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Property and Casualty Insurance Provisions

Common Policy Provisions

Introduction to Insurance Policy Provisions

  • Most property and casualty insurance policies share common provisions.

  • These provisions dictate:

    • Dispute resolution between insured and insurer.

    • Application of policy limits.

    • Duties of the insured and insurer.

    • Loss payment procedures.

  • Non-compliance can lead to:

    • Claim denial.

    • Contract rescission.

    • Legal action.

  • This chapter covers fundamental provisions in property and casualty contracts.

  • Key topics:

    • Common policy provisions

    • Limits of liability

    • commercial insurance provisions

    • Named insured provisions

    • Insurer provisions

    • Third party provisions.

  • State-specific details are discussed separately.

Learning Objectives

  • Identify and describe common policy provisions related to:

    • Insureds.

    • Policy periods and territories.

    • Deductibles.

    • Cancellation and non-renewal.

  • Explain the coinsurance provision, calculate minimum coverage, and understand penalties for non-compliance.

  • Differentiate types of liability policy limits.

  • Explain how "other insurance" and loss payment provisions affect claims when multiple insurers are involved.

  • Discuss commercial provisions detailing how a claims-made policy functions.

  • Describe the duties, rights, and restrictions for insureds and insurers.

  • Explain the rights and restrictions imparted on third parties by multiple third party provisions.

Exam Tip

  • State exams distinguish policy provisions from the conditions section of an insurance contract.

  • The condition section contains many policy provisions, but the terms are not interchangeable.

  • Example question:

    • John wants to verify how his policy will pay a loss if he has multiple policies that cover the same loss. John should review which section of his policy for this information?

    • a. Provisions b. Insuring agreement c. Declarations d. Conditions

    • Answer: d. Conditions

  • The condition section of John's policy will contain the loss settlement and other insurance provisions that answer his questions.

Common Policy Provisions

  • This section looks at common provisions found in most property and casualty insurance contracts.

  • Topics:

    • Insured

    • Named insured, first name

    • Additional insured

    • Policy period

    • Policy territory

    • Deductibles

    • Cancellation and nonrenewal

    • Lapse

    • Grace period

The Insured
  • The insured is the individual, person, or legal entity (corporation) covered by an insurance policy.

  • The declarations page specifies who is covered against loss from named or not excluded perils.

  • A policy may identify an insured by name or by description (e.g., job title or status).

Named Insureds
  • Named insureds are those listed by name or title on the declarations page.

  • In property insurance, a party must be named or defined as an insured to have the legal right to recover directly from the insurance company.

  • Example: Tenants need their own renter's policy; they cannot claim under the landlord's policy for personal property losses.

  • Third parties may have liability coverage recovery rights even if not explicitly named in the policy.

  • Parties can recover if they have the right to collect under a policy, whether named or not, depending on the loss circumstances.

  • Third parties may recover from another person's insurance company for damages they suffer due to negligence.

First Named Insured
  • A policy may have multiple named insureds, but only one is the "first named insured."

  • The first named insured is listed first on the declarations page.

  • In commercial insurance, the first named insured is the only party authorized to:

    • Exercise contractual rights.

    • Initiate policy changes.

  • They are also responsible for:

    • Premium payments.

    • Receiving and responding to policy correspondence (e.g., cancellation and renewal notices).

Additional Insureds
  • Additional insureds are third parties with an insurable interest in the policy's subject.

  • Often, they are entities that:

    • Lease property to the insured.

    • Lend money for purchasing property.

  • Example: Global Copiers Inc. might require RC Copy Service to list Global as an additional insured on RC's Business Owner's Policy (BOP) until the lease expires.

  • Mortgage companies and lending institutions are also commonly added as additional insureds.

Other Insureds
  • Individuals not named may be covered under certain conditions.

  • Auto insurance covers anyone driving the insured car with permission.

  • Homeowners insurance covers property of guests on the insured premises in certain situations.

  • Example: A guest's property is damaged at a friend's house due to a covered peril; the guest is covered, even if not named.

  • This does not apply to renters or borders unless they are family.

Policy Period
  • The policy period, found on the declarations page, specifies when coverage is active.

  • Losses are generally paid only if they occur during the policy period.

  • Exceptions may apply to commercial policies.

  • Policy periods vary by insurance type and insurer, and may be dictated by state law.

Policy Territory
  • Insurance contracts often limit coverage geographically.

  • The policy territory defines these geographical limits.

  • Some contracts offer worldwide coverage, while others specify areas like the United States, its possessions and territories, Puerto Rico, and Canada.

Deductibles
  • A deductible requires the insured to pay a portion of covered losses.

  • The insurer pays amounts exceeding the deductible.

  • Higher deductibles result in lower premiums.

  • If a loss is less than the deductible, the insured bears the entire cost.

  • Example: Belinda has a \$1,500 deductible; if a tree limb causes \$1,400 damage, she cannot file a claim.

  • Deductibles can lower insurance costs by reducing carrier involvement in small claims.

  • Insureds can use deductibles to manage premiums based on their ability to pay initial loss costs.

  • Deductibles are often a specified dollar amount but can be a percentage of coverage (e.g., earthquake endorsements).

  • Deductibles act as a form of risk-sharing.

Cancellation and Nonrenewal
  • Cancellation: A policy ends before its stated expiration date.

  • The company keeps earned premiums (for coverage already provided).

  • Unearned premium (for coverage not yet provided) must be returned.

  • Refunds can be pro rate or short rate, depending on who initiated the cancellation.

  • Rescission: If the policy is treated as if it never existed, a flat rate refund is issued (full refund).

Insurer's Right to Cancel
  • Insurers must provide advance written notice as required by state statute.

  • State laws may restrict reasons for cancellation.

  • Cancellation means withdrawing coverage for the remaining policy period.

  • The insured receives a prorated refund.

  • A prorated refund equals the unearned premium for the period coverage was not provided.

  • Example: An insurer cancels a 12-month policy after 3 months. They earned 25% of the premium and must return 75%.

Insured's Right to Cancel
  • Insureds can cancel policies without providing a reason.

  • Insurers only provide a short rate refund.

  • A short rate refund is less than pro rate, as the carrier may deduct administrative expenses (typically 5% of the unearned premium).

Exam Tip
  • Understand the differences between pro rata, short rate, and flat rate refunds, and when each is used.

Nonrenewal
  • Nonrenewal: An insurer decides not to continue coverage after the current policy period.

  • Coverage expires on the declarations page date; the insurer is not liable for damages after that date.

  • Insurers must give advance notice of nonrenewal, allowing insureds to find replacement coverage or appeal.

  • Advance notice requirements vary by policy type and state law.

Exam Tip
  • Pay attention to state-specific nonrenewal notice requirements, as they may differ from generic policy forms.

Lapse
  • Lapse: A policy terminates due to the insured's inaction (failure to pay). It is not a cancellation or nonrenewal.

