happen if a house covered by a standard mortgage clause is at a total loss

The insurer pays the mortgagee according to the mortgagee’s interest in the property

Transfer of legal rights or interest in an insurance company

Assignment

An insured owns several buildings, each at a different location and insured on a separate policy. What type of policy does the insured have?

Specific policy

Which method of loss valuation is contrary to the basic concept of indemnity?

replacement cost