Property Insurance Unit 4

types of property

real: permanent structure & buildings

personal: furniture, appliances, clothing, tools, moveable property

specific (scheduled) vs blanket coverage

specific/scheduled: detailed list of covered items

blanket: no detailed list.

policy limit

aka limit of coverage, limit of liability or limit of insurance. limits represent the max amount the insurance company will pay for a loss. listed on declarations page

open peril vs named peril policy

open: insures against all risks of direct physical loss except those specifically excluded in the policy

named: lists the perils or causes of loss such as lightning, fire, windstorm, hail etc

basic & broad coverage

basic: fire (must be hostile, intentional loss (arson not covered)), lightning (natural electricity), internal explosion (any explosion inside a covered location) - covers only named perils

broad: all basic form perils included, all of the EC perils included, plus the following: (BIG AFFECT) - covers only named perils

burglary damage

ice, sleet, snow

glass breakage

accidental discharge: of water or steam at the described location from within a plumbing, heating, air conditioning, or automatic fire protective sprinkler system or household appliance

freezing objects: feeezing or plumbing, heating & air, or sprinklers (insured must use reasonable care to maintain heat in building or shut off water supply & drain all appliances)

falling objects

electrical current

collapse

tearing asunder: sudden and accidental tearing apart, cracking or burning of steam or hot water heating or ac or sprinklers

burglary & accidental discharges of water are not covered if building has been vacant for more than 60 consecutive days

extended coverage (EC) perils

these 9 additional perils, known as EC perils, are included in most state policies: (WCSHAVVER)

wind: exterior damage, damage to interior is covered only if there is damage to the exterior first (wind broke the window and then caused damage inside)

civil commotion; damage caused by an assembly of individuals including striking employees (large in number)

smoke: not from a friendly fire (fireplace)

hail: a form of solid precipitation, hailstones are balls or lumps of ice

aircraft: loss caused by physical contact with part of or all of an aircraft

vehicles: damage caused by a vehicle contacting insured property

volcanic eruption; damage from lava, ash, debris or air shockwaves

explosion: damage caused by an explosion away from the covered location

riot: damage caused by an assembly of individuals striking employees (smaller in number than civil commotion)

V&MM:

vandalism and malicious mischief: damage caused by willful and malicious actions, and it usually involves a crime. can only be written with extended coverage

special perils (open)

special perils coverage insures against all risks of direct physical loss unless specifically excluded. most common:

flooding

earthquake

intentional damage caused by insured

government seizure

direct vs indirect loss

direct loss: property loss caused by an unbroken chain of events covered under an insurance policy. living room furniture destroyed in a fire originating in the kitchen is a direct loss

indirect loss: comes as a result, or consequence of the original loss. also known as consequential loss. a loss of business income because of a fire is an example

basic types of construction

determined by the types of materials used in the building and the roof of the insured structure.

class 1: frame - outside support walls, a roof, and floors constructed of wood or other combustible materials. exterior walls mag be covered with stucco or brick veneer

class 2: joisted masonry - have outside support walls made of non combustible masonry materials (concrete, brick, hollow concrete block, stone, tile) and a roof and floors made of combustible materials (such as wood)

class 3: non combustible - is one whose exterior walls, floors, and roof are constructed of and supported by non combustible materials such as metal, asbestos, or gypsum

class 4: masonry non combustible - have exterior walls constructed of masonry materials and a roof and floor made of metal or other non combustible materials

class 5: modified fire resistive - modified fire resistive have exterior walls, floors, and a roof constructed of masonry or fire resistive material with a fire resistance rating of 2 hours or less

class 6: fire resistive - constructed of masonry or fire resistive material with a fire resistance rating of 2 hours or more

loss valuation

in the event of a loss, the insurance company has a legal duty to determine the appropriate amount of claim payment according to the terms of the policy. these duties are sometimes contained in the valuation or how losses will be paid condition.

deductible reduces any amount after loss has been valued

insured to collect lesser of:

insurable interest

policy limits

actual cash value (ACV)

cost to repair

replacement cost

actual cash value

many losses are reimbursed on an ACV basis. ACV is the current cost of replacing an asset that is damaged or destroyed property with an identical or comparable asset minus accumulated depreciation and obsolesce.

