Property and Casualty Licensing Study (Indiana)

Elements of a Legal Contract (CLOAC)

Consideration: exchange of value (when the premium check is written/given)

Legal Purpose: not illegal

Offer: proposal made by one potential party

Acceptance: unconditional and unqualified, else = counteroffer

Competent Parties: legal capacity to enter the contract (legal age, mentally sane, and sober)

Representation

statement believed to be true and is true

Misrepresentation

statement believed to be true but is false

Material Misrepresentation

a false representation that affects the insurer’s decision

Concealment

failure to disclose known facts, could void coverage if material (but can’t void it if it’s unintentional)

Fraud

intentional act to deceive/induce another party to give away something of value; involves intentional misrepresentation and concealment

Waiver

voluntarily giving up a right

Estoppel

once you give up a right, you can’t get it back

Warranty

answer to a question that becomes part of a contract, is guaranteed to be true, and can cancel the policy if it is false (TRUE AND GUARANTEED)

Dwelling Policy

used to cover properties where the insured doesn’t permanently reside, not the homeowner’s policy and the owner does not have to occupy it

covers risks like rental properties, vacation homes, dwellings with 4 units where each can have occupants, dwellings under construction (endt), mobile homes (endt). NO FARM ‘DWELLINGS’

Coverage A

Dwelling

covers dwelling, structures attached to dwelling, and materials/supplies for use in construction or repair

Coverage B

other (detached) structures

buildings on premises separated by clear space or connected by fence, utility line, etc

NOT FOR FARMING, COMMERCIAL, OR MANUFACTURING PURPOSES

Coverage C

personal property at location and is usually there, might cover guest’s personal property

EXCLUSIONS

1. tenant property if it’s a rental

2. animals, birds, fish

3. aircraft

4. motor vehicles (other than maintenance vehicles for the grounds)

5. accounts, bills, currency, evidence of debt, money, and securities

* can get 10% of overall coverage for property not on premises (excluding guests, rowboats, or canoes)

Coverage D

fair rental value

covered loss makes rental portion of the property unusable for normal use (20% of insurance available)

if it’s because of a neighboring problem that a civil authority stops you from using, you can get payments for a max of 2 weeks

Coverage E

additional living expense, included in DP-2 and DP-3

covers living expenses incurred after a covered loss (like hotel, dining, etc)

10% of Coverage A limit

applies when the insured occupies the premises

expenses are covered until repaired or replaced (or 2 wks if civil authority blocks access)

can be added to DP-1 by endorsement

Dwelling Policy Eligibility - Other Coverages DP-1

DP-1 Dwelling Basic Form with other coverages at no additional premium

• debris removal

• property removed - 5 days

• reasonable repairs

• tenants improvements (10% coverage C)

• fire department service charge - $500

• worldwide personal property (10% coverage C)

• rental value (20% coverage A)

• other structures (10% coverage A)

Dwelling Policy Eligibility - Other Coverages DP-2 and DP-3

Includes all DP-1 Coverages AND

• trees, shrubs, and other plants - 5% coverage A, max $500 per plant

• collapse

• glass or safety glazing material

• ordinance or law - 10% coverage A for increased cost to rebuild

• property removed - 30 days

DP-1 Basic Perils

fire, lightning, and internal explosion

can add WCSHAVVER + V&MM for additional premium

Broad Perils

basic, WCSHAVVER, V&MM, and BIG AFFECT:

Burglary

Ice, sleet, snow (weight of)

Glass breakage

Accidental discharge of water

Freezing of objects

Falling Objects

Electrical current

Collapse

Tearing asunder

WCSHAVVER

Wind

civil commotion

smoke

hail

aircraft

volcanic eruption

vehicles

explosion

riot

Special Form Perils

all direct physical loss except listed exclusions

exclusions: intentional damage, theft, freezing of plumbing (if unoccupied and care not taken), wear and tear, foundations, and loss caused by birds/vermin/insects/domestic animals

Coverages by Dwelling Form

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General Dwelling Exclusions

• ordinance or law losses about pollution

• earth movement losses

• water damage in general

• losses due to power outage elsewhere

• insured’s failure to save/preserve property after a loss or protect it from loss

• war

• nuclear hazard

• losses caused by the insured or by someone else at the insured’s direction

• government seizure of property

Loss Settlement

covered property losses valued at lesser of ACV, repair, or replacement cost

DP-2 and DP-3 settle PP losses at ACV

losses to dwelling and other structures at RC if insured carries 80% or more of full replacement cost

Our Option

insurer can repair or replace property with like kind and quality within 30 days of statement of loss

Loss Payment

within 60 days of reaching agreement with insured

Recovered Property

if the insurer or insured finds the property the insurer has made a loss payment on, the other party must be notified and the loss payment may be reduced or property can be given to the insured or insurer