  • Coverage ceases when premium payments are not made, and the value of paid premiums is used up.

  • Insurers send notices before and after a policy lapses.

Grace Periods
  • A grace period is a defined time after the premium due date during which the policyholder can pay without a lapse in coverage.

  • Mandated for life and health insurance, but generally not required for property and casualty contracts.

  • States require advance written notice of pending cancellation for nonpayment (usually 10+ days).

Limits of Liability

Policy Limits
  • Policy limits are the maximum coverage amounts stated in the declarations.

  • The insured property's value and the insured's interest define property insurance coverage limits.

  • Liability policies define limits differently, with the insured choosing the amount of coverage.

  • Insureds must pay any claim settlements or judgments exceeding policy limits.

  • Insurers pay no more than the legally obligated amount based on policy limits.

Property Policy Limits
  • Property insurance indemnifies for damage or total loss.

  • The maximum payout is the lesser of the property's total value or the policy limit.

  • Example : A home valued at \$200,000 is insured for \$120,000; the insurer pays up to \$120,000.

  • Insurers require property holders to carry a certain amount of insurance on their property to receive full coverage for smaller claims.

  • 80% of the property's value if they wish to be fully reimbursed for smaller claims.

  • In personal lines, this requirement is known as insurance to value, and in commercial lines, this requirement is known as coinsurance.

Exam Tip
  • insurance to value refers to a personal lines policy, and coinsurance refers to a commercial lines policy.

  • The licensing exam will not use these terms interchangeably

  • Example question:

    • M has a home with replacement cost of $250,000, but only insures it under a homeowner's policy for $100,000. Which common requirement for property policies is m not fulfilling?

    • a. Coinsurance b, limit of liability c, insurance to value d, contribution by equal shares.

    • Answer: c, insurance to value.

Coinsurance

  • The coinsurance clause, also known as the insurance to value clause, is most commonly used in policies that cover property based on replacement cost.

  • It specifies the minimum coverage an insured must purchase to receive full reimbursement for a loss.

  • Contracts usually define the minimum as a percentage of the property's replacement cost or value, with the most common percentage in use being 80%.

  • The money needed to date to restore damaged property to its former condition before a loss or replace it with a new item of like kind and quality, whichever costs less.

Purpose and Definition
  • The coinsurance clause requires the insurer to fully insure the covered property by buying an amount equal to or greater than the minimum amount stated in the policy.

  • Contracts usually defined as minimum as a percentage of the property's replacement cost or value, with the most common percentage in use being 80%.

  • Remember, replacement cost is the money needed to date to restore damaged property to its former condition before a loss or replace it with a new item of like kind and quality, whichever costs less.

  • If the insured maintains the required level of insurance, the insurance company will pay the property's replacement cost if the partial loss occurs.

  • If the insured fails to maintain the required amount of insurance, the insurer will only pay a portion of the property's replacement cost based on how underinsured the property was at the time of loss.

  • Makes adequate levels of property insurance a win win proposition for both insurers and insured.

Calculation and Penalties
  • When an insured buys less than the required minimum coverage based on a percentage of the property's value, the company does not fully cover partial, smaller losses.

  • This reduction is known as the coinsurance penalty.

  • To calculate the coinsurance penalty when a policyholder is underinsured, use the following formula.

  • Insurance Bought \/ Insurance Required \times Loss = Settlement Amount Paid by Insurer$$Insurance Bought \/ Insurance Required \times Loss = Settlement Amount Paid by Insurer$$

  • Meeting the coinsurance requirement guarantees full replacement cost coverage for partial losses, even if the required coinsurance amount is less than property's full value.

  • Sandy owns a home with a total replacement cost of \$100,000. Sandy's insurance company has an insurance to value cost that requires the home to be insured for at least 80% of its replacement cost for smaller claims to be paid at full replacement cost.

  • So Sandy decides to insure the home for \$80,000 to meet this requirement. Sandy suffers a covered partial loss of \$5,000.

  • Sandy would still receive the full replacement cost of \$5,000 for her loss even though she isn't carrying \$100,000 of insurance to match her home's full replacement cost.

Example One
  • An insured property has a replacement cost of \$100,000. The coinsurance percentage is 80%.

  • Therefore, the insurance company will consider the policy older to be adequately fully insured if the policy holder purchases \$80,000 of insurance.

  • (80%×$100,000)(80\% \times \$100,000)$$(80\% \times \$100,000)$$

  • Unfortunately, the insured only buys \$40,000 of coverage and is therefore underinsured.

  • If the insured suffers a partial loss of \$4,000, the insurance company will only pay a portion of any partial loss.

  • Coinsurance Calculation

  • $40,000÷$80,000×$4,000=SettlementAmountPaidbyInsurer\$40,000 \div \$80,000 \times \$4,000 = Settlement Amount Paid by Insurer$$\$40,000 \div \$80,000 \times \$4,000 = Settlement Amount Paid by Insurer$$

  • Settlement Amount

  • 0.50×$4,000=$2,0000.50 \times \$4,000 = \$2,000$$0.50 \times \$4,000 = \$2,000$$

  • \$2,000 = Settlement Amount Paid by Insurer

Exam Tip
  • Remember to divide the amount bought by the amount needed to satisfy the coinsurance requirement, not the actual value of the property being insured.

  • Also, you may need to calculate the amount needed by multiplying the coinsurance percentage by the value of the insured property. This tip applies to scenarios involving replacement cost coverage.

  • If the amount to be paid after calculating the coinsurance penalty, in this case, a 2,000 settlement is less than the ACV, then the insured receives the ACV.

Example Two
  • Insured property has a replacement cost of \$100,000, and the insured's policy has an 80% coinsurance clause.

  • The insured only has a total of \$60,000 of coverage in force.

  • If property suffers a covered loss with an RC of \$10,000 and an actual cash value of \$7,000, how much will the insurer pay?

    • Replacement cost = \$100,000.

    • Insurance required = \$80,000 (80% x \$100,000 replacement cost).

    • Insurance in force = \$60,000

    • Partial loss = \$10,000 RC \$7,000 ACV

  • Coinsurance Calculation

  • $60,000÷$80,000×$10,000=SettlementAmount\$60,000 \div \$80,000 \times \$10,000 = Settlement Amount$$\$60,000 \div \$80,000 \times \$10,000 = Settlement Amount$$

  • Settlement Amount

  • 0.75×$10,000=$7,5000.75 \times \$10,000 = \$7,500$$0.75 \times \$10,000 = \$7,500$$

  • Answer: \$7,500, The policy holder is under insured by 25%.

Total vs. Partial Loss
  • The coinsurance provision does not apply to total loss situations.

  • The total amount that the property is insured for will be paid if a total loss occurs, regardless of whether the insured has reached the required percentage of insurance for the value of the property.

  • Example: A home is valued at \$200,000, and the homeowner has only insured it for \$100,000. A fire destroys the home, and it is declared a total loss. The coinsurance penalty does not apply, and the insurance company will pay the full \$100,000 minus any deductibles that the home was insured for.

