Personal Lines Flash Cards

Agent/Producer

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

Applicant or Proposed Insured

a person applying for insurance

Broker

an insurance producer not appointed by an insurer and is deemed to represent the client

Insurance Policy

a contract between a policyowner (and/or insured) and an insurance company which agrees to pay the insured or the beneficiary for loss caused by specific events

Insured

A person covered by an insurance policy. This person may or may not be the policyowner

Insurer (principal)

the company who issues an insurance policy

Policyowner

the person entitled to exercise the rights and privileges in the policy

Premium

the money paid to the insurance company for the insurance policy

Reciprocity/Reciprocal

a mutual interchange of rights and privileges

Insurance transfers...

the risk of loss from an individual or business entity to an insurance company which in turn spreads the costs of unexpected losses to many individuals.

Risk

The uncertainty or chance of a loss occurring.

Pure Risk

a risk that presents the chance of loss but no opportunity for gain

Speculative Risk

Chance of loss or gain

Exposure

A unit of measurement used to determine rates charged for insurance coverage.

Homogenous

a large number of units having the same or similar exposure to loss

Hazards

Conditions or situations that increase the probability of an insured loss occurring.

Physical Hazard

those arising from the material, structural or operational features of the risk

Moral Hazards

refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer

Morale Hazard

A condition of carelessness or indifference that increases the frequency or severity of loss.

Perils

the causes of loss insured against in an insurance policy

Life Insurance

insures against the financial loss caused by the premature death of the insured

Health Insurance

insured against the medical expenses and/or loss of income caused by the insured sickness of accidental injury

Property Insurance

insures against the loss of physical property or the loss of its income producing abilities

Casualty Insurance

insures against the loss and/or damage of property and resulting liabilities

Loss

the reduction, decrease, or disappearance of value of the person or property insured in a policy caused by a named peril

Avoidance

eliminating exposure to loss

Retention

Planned assumption of risk by an insured through the use of deductibles, co-payments, or self-insurance.

Sharing

A method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss who share the losses that occur within that group.

Reduction

lessen the possibility or severity of a loss

Transfer

loss is borne by another party

Pure risk characteristics

1. due to chance
2. definite and measurable
3. statistically predictable
4. not catastrophic
5. randomly selected and large loss exposure

Adverse selection

the insuring of risks that are more pronte to losses than the average risk

Law of Large numbers

the larger the number of people with a similar exposure to loss, the more predictable actual losses will be

Stock Companies

1. owned by stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses
2. non participating
3. taxable dividends are paid to stockholders

Mutual Companies

1. owned by the policyowner
2. participating policies
3. nontaxable

Fraternal Benefit Societies

an organization formed to provide insurance benefits for members of an affiliated lodge

Surplus Lines

Insurance for which there is no readily available, admitted market.

Example of insurance companies financial integrity rating services

1. AM BEST
2. FITCH
3. STANDARDS AND POORS
4. MOODYS
5. WEISS

Independent Agency System/American Agency System

1. 1 independent agent represents several companies
2. nonexclusive
3. commissions on personal sales
4. business renewal with any company

exclusive agency system / captive agents

1. 1 agent represents 1 company
2. exclusive
3. commisions on personal sales
4. renewals can only be placed with the appointing insurer

general agency system

1. general agent-entrepreneur represents 1 company
2. exclusive
3. compensations and commisions
4. appoints subagents

managerial system

1. branch manager
2. salaried
3. agents can be insurer employees or independent contractors

direct response marketing ssystem

1. no agents
2. company advertises directly to consumers
4. consumers apply directly to the compnay

reinsurance

a contract under which one insurance company (the reinsurer) idemnifies another insurance company for all or part of its liabilities

Risk retention group

A liability insurance company owned by its members, which are exposed to similar liability risks by virtue of being in the same business or industry.

risk purchasing group

an entity which offers insurance to groups of similar buisness with similar exposures to risk

Essential elements of a contract

1. agreement
2. consideration
3. competent parties
4. legal purpose

Contract of Adhesion

prepared by one of the parties (insurer) and accepted or jected by the other party (insured)

aleatory contract

exchange of unequal amounts of values

personal contract

between the insurance company and an indiviual

unilateral contract

only one of the parties to the contract is legally bound to do anything

conditional contract

requires that certain conditions must be met by the policy owner and the compmny in order for the contract to be executed

utmost good faith

Implies that there will be no fraud, misrepresentation or concealment between the parties.

rescision

when an insurance applicant intentionally fails to communicate information that the insurer needs the insurer has the right to cancel the policy even if the failure to communicate is discovered after the policy has been issued

waiver

the voluntary act of relinquishing a legal right claim or privlege

estoppel

a legal process that can be used to prevent a party to a contract from reasserting a right or privlege after that right or privlege has been waived. Estoppel is the legal consequence of a waiver

Earned Premium

the portion of premium paid in advance that now belongs to the insurer because it applies to the elapsed part of the policy

Implied Warranty

a legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyer's expectations

inception

the date at which the insurance policy goes into effect

obsolescence

depreciation in the value of a property due to becoming outdated

Insurable interest

Any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially.

must exist at the time of loss

Requirements to prove insurable interests

1. legitimate financial interest in perserving the property to be insured
2. there must be no potential for gain
3. there must be a potential for loss

Underwriting

The process of reviewing, accepting or rejecting applications for insurance.