Moral Hazard

an individual’s character; dishonesty

Morale Hazard

more of a state of mind; carelessness

The Law of Large Numbers

the larger the group, the more accurately losses can be predicted

Elements of Insurable Risk

CANHAM

Calculable

Affordable

Non-Catastrophic

Homogenous

Accidental

Measurable

Reinsurance

Insurance for insurers

Ceding: reducing risk

Reinsurer: assuming risk

Facultative: looks at each risk before transfer

Treaty: accepts all risk of a certain type

Adverse Selection

people with higher than average risk are more likely to purchase insurance

Law of Agency

Principal: on whose behalf the agent acts

Agent: authorized to act on behalf of another (usually insurer)

Authority

Express: written in agent contract

Implied: not written, so must perform, so implied

Apparent: tasks the agent does that a reasonable person would assume as authority based on the agent’s actions and statements

Tort

civil wrong that causes someone else to suffer loss (liability insurance only covers unintentional torts)

Establishing Negligence

1. you owe a legal duty

2. you breached that legal duty

3. you cause the loss

4. damages are caused

ex:

1. to drive safely

2. you text and drive

3. you cause an accident

4. there is BI and PD

Contributory Negligence

if a person contributes to losses in any way, another party cannot be held liable for those losses (they owe nothing)

Comparative Negligence

losses are owed based on how much each party contributed to the loss

Assumption of Risk

collect less for damages if you voluntarily and knowingly participate in an activity that causes your own injury, like sports

Intervening Cause

an independent event affects the chain of events (like a heart attack causing a wreck)

Last Clear Chance

a part of contributory negligence that says the partially negligent party can recover losses is the defendant was the last to be able to avoid the accident

Absolute Liability

those who do super risky stuff, like snake handling, may be held liable even if negligence isn’t present

Compensatory Damages

reimburse the injured party only for losses sustained

special: direct, specific expenses for loss

general: things like pain, suffering, mental anguish

Split Limit Liability

100/300/50 could mean $100,000 per person, $300,000 for all persons, and $40,000 for total PD per accident

Supplementary Payments

BAILED

Bonds

Aid (first aid at time of occurrence)

Interest on judgments

Loss of Earnings

Expenses incurred in process of defense/requested by insurer

Defense Costs

Duties After Loss (insured)

notify insurance company fast

forward demands, notices, or summons

assist the company in the case

don’t say you’re liable/try to make restitutions

Liability Policy Exclusions

• damage to property and bodily injury TO AN INSURED

• BI to employee (WORK COMP)

• nuclear energy liability

• intentional damage caused by insured

Peril

cause of loss

Basic Perils

fire, lightning, and internal explosion

WCSHAVVER + V & MM

Wind (exterior broken and causes internal damage)

Civil Commotion (by groups)

Smoke (not friendly/on purpose in home fire)

Hail

Aircraft

Vehicles

Volcanic Eruption

Explosion (away from covered location)

Riot (damage by smaller groups than C)

Vandalism and Malicious Mischief

Broad Perils

WCSHAVVER + V&MM as well as BIG AFFECT

Burglary Damage

Ice, sleet, and snow (weight of)

Glass breakage

Accidental Discharge of Water (plumbing, heating, AC, sprinklers, etc)

Freezing Objects (plumbing, heating, AC, sprinklers, etc)

Falling Objects

Electrical Current (sudden and artificial)

Collapse

Tearing Asunder

EXCLUSIONS

• Ice/sleet/snow weight or falling objects on awnings, fences, patios, swimming pools, docks, and retaining walls

• accidental discharge of water from continuous leaking

• flooding from river or lake

• burglary/accidental discharge if vacant for more than 60 days in a row

Special Perils (Open)

all risks of direct physical loss unless excluded

Common Exclusions: flooding, earthquake, intentional damage by insured, losses due to building code enforcement, damage caused by power interruption off premises, and government seizure

Types of Construction

Class 1 - Frame: possibly covered with stucco

Class 2 - Joisted Masonry: outside walls covered in noncombustible masonry materials, roof and floors still combustible

Class 3 - Noncombustible: all noncombustible

Class 4 - Masonry Noncombustible: everything made of any supported by noncombustible materials

Class 5 - Modified Fire Resistive: everything made of 2hrs or less fire resistance

Class 6 - Fire Resistive: everything made of fire resistive 2hrs+

from most to least flammable 1-6

Loss Valuation

Insured collects the least of insurable interest, policy limits, actual cash value (includes depreciation), cost to repair, or replacement cost

Functional Replacement Cost

cost to get property with the same function and efficiency even if it’s not identical (like replacing plaster on old house with drywall on new house)

