Property and Casualty Insurance Provisions

Property and Casualty Insurance Provisions

Introduction

• This chapter covers the essential components of property and casualty insurance policies.

• It builds upon insurance principles and concepts from previous chapters.

• Understanding these provisions is crucial for anyone entering the insurance industry and for passing the state exam.

Key Objectives

• Identify and describe common policy provisions regarding insurance policy periods and territories.

• Explain the purpose of the coinsurance provision and calculate the minimum coverage it requires.

• Differentiate between various liability policy limits.

• Understand how different other insurance and loss payment provisions affect claims.

• Describe the duties, rights, and restrictions imparted on the insured, insurer, and third parties.

Keywords

Additional Insured

• A third party added to a commercial policy who has the potential to suffer a loss.

Aggregate Limit

• The total amount a policy will pay for all covered losses in a given policy period, regardless of the number of claims or claimants.

• The aggregate limit resets to the original amount on the policy's anniversary.

Agreed Value

• Coverage based on the value of the property agreed upon by both the insured and the insurance company, based on appraisal and documentation.

• In the event of a total loss, the insurer pays the agreed amount.

Assignment

• Property contracts prohibit the transfer of rights or duties to another party without the insurer's written permission.

Cancellation

• The termination of a policy before the end of its term.

• Both the insured and the insurer can cancel coverage.

• Insurers must provide advance written notice as required by state statute.

• Insureds can request immediate cancellation without providing a reason.

Claim Settlement Options

• In a property policy, the insurer can pay a claim by repairing or replacing the property.

• If the exact item is unavailable, the insurer can provide property of equivalent value.

Combined Single Limit

• A total policy limit per occurrence, expressed as a single dollar amount, covering both bodily injury (including death) and property damage.

• There are no separate category limits, regardless of the number of victims in a single accident.

Declarations

• The first page of the policy, specifying the unique contractual relationship between the insured and the insurer.

• Also called the information page or deck page.

Deductible

• The amount the insured pays on a claim before the insurer pays any loss amount.

• The insurer only pays amounts exceeding the deductible.

Endorsements

• Written additions or changes to an existing insurance contract.

• Can modify policy terms, coverages, or conditions.

• Must be in writing to be valid.

• Can be used to add or delete coverage.

First Named Insured

• The only party the insurance company will recognize or deal with under a commercial policy, even if multiple names are listed as insureds.

Functional Replacement Cost (FRC)

• Claim payment based on the cost to repair or replace property using common, less expensive building materials, rather than obsolete, antique, or custom materials.

Insureds

• The individual, person, or legal entity (corporation) named in the declarations page whose interests are covered against loss from perils named or not excluded.

• Also includes any party not specifically named but identified as an insured by the policy language.

Insuring Agreement or Clause

• The section of an insurance policy outlining the insurer's obligations to the insured when a covered loss occurs.

• May state the perils covered, indicating whether they are named or open (all-risks).

Inventory the Loss

• Compiling a complete list of destroyed, damaged, and undamaged property.

Liberalization Clause

• Protects the insured if the insurer broadens coverage within 60 days of a personal lines policy purchase or during the policy period.

• The insured receives the broadened coverage at no additional premium cost.

• For commercial lines policies, liberalization is allowed within 45 days prior to or during the coverage period.

Loss Payable Clause

• Allows the insurer to pay a loss to a third party possessing an insurable interest in the insured property, such as an additional insured.

Market Value

• The price at which a property will sell in the regular marketplace when neither the seller nor the buyer is forced to terms.

• Includes the land value in the price of a home.

• A new homeowner will insure their home on a replacement cost basis, not based upon the home's purchase price.

Named Insureds

• Individuals or legal entities named in the declarations page whose interests are covered against loss from covered perils.

• Parties not specifically named or defined as insureds have no legal right to recover directly under the policy.

Non-concurrency

• Occurs when umbrella and underlying policies cover identical loss exposures but have different start and expiration dates.

• The policies do not run concurrently or have identical time periods.

Non-renewal

• When the insurance company decides not to renew a policy at the end of its term.

Per Occurrence

• The most the policy will pay for any single claim or cause of loss.

• In an automobile policy, this is typically called a per accident limit.

Per Person

• The most a policy will pay to one person for bodily injury or death, up to the stated policy limit in this specific category of coverage.

Policy Period

• The coverage period is found in the declarations and is usually a one-year period from the date of issue until the indicated expiration date.

• All covered losses will be paid only if they occur within the stated policy period.

Policy Territory

• The geographical location limits of the policy.

• May not exist in the case of worldwide coverage.

• Common language includes coverage within the boundaries of the United States, its possessions, and territories.

• Understanding territory coverage is crucial, especially for property moving from location to location covered under various inland or ocean marine floaters.

Primary and Excess

• A situation where two policies cover the same loss exposures, but one policy is the underlying primary coverage, while the other is excess or secondary.

Proof of Loss

• The insured must submit a written and signed proof of loss form to the insurer within a specified time from the date of loss or the insurer's request.

• This is the final required step before a company will pay for a covered loss.

Split Limits

• A style of liability limit that can be used with aggregate limits or per occurrence limits.

• Expresses separate limits for specified category losses, such as a per-person liability limit per occurrence, a separate limit for all persons injured or killed in one occurrence, and a third limit for all property damage in a single occurrence.

• Each category of coverage has its own separate coverage limit amount.

Standard Mortgage Clause

• A provision giving special protection for the interest of the mortgagee when a loan is made.

Stated Value

• The insurance company accepts the property owner's stated value of the insured property at the time the policy is issued but does not issue any formal agreement with that value in the event of a claim.

• This gives the insurer a broad range in valuing the actual loss.

• Stated value coverage pays either the cost of repair to the insured property or the stated value, whichever is less at the time that a claim is filed.

• The stated value is used to determine the premium level. The higher the stated value, the higher the premium.

• It is also used in renters insurance to establish the insured's personal property value.

Subrogation

• Under the subrogation clause of an indemnity contract, the insurance company has the right to recover from third parties who caused the covered loss to the insured.

• The insurer is entitled to any amount which was reimbursed by the insurance company to the insured during the settlement of the claim.

• This clause also prevents the insured from collecting more than one time on a single loss.

Supplementary Payments

• Do not reduce the liability limits of a given policy coverage (e.g., found in both the CGL and auto policies).

• Supplementary payments are paid in addition to the applicable limits of liability as stated in the declarations.

Valued Policy

• A legal requirement in some states requiring the insurer to pay the full value as stated in the policy declarations in the event of a total loss, even if the actual cash value is less.

• The law mandates that the full amount of coverage be paid.

Waiver of Rights

• An endorsement available to the insured on a property policy for an additional premium that would waive the right of an insurer to seek subrogation in the event a third party cause is lost to the insured.