Exam Tip
  • Be alert for questions on a state insurance exam that appear to ask for a coinsurance calculation and at the same time, describe the total loss of one's property.

  • Remember, the coinsurance requirement only applies to claims for partial losses, not total losses.

  • Similarly, don't fall for the trap of selecting the property's replacement cost is the answer to a total loss coinsurance question.

Example One
  • Carrie suffers a total loss of his home value of \$300,000 Carrie insures the home under a homeowner's policy with \$120,000 of coverage, and the policy contains an insurance to value requirement of 80%. How much will Carrie's insurer pay for the loss?

  • Answer: \$120,000, Because the question is about a total loss, we do not need to worry about using the coinsurance formula.

Example Two
  • Curry suffers a total loss of his home value to \$300,000. Carrie insures the home under a homeowner's policy with \$120,000 of coverage, and the policy contains a \$1,000 deductible as well as an insurance to value requirement of 80%. How much will Carrie's insurer pay for the loss?

  • Answer \$119,000, We still do not need to worry about the coinsurance formula because the question is about a total loss. Carrie will receive his policy limit of \$120,000 minus his \$1,000 deductible.

Liability/Casualty Policy Limits

  • This section will look at the following concepts that apply to casualty insurance policy limits.

Split Limits
  • Split limits are used to represent separate limits for different categories of liability losses.

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

  • These are most commonly found in auto insurance policies.

  • A per person per occurrence limit for bodily injury. This is the most that will be paid to any one person involved in an accident for bodily injury damages

  • A per occurrence accident limit for bodily injury. This is the most that will be paid for any one accident for bodily injury damages, regardless of how many individuals are injured.

  • A per occurrence limit for property damage. This is the most that will be paid for property damages for any one accident.

  • Split limits are expressed as three numbers and separated by forward slashes. For instance, a policy that provides 10,000 per person for bodily injury. 20,000 per accident for bodily injury, and 10,000 per accident for property damage would be written as limits of

    • 10/20/10

Combined Single
  • A single limit is a stated amount available for all damages arising from one occurrence or accident.

  • Example: \$200,000 to cover all damage claims arising from a single accident.

  • A combined single limit is a total policy limit per occurrence.

Per Location
  • A per location limit is the most the policy will pay for any claims that occur at one location.

  • This limit is used mostly in commercial policies to separate limits between two or more business properties.

Restoration/Non-Reduction of Limits
  • Policy contracts have restoration of limits cost that indicates either.

  • The limits are restored after a total loss is paid or paying the loss does not cause any limit reduction whatsoever or the policy is ended, and the prorated refund is issued to the insured.

Aggregate Limit
  • An aggregate limit is the total amount of policy will pay for all covered losses that occur during a given policy period, regardless of the total number of claims brought by any number of claimants.

  • The aggregate limit resets to the original amount on the anniversary or renewal of the policy.

General vs. Products-Completed Operations

  • In a commercial general liability contract, the general aggregate limit is the most the policy will pay in a policy period for all losses relating to bodily injury, property damage, and personal and advertising liability.

  • The general aggregate limit does not include bodily injury or property damage caused by product and completed operations.

  • The products completed operations aggregate limit is an aggregate limit separate from the general aggregate limit.

  • It specifically covers losses related to products liability and work that has been completed and is now in use by Apportionment apportionment describes how losses will be allocated between all insurance companies that ensure the same piece of property of the loss were to occur.

  • Primary and excess coverage, a policy that provides primary coverage is the first contract responsible to pay for claims due to a covered loss. An excess insurance policy is second layer of coverage and picks up where the underlying policy left off up to the excess coverage limit.

Primary and Excess Coverage
  • A policy that provides primary coverage is the first contract responsible to pay for claims due to a covered loss.

  • An excess insurance policy is second layer of coverage and picks up where the underlying policy left off up to the excess coverage limit.

  • Example Question

  • Brandi has a primary insurance policy through company x with a liability limit of \$50,000. Additionally, she purchases an excess policy through company y that provides an extra \$100,000 of liability coverage. If Brandi is held liable for a \$120,000 loss that is covered under both policies, how much coverage will be provided by company y a?

  • Answer. The correct answer is b. \$70.000.The first fifty thousand dollars of the loss will be covered by company x because they are the primary insurer. Once company x's \$50,000 limit is exhausted, then company y will pay the remaining 70,000.

Contribution by Equal Shares
  • The contribution by equal shares provision that dictates the amount an insurer will be required to pay when a loss is covered by multiple policies simultaneously.

  • Under this form of loss payment, each insurer that is responsible for covering a loss will pay an equal amount of the loss until the lowest policy limit among them is exhausted.

Example One
  • Company x and company y are both responsible for paying a \$100,000 liability loss according to the terms of their issued policies. Both policies have a liability limit of \$100,000. The contribution by equal shares provision, both company a and company b will pay \$50,000 each for the loss.

Example Two
  • Company x and company y are both responsible for paying a \$100,000 liability loss according to the terms of their issued policies. Company x's policy has a limit of \$30,000 and company y's policy has a limit of \$100,000 and the loss will be paid according to the contribution by equal shares provision under these circumstances.

  • Each company will pay equally until company x's \$30,000 limit is reached for a total of \$60,000, after which company y will be responsible for the remaining \$40,000. So company x's final payment total will be its liability limit of \$30,000 and company y's final payment total will be \$70,000.

Pro Rata Share
  • The other insurance clause of the policy offers a formula for multiple insurers to share coverage of the same claim based on the concept of pro rata liability.

  • When coverage by more than one company is in effect on the same property at the time of the loss, instead of sharing the liability payments equally, a company will instead pay a portion of the loss that is proportional to its coverage limits as compared to the total coverage available from all policies that cover the loss.
    Formula
    Liabilityperinsurer=Insurerscoverage/TotalinsuranceinforcexLossamountLiability per insurer = Insurer's coverage / Total insurance in force x Loss amount$$Liability per insurer = Insurer's coverage / Total insurance in force x Loss amount$$

Example One
  • Let's assume there is a \$10,000 loss that is covered by both company a and company b. Company a has a liability limit of \$70,000, and company b has a liability limit of \$30,000, combining for a total of \$100,000. Company a will be responsible 70% of the loss, and Company B will be responsible for 30% of the loss.

  • Company A

    • $70,000÷$100,000=0.70\$70,000 \div \$100,000 = 0.70$$\$70,000 \div \$100,000 = 0.70$$

    • 0.70×$10,000=$7,0000.70 \times \$10,000 = \$7,000$$0.70 \times \$10,000 = \$7,000$$

  • Company B

    • $30,000÷$100,000=0.30\$30,000 \div \$100,000 = 0.30$$\$30,000 \div \$100,000 = 0.30$$

    • 0.30×$10,000=$3,0000.30 \times \$10,000 = \$3,000$$0.30 \times \$10,000 = \$3,000$$

Example Two
  • Assume a property has a value of \$200,000 and is insured as follows.