Market Value

selling price, rarely used

Agreed Amount

agree on value before the policy is issued, common with valuable contracts like rare paintings

Stated Amount

insured states value, insurer pays lower of that or ACV

Pair or Set

loss valued at fair proportion of the set, they won’t pay the whole cost to replace the set

either replace the missing piece or the lost value to the set

example: pair of diamond earrings = $30,000

1 stolen, and the other is valued at $8,000

paid = $22,000

Appraisal Condition

either party can demand an appraisal of the loss if they disagree on the amount

each pick an appraiser and umpire decides who wins

Coinsurance

you have to insure property for a certain percentage of its value or they might make you pay more (unless it’s a total loss)

did carry / should carry * loss = payout

Unoccupancy

contents are there but people aren’t, like when snow birds are away, so coverage isn’t lost

Standard Mortgage Clause

mortgagee is protected and can recover its investment even if property owner’s claim is denied

allows lender to pay premium, file claim, receive notice if the policy will be cancelled, and the lender is protected from insured’s negligence or dishonesty

Loss Payable CLause

just like standard mortgage clause but for liens on personal property

No Benefit to Bailee

bailee isn’t covered under property owner’s policy while property is in posession of the property, instead covered by the bailee’s policy, and the bailee can’t benefit from the owner’s policy

First Party

insured

Second Party

Insurer

Third Party

The other guy

Policy Structure - DICEEDS

Declarations: name, address, coverage terms, deductibles/etc

Insuring Agreements: insurer promises to pay and states what perils are covered. This is the heart of the insurance policy and states what will be covered

Conditions: rules, policy provisions, rules of conduct, duties, and obligations to keep coverage

Endorsements: add, modify, or take away coverage

Exclusions: describes property, perils, hazards, or losses not covered by the policy

Definitions

Supplementary/Additional Coverage

Unearned Premium

premiums paid in advance are returned to insured upon cancellation

Pro Rata (Other Insurance)

each insurer pays proportion of loss; (policy limit/total policies limit * loss = payment)

Contribution by Equal Shares

each insurer pays smallest policy limit until loss is paid in full or each company has paid their policy limit

Provisions/Loss Provisions

rights/duties of named insured and insurer

Duties After Loss

Prompt notice of claim

Protect property from more damage

complete a detailed proof of loss

make property available for inspection

submit to examination under oath if needed

cooperate with insurer

Assignment Condition

can’t transfer a policy without written consent from the insurer, rights can be transferred to legal representative if the named insured dies

Abandonment Condition

the insured can’t abandon fixable property to try to get the full value reimbursed

Salvage Condition

insurer has the right to salvage property to lower claims costs

Liberalization

insurer increases/broadens coverage with no additional premium and no action required by the insured

Insurable Interest

you have to have risk of financial loss present at the time of loss

Underwriting

evaluating the risks and exposures of potential clients

determining the premium and coverage amounts

field underwriting is performed by agents/producers to seek out acceptable risks and deny unacceptable risks

Binder

temporary written/oral statement usually given by the agent. can be cancelled by the company, doesn’t guarantee coverage, and ends once the policy is issued. It’s like a holdover almost promising coverage.

Loss Ratio

incurred losses (amounts paid/reserved on claims and miscellaneous expenses) / earned premiums

Expense Ratio

cost of doing business

underwriting expenses/written premium

Combined Ratio

100% = breakeven point, < 100% = profit > 100% = loss

loss ratio + expense ratio

Judgment Rating

no set rates, just underwriter experience and vibes

Rate

Actuarial rates are expressed as a price per unit of insurance for each exposure unit

Manual/Class Rating

set rates for risk classes

Experience Rating

modified based on loss experience (actual loss experience vs historical data)

Retrospective Rating

based on losses during the policy period

Schedule Rating

applies debits and credits to reflect a specific insured

Fair Credit Reporting Act (FCRA)

rules for getting consumer credit, personnel, and other information in a fair, equitable way that includes confidentiality, accuracy, relevancy, and proper use

all insurers and producers must comply

applicant has to receive notice within 3 days of the request

consumers can dispute inaccurate information

violate FCRA = 1 year prison, $5,000 fine, or both

Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIA)

coverage trigger: $200 mil

carriers pay 20% of direct earned premium as a deductible before the government money kicks in

federal liability cap = $100 billion

limits the exposure of insurers to catastrophic events

must be certified by the secretary of treasury, homeland security, and US attorney general

Gramm-Leach-Bliley Act

requires financial and insurance companies to ensure confidentiality/security of customer information, protect against expected threats, and protect against unauthorized access

Fraud and Intentional False Statements Penalty

fine, 10 years prison, or both

can be more than 15 years of prison if it jeopardized the insurer