ACV = replacement - depreciation

example: a man purchased a tv for $2,000 5 years ago and it was destroyed in a hurricane. his insurance company says that all tvs have a useful life of 10 years. a similar tv today costs $2,500. the destroyed tv had 50% of life left. the ACV is $1,250 ($2,500 replacement cost minus $1,250 depreciation)

repair cost

insured may be reimbursed on the basis of the items repair cost when the amount is less than ACV.

replacement cost & functional replacement cost

replacement cost: n some policies, the insurer will automatically pay the replacement cost for covered losses with no allowance for depreciation. however, replacement must be similar kind a quality. if a 32 in tv is stolen, the policy won’t pay to replace it with a 90 in tv.

functional replacement cost: cost of squiring another item of property that will perform the same function with equal efficiency, even if it isn’t identical to what is being replaced. example: if you have an older house with plaster walls that is damaged by fire, functional replacement cost would allow repair using drywall instead of plaster.

market value

the price one would pay based upon free market conditions, adjusting for supply & demand. concerns realtors but not generally the insurance industry. few insurers are willing to issue a policy limited to the market value of a property unless that value is significantly lower than the replacement cost.

agreed amount

some items of property are difficult to value after a loss. the insured & insurer will agree on a value before the policy is issued. antique furniture or fine arts will most likely have agreed values. if a loss occurs, the value will be the amount the insured is guaranteed to receive. the agreed value resets every year

stated amount (value)

allows the insured to determine the value of that property. an insurance policy is then written for that amount. however, at the time of loss, the insurer will pay the lesser amount stated on the declarations page or ACV - whichever is less. unlike agreed value, it does not guarantee payment of the listed amount.

example: on an antique vehicle, the insured would have to prove the amount of loss before the claim is paid. an appraisal is required before the insurance policy is issued

pair or set

loss settlement condition that appears in many property contracts. it states that if part of a pair or set is lost or damaged, the loss will be valued as a fair proportion of the total value of the set, giving consideration to the importance of the damaged article to the set.

example: supposed the insured owns a pair of diamond earrings appraised at $30,000. one of the earrings is stolen. the remaining one is appraised for $8,000. the insured will be paid:

$22,000 (value of the pair: $30,000 - value of what remains $8,000)

appraisal and arbitration

appraisal: appraisal condition provides that either party may demand an appraisal of a loss. in this event, each party chooses an appraiser. the 2 appraisers then select an umpire. if the appraiser fails to agree on the amount, they submit their differences to the umpire. the decision agreed to by any 2 of the 3 is the final amount of claim payment. each party pays their appraiser & shares the cost of the umpire.

arbitration: similar to appraisal but not limited to disputes over the value of the loss. may resolve issues in areas such as coverage disputes in liability insurance or between 2 insurers.

coinsurance

requires the insured to carry a minimum amount of insurance (called insurance to value). the coinsurance requirement is normally 80% of the replacement cost. as long as the insured carries the amount of insurance required by coinsurance condition at the time of loss, the insurer will indemnify losses up to the limit of the policy. if the insured does not carry enough insurance when a loss occurs, the company will only pay a percentage of what full reimbursement otherwise would have been. the amount not paid is called the coinsurance penalty.

step 1: determine insurance required (replacement cost x 80%)

step 2: does the insured carry at least this amount?

step 3: if no, apply the following formula

insurance carried

divided by

insurance required x loss = claim payment - deductible

examples:

1. insured’s building is valued at $200,000 and purchases coverage for $100,000 & has total loss. coinsurance penalty does not apply to total losses so the $100,000 limit will be paid.

2. has partial loss which causes $10,000 of damage

DID $100,000

SHOULD $200,000 × 80% = $160,000

= .625 x LOSS $10,000 = $6,250 amount insurer pays

you are dividing the amount of insurance carried by the amount of insurance required (not replacement cost)

vacancy & unoccupancy

vacant: entirely empty. no people, no content insured penalized after 60 days of vacancy

unoccupied; lack of habitational presence of human beings. contents remain. no loss of coverage

standard mortgage clause

specifies the rights & duties of the mortgagee under the policy. a mortgagee is a bank or mortgage company that has a mortgage on an insured property. mortgagees may be named in the declarations if they have an incurable interest in real property. does not apply to moveable personal property.

rights & duties may include:

filing proof of loss if the insured fails to do so

paying the premium if the insured fails to do so

nothing the insured does can prevent a listed mortgagee from being paid. even committing arson and burning your own house down. in case of an illegal act by the insureds, the mortgage company would become the insured on the policy

loss payable clause

similar to standard mortgage clause. personal property such as cars and boats have a lien that is owed to a lender rather than a mortgage.

allows lender to pay premium

lender entitled to receive notice of policy is to be canceled

lender can file claim

lender protected from negligent or dishonest acts of insured

lender only entitled to receive payment up to the amount of the debt

no benefit to bailee

a bailee is a person or organization that has temporary possession of someone else’s personal property. the no benefit to bailee condition states that the bailee is not covered under the property owner’s policy while the bailee has possession of the property. the property in the bailee’s possession would be covered by their bailee policy. examples include dry cleaners and storage facilities. cannot benefit from property owner’s insurance