  • Company X, \$100,000

  • Company y \$50,000

  • Company C, \$50,000

  • If the \$100,000 loss occurs that is covered by all three, three policies. Pro rata liability will be distributed to each company as follows.

  • Company X

    • $100,000÷$200,000=0.50\$100,000 \div \$200,000 = 0.50$$\$100,000 \div \$200,000 = 0.50$$

    • 0.50×$100,000=$50,0000.50 \times \$100,000 = \$50,000$$0.50 \times \$100,000 = \$50,000$$

  • Company Y

    • $50,000÷$200,000=0.25\$50,000 \div \$200,000 = 0.25$$\$50,000 \div \$200,000 = 0.25$$

    • 0.25×$100,000=$25,0000.25 \times \$100,000 = \$25,000$$0.25 \times \$100,000 = \$25,000$$

  • Company Z

    • $50,000÷$200,000=0.25\$50,000 \div \$200,000 = 0.25$$\$50,000 \div \$200,000 = 0.25$$

    • 0.25×$100,000=$25,0000.25 \times \$100,000 = \$25,000$$0.25 \times \$100,000 = \$25,000$$

Non-concurrency
  • Umbrella policies or excess liability contracts require that coverage provided by a separate and underlying policy must be of minimum coverage limit and be exhausted before the umbrella will take over coverage.

  • Nonconcurrency happens when the umbrella and the underlying policy or two individual policies covering the same property, both apply to identical loss exposure, but the separate policies have different perils or different start and expiration dates of coverage.

Commercial Insurance Provisions

  • This section discusses a few provisions that apply to commercial lines insurance.

  • Now, you simply need to be familiar with the basic concepts presented as commercial insurance will be discussed later in the course. Personal lines courses will not contain commercial chapters.

Claims Made Policy
  • A claims made policy is a type of policy that provides coverage as of the time a claim is made, regardless of when the event that led to the claim took place.

  • Instead of relying on when the actual event occurred that resulted in damages, a claims made policy only cares about when the claim was actually made.

  • To be covered, claims must be made during the policy period.

Retroactive Date
  • The retroactive date is a common claims made policy provision stating that coverage will not be provided for claims resulting from a wrongful act that took place prior to the date specified in the provision, regardless of if the claim is made during the policy period.

  • Prevent the insurer from being forced to provide coverage for incidents known to the insurer that may result in a future claim, and to prevent the insurer from being forced to provide coverage for claims that may arise from events or incidents that occurred far in the past.

Extended Reporting Period (Tail)
  • The extended reporting period, also known as the coverage tail allows an insurer to report claims even after their claims made policy has expired.

  • A claims made policy typically provides a thirty or sixty day basic extended reporting period automatically, but longer periods may be purchased.

Named Insured Provisions

  • Previously discussed, the insured is an individual person or legal entity corporation indicated in the declarations page of the property contract whose interests are covered against loss from perils named or not excluded as stated in the contract. named insured, severability, duties following a loss, assignment, abandonment, and waiver of rights.

Severability
  • The severability of interest clause in an insurance policy states that coverage applies to each insured under the policy as if a separate policy were issued to each of them, however, all insureds under the policy are still subject to the same coverage limits. If the limit of liability is \$100,000, then each insured is only afforded \$100,000 total, not \$100,000 each.

Duties After Loss
  • Duties by the insured after a loss include,

    • Immediate notice of claim to the company in writing is specified, but telephoning the insurance agent is also deemed to meet this criterion under modern interpretation.

    • Prevent further loss of property from damage under reasonable conditions. Damaged and undamaged property must be separated to determine loss.

    • Inventory, the loss means compiling a complete list of destroyed, damaged, and undamaged property.

    • Police reports are required in case of a theft.

    • The insured agrees not to make any voluntary payments.

Assignments
  • Property contracts prohibit the assignment, I e, transfer of any right or duties enjoyed by the insurer to any other party without the written permission of the insurance company through what is called the anti assignment clause. Deceased insured's rights and duties under a policy will typically be assigned to their legal representative.

Abandonment
  • Under the terms of the abandonment provision. The insured is prohibited from abandoning damaged property to the insurer for repair or disposal.

Insurer Provisions

  • This section will explore the following conditions related to the insurance company. Claim settlement options, duty to defend, liberalization, subrogation, right of salvage, vacancy or on occupancy, appraisal, and arbitration mediation.

Claim Settlement Options
  • Available options available to the insurer vary depending on if it is a property or liability contract. In a property policy, the company can opt to pay a claim based on the value of the property by either repairing it or replacing it. Liability insurance contracts contain provisions making it clear that when a claim is filed against the insured, the insurer has a duty to defend the insured against the claim.

Duty to Defend
  • Liability insurance contracts contain provisions making it clear that when a claim is filed against the insured, the insurer has a duty to defend the insured against the claim.

  • If the limit of liability as stated in the declarations is exhausted by a claim, then duty of the insurer to defendants.

Liberalization
  • Within sixty sixty days of buying a personal lines policy or during the policy period, the insurer amends the policy and broadens coverage to contain more favorable terms or provide more coverage benefits with no additional premium cost.

Subrogation
  • Under the subrogation clause of an indemnity contract, the insurance company has the right to recover amounts it has paid directly to its insured as a result of damages caused by a third party. This clause also prevents the insured from collecting more than one time on a single loss.

  • Example, Sally caused damages to Bobs property, company H would be able to make her reimburse Company H for their insurance payment.

Right of Salvage
  • Salvage value is the value of insured property after its useful life has ended, and the right to salvage provision states that the insurer has the right to the salvage value of property when a total loss claim has been paid for that property.

Vacancy or Unoccupancy
  • If the property is vacant, the policy coverages are eliminated.

  • Vacancy describes a dwelling or other structure that has no people and no personal property or contents within it.

  • Unoccupancy describes a dwelling or other structure that has no people inside it but still contains personal property or contents within it.

Appraisal
  • The appraisal clause of a property contract is a condition in a property policy that addresses a situation in which the insured and the insurer cannot agree on the value, amount, of the loss.

Arbitration
  • The arbitration clause is similar to appraisal in that it deals with dispute resolution, but it is not limited to loss settlement disputes.

  • For the value of a loss, appraisal is used. Any other dispute, arbitration is to be used.

Third Party Provisions

  • not parties to the insurance contract itself, but provisions must still be in place to address how third parties will be interacted with under certain circumstances.

Standard Mortgage Clause
  • When a lender is involved in the purchase of property that is insured. Third party rights exist directly between the insurer and the mortgage until the mortgage is fully repaid by the insured.A mortgagee owns a contractual right to recover for a loss even if a policy holder has violated conditions under the insurance policy that would normally prevent recovery.

