CH 4 - A Typical Property Casualty

America's Professor Ch. 4

Property Insurance

A two party contact involving only the Insured and the Insurer. Property insurance contracts involves two people.

Covered items

Personal or real property. Real property does not include land.

Additional Coverages

They throw in three additional coverages for free that adds to the policy’s overall limit of liability. Debris removal, Renewal/preservation of property, and Fire Department Service Charge.

Debris Removal

It adds to the policy’s overall limit of liability. It covers the cost to haul destroyed property to the landfill.

Removal/Preservation of Property

The insurer will provide coverage for an additional time if the Insured has to remove personal property from the covered premises. Whatever is removed from the home is covered from all peril. Does not add to the policy’s overall limit of liability.

Fire Department Service Charge

$500 for homeowners policy and $1000 for commercial policy. No deductible for this charge. It adds to the policy’s limit of liability.

Choosing a causes of loss form

Basic, Broad and Special

Basic Cause of Loss

covers the fewest perils (11) and provides named peril coverage.

Broad Cause of Loss

covers 16 perils and also provides named peril coverage

Special Cause of Loss

covers the greatest number of perils. it is not named peril coverage.

Bankers holding a mortgage

They will usually require the property owner to have Special coverage, so many insurance agents never see basic or broad coverage.

Basic Perils Covered

• Fire from a hostile fire, which is not intended.

• Lightening

• Rioting and civil commotion

• Explosions - does not cover explosions from a high pressure steam boiler, compressor nor refrigeration system

• Wind and hail

• Smoke

• Sprinkler leakage from a fire sprinkler system (but no other water damage)

• Sinkhole collapse

• Volcanic activity (only the above ground blast, dust, and lava issues. nothing underground.)

• Vehicles or aircraft that damage our property by coming in contact with our property (excludes Insured’s own vehicle and sonic booms)

• Vandalism like graffiti but not theft.

• No glass coverage

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Broad Perils Covered

• Water damage - only covers water that escapes from a water system that is intended to bring water into the building, like a leaky pipe or a burst pipe. It is limited to the damage within 14 days. Will not cover damage from a leaky roof and floods.

• Weight of Snow, Ice or Sleet (SIS) that damages the building.

• Falling Objects - a tree or a tree branch or something falling off of a truck.

• Glass coverage - if the peril is covered.

• Collapse - if a building collapses due to such problems as weight of people or personal property, defective design or construction, hidden decay or hidden insect (termite) damage, weight of rain or use of defective materials.

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Glass coverage

Basic = no glass coverage, Broad has some, and Special has full.

Special Causes of Loss

Not a named peril coverage. Sometimes called all risk, open perils, comprehensive and extended coverage. Covers everything but what is excluded on the policy:

• War

• Nuclear catastrophe

• Sewer backup

• Floods and mudslides

• Earth movement

• Off premises power failure

• Government action

• Building ordinance requirements

• Explosion of a steam boiler, fridge system, compressor mechanical breakdown of equipment or an artificially created power surge.

• Intentional acts by the Insured.

• Theft by employees

• Inherent vice (natural deterioration)

• Normal wear and tear

• Neglect

• Birds, vermin, rodents and insects

• Terrorism

• Mold

• Damage to the structure interior by rain, snow, sand or dust due to an open window or door.

• Damage caused by animals owned by Insured.

What coverages does Special add?

• Full glass coverage

• Theft but not theft of money, employee theft or theft by the Insured.

• Mysterious disappearance

• Breakage

• A bear breaks down a door or a deer chews on the siding

• Sonic booms that crack the walls

• Leaky roof but not the actual roof itself, just damage as a result of the leak

• The insured’s own vehicle hits the Insured’s property

• And many many more

Fair Market Value

It is not a payment option for Property Insurance

Replacement Cost

• Pays the Insured the full cost of buying new, similar property to replace the old destroyed or damaged property.

• Pays without deducting for depreciation.

• It goes above and beyond indemnification. Not a good example of indemnification because you come out ahead.

• Both the Boiler and machinery policy and the Business Owner’s Policy provides replacement cost.

• Homeowner’s policy provides replacement cost for house and out buildings.

• Personal property will be covered on a depreciated basis known as Actual Cash Value in the Homeowner’s policy.

• Home must be insured to 80% of its value to get replacement cost coverage on Homeowner’s policy.

Actual Cash Value

• The vast majority of Property policies state that they will only pay claims on the basis of depreciated value.

• ACV = replacement cost minus physical depreciation.

• Best example of indemnification.

Valued Policies

• Covers fine art and antiques that may appreciate.

• Can be called a “stated policy” or “agreed value policy.”

Claim Payment

Once Insured provides proof of loss form and parties have agreed on the value of the loss, the payment will be made within 30 days.

Suit against Insurer

The insured must file the lawsuit within a stated time, usually two years after the loss. This happens if you are not paid within 30 days.

Appraisal provision

It specifies how the parties can resolve payment disputes without going to court.

Appraisal

• Each party selects an appraiser

• The two appraisers then choose a neutral third party to cast the deciding vote if the two appraisers can’t agree on the value of the items. The third part is the umpire.

• If both Insurer and Insured agree, the company pays the appropriate benefits. The insured and insurer each pay their chosen appraiser and the umpire’s fee is split equally.

• If either party disputes, it can be taken to court. Neither side is bound by appraisal.

• Appraisals settle payment disputes, not coverage disputes.

Subrogration

The transfer to the Insurer of the Insured’s rights of recovery from a responsible third party.

• Upholds the principle of indemnity by preventing double dipping (collecting from Insurer and third party who caused the loss).

• Places burden of loss on the third party who caused it

• Reduces the Insurer’s loss costs and thus lowers premium rates.

Insurer’s Right of Salvage

The Insurer has the right of salvage to recover whatever value it can from damaged property that has been replaced or paid for.

• Upholds indemnification by preventing the Insured from both being paid in full and selling the salvaged property to come out ahead.

• Reduces premiums by allowing the Insurer to sell the damaged property to recover part of the money paid for the claim.

No right of abandonment

There can be no abandonment to this insurance company of any property. The Insured cannot abandon the property to the insurance company. There is no right of abandonment.

Standard Mortgage Provision

• Ensures that the mortgagee is virtually always paid by the Insurer in the event of a loss, and it doesn’t require the bank to have its own insurance policy.

• The banker is entitled to 10 days notice of cancellation or nonrenewal.

• If the Insured doesn’t make the premium payments, then the banker can pay it and add it to the loan.

• If the Insured fails to file POL within 60 days, then the mortgagee will have an additional 60 days to file.

• After the loss, the Insurer may take the claim check payable to both the mortgage and the Insured. The mortgagee cannot profit off the claim check.

• If the Insured is denied payment because of the Insured’s breach of the policy, then the mortgagee is still entitled to payment.

Direct loss

Direct loss is damage to the property itself.

Indirect loss

Loss of use, loss of income, consequential loss. Commercial property policy will not usually pay for this. It can be covered by a “business interruption endorsement.”