Chapter 2 notes simplified

Learning objectives: 

Named peril and open peril policy

Describe different methiofs of loss valuation

Know the policy compoonents and the purpose of each

Identify and describe common policy provisions

Terms:

 Depreciation — reduction in value, particularly due to wear and tear

Earned premium — the portion of premium paid in advance that now belongs to the insurer for providing coverage for a specified period of time

Exposure units — used as a measure of the rating units or the premium base of a risk (exposure units multiplied by the rate results in the premium)

Implied warranty — a legal term meaning that a product is suitable for its intended purpose and that it fits an ordinary buyer's expectations

Inception — the date at which the insurance policy goes into effect

Negligence — the failure to use the care that a reasonable, prudent person would under the same or similar circumstances

Obsolescence — depreciation in the value of a property due to becoming outdated

Statute — a written law passed by a legislative body

Principles and Concepts

1. Insurable Interest

The financial interest in property to be insured is called insurable interest. In property and casualty insurance, insurable interest must exist at the time of loss. There are 3 requirements to prove insurable interest:

1. Legitimate financial interest in preserving the property to be insured.

2. There must be no potential for gain.

3. There must be a potential for loss.

2. Underwriting

Underwriting is the process of reviewing applications for insurance and the information on the application. In other words, it is a risk selection process.

Function

The underwriter's function refers to the operations of an insurance company where an employee, called an underwriter, is responsible for evaluating applications submitted to the insurer and determining whether a policy should be issued, and if so, the terms, conditions and rates for that policy.

Loss Ratio

Loss ratio refers to a formula used by insurance companies to compare premium income to losses, including claims paid and claim-related expenses. The formula is as follows:

(Incurred losses + Loss adjusting expense) ÷ Earned premium = Loss ratio

3. Hazards (physical, moral, morale)

Hazards are conditions or situations that increase the probability of an insured loss occurring. Conditions such as slippery floors, or congested traffic are hazards and may increase the chance of a loss occurring. Hazards are classified as physical hazards, moral hazards; or morale hazards.

1. Physical hazards are those arising from the material, structural, or operational features of the risk, apart from the persons owning or managing it.

2. Moral hazards refer to those applicants that may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

3. Morale hazard refers to an increase in the hazard presented by a risk, arising from the insured's indifference to loss because of the existence of insurance.

4. Named Perils vs. Special (Open) Perils

A peril is a specific cause of loss. Perils insured against in standard property policies include fire, wind, hail, and explosions.

Named peril is a term used in property insurance to describe the breadth of coverage provided under an insurance policy form that lists specific covered perils. No coverage is provided for unlisted perils.

Open peril is a term used in property insurance to describe the breadth of coverage provided under an insurance policy form that insures against any risk of loss that is not specifically excluded. (This term replaced the use of the term "all risks.")

5. Direct and Indirect Loss

The two types of property losses that an individual or a business may be exposed to are direct and indirect. Property insurance only covers direct losses. However, indirect losses are related to the direct loss, and insurance coverage to protect against these indirect losses often is added to property insurance policies. Direct losses mean direct physical damage to buildings and/or personal property.

1. Direct loss also includes other damage where the insured peril was the proximate cause of loss.

   1.  For example, an insured building catches fire. When the fire department applies water to put out the fire, the wall and floor coverings suffer water damage. Although water damage is not an insured peril, the damage is paid under the peril of fire because fire was the proximate cause.

2. Indirect losses, also known as consequential losses, are losses considered a result of direct loss. Such losses usually result from the time it takes to repair or replace damaged property. The most prevalent type of indirect loss for individual homeowners is the extra living expense that may be incurred by the insured while the home is being repaired. For commercial risks, the primary type of indirect or consequential loss is the loss of profits a business may suffer because of having to close down until the business is repaired.

6. Blanket vs. Specific Insurance

Blanket insurance is a single property insurance policy that provides coverage for multiple classes of property at one location, or for one or more classes of property at multiple locations. All insured properties are written for one total amount of insurance, and no single insured item is assigned a specific amount of insurance. However, different amounts may be shown for buildings in general, equipment in general, and other items.

Specific insurance is a property insurance policy that covers a specific kind or unit of property for a specific amount of insurance.

7. Basic Types of Construction

An important element in the underwriting and rating of property insurance is the type of construction of the building to be insured. A building constructed with materials that are less prone to fire damage would be more favorably rated than a building more prone to fire damage. The following are the basic classes of construction used for underwriting:

Fire-resistive — Buildings constructed with masonry and/or other materials with a fire resistance rating of 2 hours or more. Fire-resistive usually receives the most favorable rating.

Modified fire-resistive — Buildings constructed with masonry and/or other materials with a fire resistance rating between 1 hour and 2 hours.

Masonry noncombustible — Buildings constructed with masonry or fire-resistive walls and noncombustible or slow-burning floors and roof.

Noncombustible — Buildings constructed of noncombustible materials (materials that will not ignite and burn when subjected to fire).

Joisted-masonry — Buildings constructed with masonry or fire-resistive walls and combustible floors and roof.

Frame — Buildings constructed of combustible materials, or with noncombustible or slow-burning walls and combustible floors and roof. Frame usually receives the least favorable rating.

8. Loss Valuation

At the time a property insurance policy is written, the insured has several options as to how a loss to the insured property will be valued at the time of a loss. Loss valuation is a factor in determining the premium charged and the amount of insurance required.

Actual Cash Value

The actual cash value (ACV) method of valuation reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence. Usually, actual cash value is calculated as follows:

Current Replacement Cost – Depreciation = Actual Cash Value

Replacement Cost

Replacement cost is defined as the cost to replace damaged property with like kind and quality at today's price, without any deduction for depreciation. This method of loss valuation is contrary to the basic concept of indemnity because following a loss it may provide the insured with a settlement in excess of the property's actual cash value.