Loss Payable Clause
  • The insurer may pay loss to a third party possessing an insurable interest in the being insured, such as an additional insured. Instead of paying the named insured directly, the authorization for the insurer to pay a third party in the event of a loss is contained in the loss payable clause.

No Benefit to the Bailey
  • Bailey is a person or entity who has taken care, custody, control, or possession in some fashion of property from another. Property is commonly entrusted to A Bailey for the storage, repair, or servicing of the property. The no benefit to Bailey clause states that if a covered loss occurs while property is in the possession of A Bailey, the insurance policy will pay the insured, not benefit the Bailey.


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Property and Casualty Insurance Provisions

Common Policy Provisions

Introduction to Insurance Policy Provisions

  • Most property and casualty insurance policies share common provisions.

  • These provisions dictate:

    • Dispute resolution between insured and insurer.

    • Application of policy limits.

    • Duties of the insured and insurer.

    • Loss payment procedures.

  • Non-compliance can lead to:

    • Claim denial.

    • Contract rescission.

    • Legal action.

  • This chapter covers fundamental provisions in property and casualty contracts.

  • Key topics:

    • Common policy provisions

    • Limits of liability

    • commercial insurance provisions

    • Named insured provisions

    • Insurer provisions

    • Third party provisions.

  • State-specific details are discussed separately.

Learning Objectives

  • Identify and describe common policy provisions related to:

    • Insureds.

    • Policy periods and territories.

    • Deductibles.

    • Cancellation and non-renewal.

  • Explain the coinsurance provision, calculate minimum coverage, and understand penalties for non-compliance.

  • Differentiate types of liability policy limits.

  • Explain how "other insurance" and loss payment provisions affect claims when multiple insurers are involved.

  • Discuss commercial provisions detailing how a claims-made policy functions.

  • Describe the duties, rights, and restrictions for insureds and insurers.

  • Explain the rights and restrictions imparted on third parties by multiple third party provisions.

Exam Tip

  • State exams distinguish policy provisions from the conditions section of an insurance contract.

  • The condition section contains many policy provisions, but the terms are not interchangeable.

  • Example question:

    • John wants to verify how his policy will pay a loss if he has multiple policies that cover the same loss. John should review which section of his policy for this information?

    • a. Provisions b. Insuring agreement c. Declarations d. Conditions

    • Answer: d. Conditions

  • The condition section of John's policy will contain the loss settlement and other insurance provisions that answer his questions.

Common Policy Provisions

  • This section looks at common provisions found in most property and casualty insurance contracts.

  • Topics:

    • Insured

    • Named insured, first name

    • Additional insured

    • Policy period

    • Policy territory

    • Deductibles

    • Cancellation and nonrenewal

    • Lapse

    • Grace period

The Insured
  • The insured is the individual, person, or legal entity (corporation) covered by an insurance policy.

  • The declarations page specifies who is covered against loss from named or not excluded perils.

  • A policy may identify an insured by name or by description (e.g., job title or status).

Named Insureds
  • Named insureds are those listed by name or title on the declarations page.

  • In property insurance, a party must be named or defined as an insured to have the legal right to recover directly from the insurance company.

  • Example: Tenants need their own renter's policy; they cannot claim under the landlord's policy for personal property losses.

  • Third parties may have liability coverage recovery rights even if not explicitly named in the policy.

  • Parties can recover if they have the right to collect under a policy, whether named or not, depending on the loss circumstances.

  • Third parties may recover from another person's insurance company for damages they suffer due to negligence.

First Named Insured
  • A policy may have multiple named insureds, but only one is the "first named insured."

  • The first named insured is listed first on the declarations page.

  • In commercial insurance, the first named insured is the only party authorized to:

    • Exercise contractual rights.

    • Initiate policy changes.

  • They are also responsible for:

    • Premium payments.

    • Receiving and responding to policy correspondence (e.g., cancellation and renewal notices).

Additional Insureds
  • Additional insureds are third parties with an insurable interest in the policy's subject.

  • Often, they are entities that:

    • Lease property to the insured.

    • Lend money for purchasing property.

  • Example: Global Copiers Inc. might require RC Copy Service to list Global as an additional insured on RC's Business Owner's Policy (BOP) until the lease expires.

  • Mortgage companies and lending institutions are also commonly added as additional insureds.

Other Insureds
  • Individuals not named may be covered under certain conditions.

  • Auto insurance covers anyone driving the insured car with permission.

  • Homeowners insurance covers property of guests on the insured premises in certain situations.

  • Example: A guest's property is damaged at a friend's house due to a covered peril; the guest is covered, even if not named.

  • This does not apply to renters or borders unless they are family.

Policy Period
  • The policy period, found on the declarations page, specifies when coverage is active.

  • Losses are generally paid only if they occur during the policy period.

  • Exceptions may apply to commercial policies.

  • Policy periods vary by insurance type and insurer, and may be dictated by state law.

Policy Territory
  • Insurance contracts often limit coverage geographically.

  • The policy territory defines these geographical limits.

  • Some contracts offer worldwide coverage, while others specify areas like the United States, its possessions and territories, Puerto Rico, and Canada.

Deductibles
  • A deductible requires the insured to pay a portion of covered losses.

  • The insurer pays amounts exceeding the deductible.

  • Higher deductibles result in lower premiums.

  • If a loss is less than the deductible, the insured bears the entire cost.

  • Example: Belinda has a \$1,500 deductible; if a tree limb causes \$1,400 damage, she cannot file a claim.

  • Deductibles can lower insurance costs by reducing carrier involvement in small claims.

  • Insureds can use deductibles to manage premiums based on their ability to pay initial loss costs.

  • Deductibles are often a specified dollar amount but can be a percentage of coverage (e.g., earthquake endorsements).

  • Deductibles act as a form of risk-sharing.

Cancellation and Nonrenewal
  • Cancellation: A policy ends before its stated expiration date.

  • The company keeps earned premiums (for coverage already provided).

  • Unearned premium (for coverage not yet provided) must be returned.

  • Refunds can be pro rate or short rate, depending on who initiated the cancellation.

  • Rescission: If the policy is treated as if it never existed, a flat rate refund is issued (full refund).

Insurer's Right to Cancel
  • Insurers must provide advance written notice as required by state statute.

  • State laws may restrict reasons for cancellation.

  • Cancellation means withdrawing coverage for the remaining policy period.

  • The insured receives a prorated refund.

  • A prorated refund equals the unearned premium for the period coverage was not provided.

  • Example: An insurer cancels a 12-month policy after 3 months. They earned 25% of the premium and must return 75%.

Insured's Right to Cancel
  • Insureds can cancel policies without providing a reason.

  • Insurers only provide a short rate refund.

  • A short rate refund is less than pro rate, as the carrier may deduct administrative expenses (typically 5% of the unearned premium).

Exam Tip
  • Understand the differences between pro rata, short rate, and flat rate refunds, and when each is used.

Nonrenewal
  • Nonrenewal: An insurer decides not to continue coverage after the current policy period.

  • Coverage expires on the declarations page date; the insurer is not liable for damages after that date.

  • Insurers must give advance notice of nonrenewal, allowing insureds to find replacement coverage or appeal.

  • Advance notice requirements vary by policy type and state law.

Exam Tip
  • Pay attention to state-specific nonrenewal notice requirements, as they may differ from generic policy forms.

Lapse
  • Lapse: A policy terminates due to the insured's inaction (failure to pay). It is not a cancellation or nonrenewal.

  • Coverage ceases when premium payments are not made, and the value of paid premiums is used up.

  • Insurers send notices before and after a policy lapses.

Grace Periods
  • A grace period is a defined time after the premium due date during which the policyholder can pay without a lapse in coverage.

  • Mandated for life and health insurance, but generally not required for property and casualty contracts.

  • States require advance written notice of pending cancellation for nonpayment (usually 10+ days).

Limits of Liability

Policy Limits
  • Policy limits are the maximum coverage amounts stated in the declarations.

  • The insured property's value and the insured's interest define property insurance coverage limits.

  • Liability policies define limits differently, with the insured choosing the amount of coverage.

  • Insureds must pay any claim settlements or judgments exceeding policy limits.

  • Insurers pay no more than the legally obligated amount based on policy limits.

Property Policy Limits
  • Property insurance indemnifies for damage or total loss.

  • The maximum payout is the lesser of the property's total value or the policy limit.

  • Example : A home valued at \$200,000 is insured for \$120,000; the insurer pays up to \$120,000.

  • Insurers require property holders to carry a certain amount of insurance on their property to receive full coverage for smaller claims.

  • 80% of the property's value if they wish to be fully reimbursed for smaller claims.

  • In personal lines, this requirement is known as insurance to value, and in commercial lines, this requirement is known as coinsurance.

Exam Tip
  • insurance to value refers to a personal lines policy, and coinsurance refers to a commercial lines policy.

  • The licensing exam will not use these terms interchangeably

  • Example question:

    • M has a home with replacement cost of $250,000, but only insures it under a homeowner's policy for $100,000. Which common requirement for property policies is m not fulfilling?

    • a. Coinsurance b, limit of liability c, insurance to value d, contribution by equal shares.

    • Answer: c, insurance to value.

Coinsurance

  • The coinsurance clause, also known as the insurance to value clause, is most commonly used in policies that cover property based on replacement cost.

  • It specifies the minimum coverage an insured must purchase to receive full reimbursement for a loss.

  • Contracts usually define the minimum as a percentage of the property's replacement cost or value, with the most common percentage in use being 80%.

  • The money needed to date to restore damaged property to its former condition before a loss or replace it with a new item of like kind and quality, whichever costs less.

Purpose and Definition
  • The coinsurance clause requires the insurer to fully insure the covered property by buying an amount equal to or greater than the minimum amount stated in the policy.

  • Contracts usually defined as minimum as a percentage of the property's replacement cost or value, with the most common percentage in use being 80%.

  • Remember, replacement cost is the money needed to date to restore damaged property to its former condition before a loss or replace it with a new item of like kind and quality, whichever costs less.

  • If the insured maintains the required level of insurance, the insurance company will pay the property's replacement cost if the partial loss occurs.

  • If the insured fails to maintain the required amount of insurance, the insurer will only pay a portion of the property's replacement cost based on how underinsured the property was at the time of loss.

  • Makes adequate levels of property insurance a win win proposition for both insurers and insured.

Calculation and Penalties
  • When an insured buys less than the required minimum coverage based on a percentage of the property's value, the company does not fully cover partial, smaller losses.

  • This reduction is known as the coinsurance penalty.

  • To calculate the coinsurance penalty when a policyholder is underinsured, use the following formula.

  • Insurance Bought \/ Insurance Required \times Loss = Settlement Amount Paid by Insurer

  • Meeting the coinsurance requirement guarantees full replacement cost coverage for partial losses, even if the required coinsurance amount is less than property's full value.

  • Sandy owns a home with a total replacement cost of \$100,000. Sandy's insurance company has an insurance to value cost that requires the home to be insured for at least 80% of its replacement cost for smaller claims to be paid at full replacement cost.

  • So Sandy decides to insure the home for \$80,000 to meet this requirement. Sandy suffers a covered partial loss of \$5,000.

  • Sandy would still receive the full replacement cost of \$5,000 for her loss even though she isn't carrying \$100,000 of insurance to match her home's full replacement cost.

Example One
  • An insured property has a replacement cost of \$100,000. The coinsurance percentage is 80%.

  • Therefore, the insurance company will consider the policy older to be adequately fully insured if the policy holder purchases \$80,000 of insurance.

  • (80%×$100,000)(80\% \times \$100,000)

  • Unfortunately, the insured only buys \$40,000 of coverage and is therefore underinsured.

  • If the insured suffers a partial loss of \$4,000, the insurance company will only pay a portion of any partial loss.

  • Coinsurance Calculation

  • $40,000÷$80,000×$4,000=SettlementAmountPaidbyInsurer\$40,000 \div \$80,000 \times \$4,000 = Settlement Amount Paid by Insurer

  • Settlement Amount

  • 0.50×$4,000=$2,0000.50 \times \$4,000 = \$2,000

  • \$2,000 = Settlement Amount Paid by Insurer

Exam Tip
  • Remember to divide the amount bought by the amount needed to satisfy the coinsurance requirement, not the actual value of the property being insured.

  • Also, you may need to calculate the amount needed by multiplying the coinsurance percentage by the value of the insured property. This tip applies to scenarios involving replacement cost coverage.

  • If the amount to be paid after calculating the coinsurance penalty, in this case, a 2,000 settlement is less than the ACV, then the insured receives the ACV.

Example Two
  • Insured property has a replacement cost of \$100,000, and the insured's policy has an 80% coinsurance clause.

  • The insured only has a total of \$60,000 of coverage in force.

  • If property suffers a covered loss with an RC of \$10,000 and an actual cash value of \$7,000, how much will the insurer pay?

    • Replacement cost = \$100,000.

    • Insurance required = \$80,000 (80% x \$100,000 replacement cost).

    • Insurance in force = \$60,000

    • Partial loss = \$10,000 RC \$7,000 ACV

  • Coinsurance Calculation

  • $60,000÷$80,000×$10,000=SettlementAmount\$60,000 \div \$80,000 \times \$10,000 = Settlement Amount

  • Settlement Amount

  • 0.75×$10,000=$7,5000.75 \times \$10,000 = \$7,500

  • Answer: \$7,500, The policy holder is under insured by 25%.

Total vs. Partial Loss
  • The coinsurance provision does not apply to total loss situations.

  • The total amount that the property is insured for will be paid if a total loss occurs, regardless of whether the insured has reached the required percentage of insurance for the value of the property.