The underwriters function

refers to the operations of an insurance company where an employee, called an underwriter, is responsible for evaluating applications submitted to the insurer and determining whether a policy should be issued, and if so, the terms, conditions and rates for that policy

loss ratio

(incurred losses + loss adjustment expenses) / premiums earned

Insurance risk score

a point system used by insurance underwriters to predict risk and possibility of claims, and determine charges for premiums

insurance rate

the amount an insurance company charges a policyholder for a certain amount of insurance

Class / Manual Rating

The practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics.

Individual Rating

A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate.
Primarily used for commercial and specialty risks because of the number of unique variables involved.

Judgment Rating ("A" Rating)

Judgment rating establishes a particular rate for the applicant's specific risk. The underwriter uses their best judgment about the risk to establish its rate.

Schedule Rating

A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk being rated.

Experience Rating

A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.

Retrospective Rating

A self-rating plan under which the actual losses during the policy period determine the final premium (subject to a minimum and maximum premium).

Merit Rating

a rating plan by which class rates are adjusted upward or downward based on individual loss experience

Defenses against negligence

1. assumption of risk
2. comparative negligence
3. contributory negligence
4. intervening cause
5. statute of limitations

assumption of risk

A defense against negligence that can be used when the plaintiff was aware of a danger and voluntarily assumed the risk of injury from that danger.

comparative negligence

A theory in tort law under which the liability for injuries resulting from negligent acts is shared by all parties who were negligent (including the injured party), on the basis of each person's proportionate negligence.

contributory negligence

A legal defense that may be raised when the defendant feels that the conduct of the plaintiff somehow contributed to any injuries or damages that were sustained by the plaintiff.

special damages

A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages.

blanket insurance

A single property insurance policy that provides coverage for multiple classes of property at one location, or provides coverage for one or more classes of property at multiple locations.

Examples of conditions

1. inspections may be made as needed by the insurer
2.changes to policy
3. liberalization caluse
4. return of premium

Examples of exclusions

1. earth movement
2. water damage

Cancellation

the termination of an in-froce insurance policy, by either the insurerd or the insurer prior to the expiration date shown in the policy

Non-renewal

The termination of a policy at the expiration of its term. The policy does not renew and no coverage is provided after the expiration date.

Earned premium

(amount of policy / term of policy ) x Calculation period

Flat cancellation

when a policy is cancelled upon its effective date and there is generally no premium penalty

Pro rata refund

the unused premium (based on the pro rata portion of the premium for the number of days remaining in the policy) returned to the insured when a policy is canceled

Short rate cancellation

A cancellation of insurance that incurs a financial penalty. Sometimes when the insured cancels the policy before its expiration date, a short-rate cancellation is issued. The insurer retains a portion of the unearned premium to cover costs.

10% penalty

deductible

Amount you must pay before you begin receiving any benefits from your insurance company

coinsurance

insurer agrees to maintain a certain minimum amount of insurance on the insured property

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

assignment

the trasnfer of a legal right or interest in an insurance policy

abandonment

the relinquishing of insured property into the hands of another or into the possesion of no one in particular

liberalization

extends broader legislated or regulated coverage to current policies as long as it does not result in a higher premium

standard mortgage clause

Protects the interest of the financial institution against loss to real property caused by perils insured against.

loss payable clause

used to cover the interest of a secured lender in personal property

no benefit to the bailee

A provision that excludes any assignment or granting of any policy provision to any person or organization holding, storing, repairing, or moving insured property for a fee.

incidental occupancy

minor uses that are accessory to or support the predominant occupancy

Dwelling Property Policy

*developed by ISO to be used primarily as property coverage form

*can insure dwelling only, contents only or both

*basic, broad, special

*Liability not included but can be added

*up to 5 roomers or boarders
*up to 4 residential units
* properties in the course of instruction
*owner occupied, tenant occupied or both
* mobile homes on the basic form only; if they contain no more than one apartment, and are located at a permanent location listed in the policy
*seasonal dwellings unoccupied for 3 or more months during a 12-month period
* not designed as a farm property

Dwelling Policy Form Structure

1. Agreement
2. Definitions
3. Deductible
4. Coverages, including Other Coverages
5. Perils Insured Against
6. General Exclusions
7. Conditions

Basic Form

DP1 Named Peril

Basic Perils:
Fire
Lightning
Internal Explosion

Extended Perils:
Windstorm
Hail
Aircraft/Vehicles
Riot/Civil Commotion
Volcanic Eruption
Explosion
Smoke

may also add coverage for vandalism and malicious mischief if extended coverage for perils