FINC 300: Exam #3

What are the basic parts of an insurance contract?

1. Declarations

2. Definitions

3. Insuring agreement

4. Exclusions

5. Conditions

6. Miscellaneous provisions

Declarations

Statements that provide information about the particular property or activity to be insured

Where are the declarations on a policy?

Usually on the first page

What do declarations contain in property insurance?

• Information concerning:

  • The identification of the insurer

  • Name of the insured

  • Location of property

  • Period of protection

  • Amount of insurance

  • Premium and deductible information

Insurance contracts typically contain a page or section of _______

Definitions

What is an example of a definition you might see in a contract?

The insured is referred to as “you”

Insuring Agreement

Summarizes the major promises of the insurer

What are the two basic forms of an insuring agreement in property insurance?

Named perils coverage and open perils

Named Perils Coverage

Where only those perils specifically named in the policy are covered

Open Perils (Special Coverage)

Where all losses are covered except those losses specifically excluded

What are open-perils formerly called?

“All-risks” coverage

Insurance contracts contain three major types of _______

Exclusions

What are the three major types of exclusions in insurance contracts?

Excluded perils, losses, and property

What are some examples of excluded perils in insurance contracts?

• Flood

• Intentional act

What are some examples of excluded losses in insurance contracts?

A professional liability loss is excluded in the homeowner’s policy

What are some examples of excluded property in insurance contracts?

Pets are not covered as personal property in the homeowner’s policy

What are some reasons for exclusions?

• Some perils are not commercially insurable

• Extraordinary hazards are present

• Coverage is provided by other contracts

• Moral hazard problems

• Attitudinal hazard problems

• Coverage not needed by typical insureds

What is an example of a peril that is not commercially insurable?

Catastrophic losses due to war

What is an example of extraordinary hazards being present?

Using the automobile for a taxi

What is an example of a coverage that is provided by other contracts?

Use of auto excluded on homeowners’ policy

What is an example of moral hazard problems?

Coverage of money limited to $200 in homeowners’ policy

What is an example of attitudinal hazard problems?

Individuals are forced to bear losses that result from their own carelessness

What is an example of coverage not needed by typical insureds?

Homeowners policy does not cover aircraft

Conditions

Provisions in the policy that qualify or place limitations on the insurer’s promise to perform

If policy conditions are not met, the insurer can ______ to pay the claim

Refuse

Insurance policies contain a variety of ________ provisions

Miscellaneous

What are some examples of the miscellaneous provisions seen in insurance policies?

• Cancellation

• Subrogation

• Grace period

• Misstatement of age

An insurance contract must ______ the persons or parties who are insured under the policy

Identify

Named Insured

The person or persons named in the declarations section of the policy

First Named Insured

Has certain additional rights and responsibilities that do not apply to other named insureds

A policy may cover ______ insureds even though they are not specifically named

Other

Additional insured may be added to an insurance contract using an ____________

Endorsement

Endorsement

A written provisions that adds to, deletes from, or modifies the provisions in the original contract

What is an example of an endorsement?

An earthquake endorsement to a homeowner’s policy

Rider

A provision that amends or changes the original policy in life and health insurance

What is an example of a rider?

A waiver-of-premium rider on a life insurance

Deductibile

A provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable

What is the purpose of a deductible?

• Eliminate small claims that are expensive to handle and process

• Reduce premiums paid by the insured

• Reduce moral hazard and attitudinal hazard

What are the two commonly found deductibles found in property insurance contracts?

Straight and aggregate deductible

Straight Deductible

The insured must pay a certain number of dollars of loss before the insurer is required to make a payment

What is an example of a straight deductible?

An auto insurance deductible

Aggregate Deductible

All losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount

Coinsurance Clause

A property insurance contract encourages the insured to insure the property to a stated percentage of its insurable value

What happens if the coinsurance requirement is not met at the time of loss?

The insured must share in the loss as a coinsurer

What is the equation for coinsurance?

Amount of insurance carried/Amount of insurance required x loss = amount of recovery

What is the purpose of other insurance provisions?

To prevent profiting from insurance and violating the principle of indemnity

What happens under a pro rata liability?

Eash insurer’s share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property

Review your exercises!

Review them!

What happens under contribution by equal shares?

Each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid

What happens under primary and excess insurance provision?

The primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted