Property and Casualty Insurance Basics

Louisiana P&C Insurance Basics

Insurable Interest

The potential for an insured to suffer financial or economic hardship in the event of a loss due to an individual object, such as a property.

Damages

Accounts paid by order of a court as compensation to an injured claimant.

Compensatory Damages

Damages awarded to an injured party to compensate for an actual sustained loss, that can be special or general. 

Punitive Damages

Damages paid to punish and discourage the wrongdoer from repeating negligent acts.

General Damages

Damages awarded to compensate for the noneconomic losses that are difficult to calculate, and would be experienced by anyone in similar circumstances, such as pain and anguish.

Liability

responsible for damage or injury to another and reparations must be provided to that party.

Absolute Liability

Automatically confers liability to the responsible party based on conditions or activities without the need to establish negligence.

Strict Liability

Automatically confers liability to the responsible party based on products that are hazardous or defective without the need to establish negligence. 

Vicarious Liability

Imputed negligence that means the negligence is not directed at the person against who the claim was made, but another person is responsible for the acts of the negligent party. (Ex: Parents and their children)

Underwriting Purpose

Primary responsibility is the selection of risks to be insured. To select risks whose future losses fall into the normal range of expected losses. 

Underwriting Process

Checks for insurability and makes sure the applicant can meet the requirements. Looks at things like the nature of a risk, what hazards are present, the applicant’s claim history, and other things like construction, occupancy, etc.

Underwriting Results

The risks are put through a selected rating system and the premium estimate is sent to the applicant. 

Rate Types

used to determine the policy’s premium relative to the risk on the application.

Functional Replacement Cost

The insurer will pay the cost of replacing property with its functional equivalent.

Special Damages

Damages award to an injured party for tangible and known expenses. These are specific amounts that are unique to the claimant, such as bills, loss of earnings, etc.

Judgement Rating

The underwriter uses their best judgement about the risk to establish its rate.

Manual Rating

These are contained in a rating manual published by the insurer or in rating manuals published by a rating organization.

Individual Rating

This establishes a rate for a particular policyholder because a large enough pool of similar risks is not available for any other type of rate.

Experience Rating

This rating is determined by the insured’s loss history.  

Rating Components

Loss cost (pure premium), Expense Load, and Profit Factor are ways the insurer determines what to charge for a policyholders rate of insurance.

Loss Cost (Pure Premium)

the cost of claims paid for a certain kind of risk that the carrier uses to determine the rate of insurance for a policyholder.

Expense Load

total of the expenses associated with handling claims and operating the business. This is another rating component that carriers use to determine the rate of insurance for a policyholder.

Profit Factor

An estimate insurers use to ensure the business is profitable. The helps the insurer protect themselves from fraudulent claims. This is another rating component that carriers use to determine the rate of insurance for a policyholder.

Types of Hazards

Physical, moral, and morale

Physical Hazard

A physical condition that increases the probability of a loss. Often seen, heard, smelled, or tasted.

Moral Hazard

Dishonest tendencies that increase the probability of a loss, including certain behaviors and characteristics of people. These are intentional so they are not covered by insurance.

Morale Hazard

An attitude of indifference toward the risk of loss that increases the probability of a loss occurring. 

Named Perils

type of coverage that only provides insurance for the causes of loss that are listed in the policy.

Open Perils

all-risk coverage that provides insurance for all causes of loss that are not specifically excluded under the policy.

Direct Loss

Loss that is an immediate result of a peril.

Indirect Loss

a consequential loss that is a consequence of a direct physical loss. Financial losses that were incurred by the insured while the property is being repaired.

Loss Valuation

methods used to evaluate the amount a policy would pay for a loss.

Actual Cash Value

Loss valuation method that pays for the cost to repair or replace damaged property at the time of loss, minus depreciation. 

Replacement Cost

The full cost to repair damaged property or replace damaged property of like kind and quality, at current pricing, without a deduction for depreciation.

Market Value

The price a willing buyer would pay for property purchased from a willing seller under fair market conditions.

Agreed Value (Valued Policy)

Agreed-upon policy limit that is paid in the event of a total loss, regardless of the actual cash value of the property at the time of loss.

Frame

Roof, floor, and supports made of combustible material typically for private residences.

Joisted Masonry

Exterior walls are masonry with combustible floors and roofs. Rated for an hour.

Noncombustible

Walls, floors, and structural framework are constructed of noncombustible materials. Typically used for warehouses and factories.

Masonry Noncombustible

Exterior walls of masonry with noncombustible floors and roofs. Typically for shopping centers and low rise buildings.

Modified Fire-Resistive

Walls, floors, and roof must have a fire resistive rating of at least an hour but less than 2 hours. Typically for mid and high rise office buildings.

Fire-Resistive

Entire building and roof are constructed of reinforced concrete and steel and much have a fire resistive seating of at least two hours. Typically used for high rise buildings and parking garages.

Negligence

An unintentional tort that is a failure to exercise the degree of care required by law to protect others from an unreasonable risk of harm.

Unintentional Torts

These are not deliberate, but result from the failure to act as a reasonable or prudent person would under the same circumstances.

Intentional Torts

These are deliberate acts that are premeditated or planned and that harm another.

Gross Negligence

This is the failure to exhibit, any sort of care through recklessness or deliberate indifference, to the well-being of others.

Elements of Negligence

1. Legal Duty of Care

2. Breach of Duty

3. Proximate Cause

4. Loss or Damage

Common Law Defenses

Defenses that are based on judicial or court decisions.

Contributory Negligence

this defense prevents recovery for damages caused by a negligent party if the claimant was negligent to any extent, not all states allow the use of this defense.

Assumption of Risk

This defense prevents recovery if the claimant knowingly assumed a risk, thus weakening or eliminating the defendants duty of care.

Last Clear Chance

This defense states when both the claimant and defendant contribute to the injury, either party could argue that the other had the last clear opportunity to avoid the accident.

Intervening Cause

This defense prevents or limits recovery from the wrongdoer when a distinctly separate negligent act occurs after the original negligent act, but before damage occurs. This interferes with the chain of events that brings about the loss

Act of God or Nature

This defense argues that the loss resulted from an unforeseeable cause rather than by the defendants action

Sudden Emergency

This defense states the defendant cannot be liable for any injury that was caused when the defendant, who was acting within reasonable care, experienced a sudden, unforeseeable medical emergency.

Statutory Defenses

These defenses are based on legislation.

Comparative Negligence

In this defense, a claimant who is partially negligent is still entitled to damages, but damages are reduced in proportion to the claimants negligence.

Statute of Limitations

this is the length of time during which legal proceedings may be initiated, set either by state or federal law. If this time period has ended, the claimant cannot recover damages.

Accident

Is a sudden unforeseen, unintended, and unplanned event that results in bodily injury or property damage.

Occurrence

Is an accident, including continuous or repeated exposure to the same generally harmful conditions that results in loss or damage.

Coinsurance

This provision requires an insured to carry a certain percentage of the properties total valuation in order for losses to be paid in full. This does not apply to a total loss.

Coinsurance Purpose

This provision encourages insured to purchase and maintain insurance to value.

Coinsurance Formula

Amount of insurance carried/Amount of Insurance Required X Amount of Loss= Amount Payable before deductible

Coinsurance Total Loss

In the event of a total loss, the policy would pay up to its specified limit of insurance. It does not matter if the property is insured for less than 80% of the replacement cost.

Coinsurance Penalties

If the property is insured for less than 80% of the replacement cost, the insurer will not pay the full amount of the partial loss claim. They will pay for the percentage covered by the policy.

Declarations

Describes information about the policy including the who, what, when, where, and how much.

Definitions

This contains words, terms, and phrases that are clearly described and used in an insurance policy. This is used to clarify the intent of the insurer.

Insuring Agreement

The insurer’s promise of protection to the insured, affirming that the insurer will indemnify the insured for covered losses. The perils insured against are listed here.

Supplementary Coverage/Additional Coverages

Coverages automatically included in the policy without an additional premium. Will list these coverages and specify if the limit is included in another coverage or paid separately.

Conditions

Specifies the obligations that the insured and insurer agree to follow in order for the policy provisions to take effect.

Exclusions

Specifies the perils that are not insured against or the property that is not covered by the policy. 

Endorsements

Policy forms that alter the provisions of an insurance contract, typically added to the policy for an additional premium. 

Named Insured

person, company, or organization protected by an insurance contact.

Policy Period

This condition states that insurance coverage only applies to losses occurring when the policy is in force.

Policy Territory

This condition states that coverage may be limited to the premises or may be expansive for mobile property and liability claims.

Cancellation

Termination of a policy before its expiration date and coverage is not effective as of that date.

Nonrenewal

When the insurer chooses not to renew the policy and coverage ends at the expiration of the policy term.

Deductibles

A specified amount of each loss that the insured must bear as a way to share the cost of a loss. 

Other Insurance

If multiple policies exist on the same exposure the loss paid by each policy will vary by contract. 

Primary Insurance

Any type of coverage that responds to a loss first, before all other coverages.

Excess Insurance

Coverage provided only after the limits of a primary insurance policy are exhausted.

Pro-rata Cancellation

If the insurer cancels the policy a proportionate cancellation of insurance will refund the unearned premium.

Nonconcurrent Policies

Two or more policies covering the same exposures but do not have the same policy period. 

First Named Insured

person, company, or organization whose name appears first on the declarations. Responsible for insurance payments.

Additional Insured

person, company, or organization not ordinarily protected by a policy but who, through endorsement, is granted statues as an insured.

Short-rate Cancellation

If the insured cancels the policy, the insurer retains a portion of the unearned premium to cover administrative costs.

Flat Cancellation

When the policy is cancelled after a certain number of days after being issued, or insurer reverses the offer for coverage the full premium is refunded to the insured.

Pro-rata Liability

The other insurance contract states that the policies will share losses by the ratio of applicable limits of insurance each insurer writes compared to the total of all limits available for the loss.

Contribution by Equal Shares

The other insurance contract states that the policies will share the cost of loss until the insurer has paid up to its limit.

Limits of Liability

The policy’s face value. The insurer will not be responsible for payment of a loss greater than the financial interest of an insured.

Per Accident

Per Occurrence

The most a policy will pay for all losses arising out of any one occurrence.

Per Person

The most a policy will pay for a loss to any one person injured in any one loss.

Aggregate

The maximum amount a policy will pay for all losses submitted during the policy period. This caps the amount of coverage allowed per policy period.

Split Limits

The most a policy will pay for different types of losses that occur as a result of any one loss, regardless of other limits.

Combined Single Limits

The most a policy will pay for all losses of all types resulting from any one occurrence, regardless of other limits.

Specific Insurance

Insures a single item of property for a single limit of insurance

Scheduled Insurance

Insures multiple items of property on a single policy with a different limit applying to each item, as scheduled in the declarations. 

Blanket Insurance

Insures multiple items of property for a single amount of insurance that applies to all covered property.

Vacant

Refers to property that contains no personal property and has no occupants.

Unoccupied

Refers to a property that contains personal property but has no occupants.