  • Example: A home is valued at \$200,000, and the homeowner has only insured it for \$100,000. A fire destroys the home, and it is declared a total loss. The coinsurance penalty does not apply, and the insurance company will pay the full \$100,000 minus any deductibles that the home was insured for.

Exam Tip
  • Be alert for questions on a state insurance exam that appear to ask for a coinsurance calculation and at the same time, describe the total loss of one's property.

  • Remember, the coinsurance requirement only applies to claims for partial losses, not total losses.

  • Similarly, don't fall for the trap of selecting the property's replacement cost is the answer to a total loss coinsurance question.

Example One
  • Carrie suffers a total loss of his home value of \$300,000 Carrie insures the home under a homeowner's policy with \$120,000 of coverage, and the policy contains an insurance to value requirement of 80%. How much will Carrie's insurer pay for the loss?

  • Answer: \$120,000, Because the question is about a total loss, we do not need to worry about using the coinsurance formula.

Example Two
  • Curry suffers a total loss of his home value to \$300,000. Carrie insures the home under a homeowner's policy with \$120,000 of coverage, and the policy contains a \$1,000 deductible as well as an insurance to value requirement of 80%. How much will Carrie's insurer pay for the loss?

  • Answer \$119,000, We still do not need to worry about the coinsurance formula because the question is about a total loss. Carrie will receive his policy limit of \$120,000 minus his \$1,000 deductible.

Liability/Casualty Policy Limits

  • This section will look at the following concepts that apply to casualty insurance policy limits.

Split Limits
  • Split limits are used to represent separate limits for different categories of liability losses.

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

  • These are most commonly found in auto insurance policies.

  • A per person per occurrence limit for bodily injury. This is the most that will be paid to any one person involved in an accident for bodily injury damages

  • A per occurrence accident limit for bodily injury. This is the most that will be paid for any one accident for bodily injury damages, regardless of how many individuals are injured.

  • A per occurrence limit for property damage. This is the most that will be paid for property damages for any one accident.

  • Split limits are expressed as three numbers and separated by forward slashes. For instance, a policy that provides 10,000 per person for bodily injury. 20,000 per accident for bodily injury, and 10,000 per accident for property damage would be written as limits of

    • 10/20/10

Combined Single
  • A single limit is a stated amount available for all damages arising from one occurrence or accident.

  • Example: \$200,000 to cover all damage claims arising from a single accident.

  • A combined single limit is a total policy limit per occurrence.

Per Location
  • A per location limit is the most the policy will pay for any claims that occur at one location.

  • This limit is used mostly in commercial policies to separate limits between two or more business properties.

Restoration/Non-Reduction of Limits
  • Policy contracts have restoration of limits cost that indicates either.

  • The limits are restored after a total loss is paid or paying the loss does not cause any limit reduction whatsoever or the policy is ended, and the prorated refund is issued to the insured.

Aggregate Limit
  • An aggregate limit is the total amount of policy will pay for all covered losses that occur during a given policy period, regardless of the total number of claims brought by any number of claimants.

  • The aggregate limit resets to the original amount on the anniversary or renewal of the policy.

General vs. Products-Completed Operations

  • In a commercial general liability contract, the general aggregate limit is the most the policy will pay in a policy period for all losses relating to bodily injury, property damage, and personal and advertising liability.

  • The general aggregate limit does not include bodily injury or property damage caused by product and completed operations.

  • The products completed operations aggregate limit is an aggregate limit separate from the general aggregate limit.

  • It specifically covers losses related to products liability and work that has been completed and is now in use by Apportionment apportionment describes how losses will be allocated between all insurance companies that ensure the same piece of property of the loss were to occur.

  • Primary and excess coverage, a policy that provides primary coverage is the first contract responsible to pay for claims due to a covered loss. An excess insurance policy is second layer of coverage and picks up where the underlying policy left off up to the excess coverage limit.

Primary and Excess Coverage
  • A policy that provides primary coverage is the first contract responsible to pay for claims due to a covered loss.

  • An excess insurance policy is second layer of coverage and picks up where the underlying policy left off up to the excess coverage limit.

  • Example Question

  • Brandi has a primary insurance policy through company x with a liability limit of \$50,000. Additionally, she purchases an excess policy through company y that provides an extra \$100,000 of liability coverage. If Brandi is held liable for a \$120,000 loss that is covered under both policies, how much coverage will be provided by company y a?

  • Answer. The correct answer is b. \$70.000.The first fifty thousand dollars of the loss will be covered by company x because they are the primary insurer. Once company x's \$50,000 limit is exhausted, then company y will pay the remaining 70,000.

Contribution by Equal Shares
  • The contribution by equal shares provision that dictates the amount an insurer will be required to pay when a loss is covered by multiple policies simultaneously.

  • Under this form of loss payment, each insurer that is responsible for covering a loss will pay an equal amount of the loss until the lowest policy limit among them is exhausted.

Example One
  • Company x and company y are both responsible for paying a \$100,000 liability loss according to the terms of their issued policies. Both policies have a liability limit of \$100,000. The contribution by equal shares provision, both company a and company b will pay \$50,000 each for the loss.

Example Two
  • Company x and company y are both responsible for paying a \$100,000 liability loss according to the terms of their issued policies. Company x's policy has a limit of \$30,000 and company y's policy has a limit of \$100,000 and the loss will be paid according to the contribution by equal shares provision under these circumstances.

  • Each company will pay equally until company x's \$30,000 limit is reached for a total of \$60,000, after which company y will be responsible for the remaining \$40,000. So company x's final payment total will be its liability limit of \$30,000 and company y's final payment total will be \$70,000.

Pro Rata Share
  • The other insurance clause of the policy offers a formula for multiple insurers to share coverage of the same claim based on the concept of pro rata liability.

  • When coverage by more than one company is in effect on the same property at the time of the loss, instead of sharing the liability payments equally, a company will instead pay a portion of the loss that is proportional to its coverage limits as compared to the total coverage available from all policies that cover the loss.
    Formula
    Liabilityperinsurer=Insurerscoverage/TotalinsuranceinforcexLossamountLiability per insurer = Insurer's coverage / Total insurance in force x Loss amount

Example One
  • Let's assume there is a \$10,000 loss that is covered by both company a and company b. Company a has a liability limit of \$70,000, and company b has a liability limit of \$30,000, combining for a total of \$100,000. Company a will be responsible 70% of the loss, and Company B will be responsible for 30% of the loss.

  • Company A

    • $70,000÷$100,000=0.70\$70,000 \div \$100,000 = 0.70

    • 0.70×$10,000=$7,0000.70 \times \$10,000 = \$7,000

  • Company B

    • $30,000÷$100,000=0.30\$30,000 \div \$100,000 = 0.30

    • 0.30×$10,000=$3,0000.30 \times \$10,000 = \$3,000

Example Two
  • Assume a property has a value of \$200,000 and is insured as follows.

  • Company X, \$100,000

  • Company y \$50,000

  • Company C, \$50,000

  • If the \$100,000 loss occurs that is covered by all three, three policies. Pro rata liability will be distributed to each company as follows.

  • Company X

    • $100,000÷$200,000=0.50\$100,000 \div \$200,000 = 0.50

    • 0.50×$100,000=$50,0000.50 \times \$100,000 = \$50,000

  • Company Y

    • $50,000÷$200,000=0.25\$50,000 \div \$200,000 = 0.25

    • 0.25×$100,000=$25,0000.25 \times \$100,000 = \$25,000

  • Company Z

    • $50,000÷$200,000=0.25\$50,000 \div \$200,000 = 0.25

    • 0.25×$100,000=$25,0000.25 \times \$100,000 = \$25,000

Non-concurrency
  • Umbrella policies or excess liability contracts require that coverage provided by a separate and underlying policy must be of minimum coverage limit and be exhausted before the umbrella will take over coverage.

  • Nonconcurrency happens when the umbrella and the underlying policy or two individual policies covering the same property, both apply to identical loss exposure, but the separate policies have different perils or different start and expiration dates of coverage.

Commercial Insurance Provisions

  • This section discusses a few provisions that apply to commercial lines insurance.

  • Now, you simply need to be familiar with the basic concepts presented as commercial insurance will be discussed later in the course. Personal lines courses will not contain commercial chapters.

Claims Made Policy
  • A claims made policy is a type of policy that provides coverage as of the time a claim is made, regardless of when the event that led to the claim took place.

  • Instead of relying on when the actual event occurred that resulted in damages, a claims made policy only cares about when the claim was actually made.

  • To be covered, claims must be made during the policy period.

Retroactive Date
  • The retroactive date is a common claims made policy provision stating that coverage will not be provided for claims resulting from a wrongful act that took place prior to the date specified in the provision, regardless of if the claim is made during the policy period.

  • Prevent the insurer from being forced to provide coverage for incidents known to the insurer that may result in a future claim, and to prevent the insurer from being forced to provide coverage for claims that may arise from events or incidents that occurred far in the past.

Extended Reporting Period (Tail)
  • The extended reporting period, also known as the coverage tail allows an insurer to report claims even after their claims made policy has expired.

  • A claims made policy typically provides a thirty or sixty day basic extended reporting period automatically, but longer periods may be purchased.

Named Insured Provisions

  • Previously discussed, the insured is an individual person or legal entity corporation indicated in the declarations page of the property contract whose interests are covered against loss from perils named or not excluded as stated in the contract. named insured, severability, duties following a loss, assignment, abandonment, and waiver of rights.

Severability
  • The severability of interest clause in an insurance policy states that coverage applies to each insured under the policy as if a separate policy were issued to each of them, however, all insureds under the policy are still subject to the same coverage limits. If the limit of liability is \$100,000, then each insured is only afforded \$100,000 total, not \$100,000 each.

Duties After Loss
  • Duties by the insured after a loss include,

    • Immediate notice of claim to the company in writing is specified, but telephoning the insurance agent is also deemed to meet this criterion under modern interpretation.

    • Prevent further loss of property from damage under reasonable conditions. Damaged and undamaged property must be separated to determine loss.

    • Inventory, the loss means compiling a complete list of destroyed, damaged, and undamaged property.

    • Police reports are required in case of a theft.

    • The insured agrees not to make any voluntary payments.

Assignments
  • Property contracts prohibit the assignment, I e, transfer of any right or duties enjoyed by the insurer to any other party without the written permission of the insurance company through what is called the anti assignment clause. Deceased insured's rights and duties under a policy will typically be assigned to their legal representative.

Abandonment
  • Under the terms of the abandonment provision. The insured is prohibited from abandoning damaged property to the insurer for repair or disposal.

Insurer Provisions

  • This section will explore the following conditions related to the insurance company. Claim settlement options, duty to defend, liberalization, subrogation, right of salvage, vacancy or on occupancy, appraisal, and arbitration mediation.

Claim Settlement Options
  • Available options available to the insurer vary depending on if it is a property or liability contract. In a property policy, the company can opt to pay a claim based on the value of the property by either repairing it or replacing it. Liability insurance contracts contain provisions making it clear that when a claim is filed against the insured, the insurer has a duty to defend the insured against the claim.

Duty to Defend
  • Liability insurance contracts contain provisions making it clear that when a claim is filed against the insured, the insurer has a duty to defend the insured against the claim.

  • If the limit of liability as stated in the declarations is exhausted by a claim, then duty of the insurer to defendants.

Liberalization
  • Within sixty sixty days of buying a personal lines policy or during the policy period, the insurer amends the policy and broadens coverage to contain more favorable terms or provide more coverage benefits with no additional premium cost.

Subrogation
  • Under the subrogation clause of an indemnity contract, the insurance company has the right to recover amounts it has paid directly to its insured as a result of damages caused by a third party. This clause also prevents the insured from collecting more than one time on a single loss.

  • Example, Sally caused damages to Bobs property, company H would be able to make her reimburse Company H for their insurance payment.

Right of Salvage
  • Salvage value is the value of insured property after its useful life has ended, and the right to salvage provision states that the insurer has the right to the salvage value of property when a total loss claim has been paid for that property.

Vacancy or Unoccupancy
  • If the property is vacant, the policy coverages are eliminated.

  • Vacancy describes a dwelling or other structure that has no people and no personal property or contents within it.

  • Unoccupancy describes a dwelling or other structure that has no people inside it but still contains personal property or contents within it.

Appraisal
  • The appraisal clause of a property contract is a condition in a property policy that addresses a situation in which the insured and the insurer cannot agree on the value, amount, of the loss.

Arbitration
  • The arbitration clause is similar to appraisal in that it deals with dispute resolution, but it is not limited to loss settlement disputes.

  • For the value of a loss, appraisal is used. Any other dispute, arbitration is to be used.

Third Party Provisions

  • not parties to the insurance contract itself, but provisions must still be in place to address how third parties will be interacted with under certain circumstances.

Standard Mortgage Clause
  • When a lender is involved in the purchase of property that is insured. Third party rights exist directly between the insurer and the mortgage until the mortgage is fully repaid by the insured.A mortgagee owns a contractual right to recover for a loss even if a policy holder has violated conditions under the insurance policy that would normally prevent recovery.

Loss Payable Clause
  • The insurer may pay loss to a third party possessing an insurable interest in the being insured, such as an additional insured. Instead of paying the named insured directly, the authorization for the insurer to pay a third party in the event of a loss is contained in the loss payable clause.

No Benefit to the Bailey
  • Bailey is a person or entity who has taken care, custody, control, or possession in some fashion of property from another. Property is commonly entrusted to A Bailey for the storage, repair, or servicing of the property. The no benefit to Bailey clause states that if a covered loss occurs while property is in the possession of A Bailey, the insurance policy will pay the insured, not benefit the Bailey.