Functional Replacement Cost

Another loss valuation method allows the insurer, at the time of a loss, to adjust the loss on the basis of functional replacement cost, which is the cost to replace damaged property with less expensive and more modern construction or equipment. A building with lath and plaster walls may be replaced with drywall that is just as functional, but at a lower cost to repair.

Agreed Value

Agreed value is a property policy with a provision agreed upon by the insurer and insured as to the amount of insurance that represents a fair valuation for the property at the time the insurance is written and suspends any coinsurance or other contribution clauses in the policy. This type of valuation works best for items whose value does not fluctuate much. When a loss occurs, the policy pays the agreed value as specified on the policy schedule, regardless of the insured item's appreciation or depreciation.

Stated Amount

A stated amount is an amount of insurance scheduled in a property policy that is not subject to any coinsurance requirements in the event of a covered loss. This scheduled amount is the maximum amount the insurer will pay in the event of a loss.

Policy Structure

Every property or casualty policy is comprised of the following major components:

• Declarations;

• Definitions;

• Insuring agreement;

• Additional coverage;

• Conditions;

• Endorsements; and

• Exclusions and policy limits.

1. Declarations (1st page)

Declarations is the section of an insurance policy containing the basic underwriting information, such as the insured's name, address, amount of coverage and premiums, and a description of insured locations. It also contains any supplemental representations by the insured. This is usually the first page of the policy.

2. Definitions

The definitions component of an insurance policy clarifies terms used in the policy. Typically, words that are printed in bold, italics, or quotations have a definition as to their meaning in that contract.

3. Insuring Agreement or Clause

An Insuring Agreement (sometimes labeled Agreement) is the section of an insurance policy that establishes the obligation of the insurance company to provide the insurance coverages as stated in the policy. Among other things, the insuring agreement lists the parties to the contract, effective and renewal dates, the description of coverage provided, and perils. It is usually found after policy Declarations, but may be placed after Definitions.

4. Additional and Supplementary Coverage

Additional (or supplementary) coverage is a provision in an insurance policy that provides an additional amount of coverage for specific loss expense, at no additional premium. Examples: claim-related expenses, reasonable expenses incurred by an insured to protect damaged property from further loss, and defense expenses.

5. Conditions

Conditions is the section of an insurance policy that indicates the general rules or procedures that the insurer and insured agree to follow under the terms of the policy.

Following are examples of conditions:

• Inspections may be made as needed by the insurer. The insurance company reserves the right to inspect or examine the insured's location or books to determine the exact exposure for underwriting and rating purposes.

• Changes to the policy must be made by the insurer and be in writing.

• The liberalization clause ensures that if the insurer introduces improved coverage free of charge, the insured will get the benefit of the new coverage immediately and will not have to wait for policy renewal.

• Return of premium dictates the method that will be used to calculate the return premium when the policy is cancelled before the expiration date.

6. Exclusions

The exclusions section of an insurance policy details the perils that are not insured against and what persons are not insured. Exclusions restrict some of the broad terms used in the insuring agreement. This section can exclude people (except a spouse), property, and perils.

The following are examples of exclusions from coverage in a property policy: earth movement and water damage.

• Earth movement is excluded if caused by earthquake, mudflow, or a volcanic eruption; and

• Under the water damage exclusion, the following perils are not covered: flood and subsurface water, water that backs up through sewers and drains or overflows from a sump pump, or water below ground that seeps through basement walls.

7. Endorsements

Endorsements are printed addendums to a contract that are used to change the policy's original terms, conditions, or coverages. Endorsements may be included at the time the policy is issued or added during the policy term. Endorsements must be in writing, attached to the policy and signed by an executive officer of the insurer to have any effect on the contract. Endorsement may be used to add or delete coverage, or may be used to correct items such as the insured name or address.

Common Policy Provisions

1. Insureds - Named, First Named, Additional

In property and casualty insurance, an insured is anyone who is covered under the policy, whether named or not. An example of an insured would include an unnamed spouse or any resident relative that is a member of the named insured's household.

Named insured means the individual(s) whose name appears on the policy's Declarations.

First named insured is the individual whose name appears first on the policy's declaration. In commercial insurance policies, the first named insured has control of the policy and is the only insured who may cancel the policy or request changes to the policy, and also is the one responsible for paying premiums and reporting losses.

Additional insureds are individuals or businesses that are not named as insureds on the declaration page, but are protected by the policy, usually in regard to a specific interest. Additional insureds usually are added to the policy by an endorsement.

2. Policy Period

The policy period is the time period, stated on the declarations page, during which the policy provides coverage.

3. Policy Territory

The policy territory defines the location where coverage will be provided.

4. Policy Limits

Policy limits (also known as limitations) are the maximum amount an insured may collect, or for which an insured is protected under the terms of the policy.

5. Restoration and Nonreduction of Limits

Insurance policies covering property have a limit that shows the maximum amount the insurer will pay in the event of a total loss. In the event of a partial loss, the insurer only will pay for the actual amount of that loss. In the event of a partial loss and before the repairs are made, that limit is reduced by the amount of the partial loss. After the repairs are made, the policy limits are restored to the original limit.

In liability policies written with an occurrence limit, the insurer will not pay more than that limit for any one occurrence. However, the limit is restored to the original amount for the next occurrence.

Liability policies written with an aggregate limit do not restore the limit following payment for an occurrence. The policy limit is restored only on the anniversary (renewal) of the policy.

6. Cancellation and Nonrenewal

Cancellation is the termination of an in-force insurance policy, by either the insured or the insurer, prior to the expiration date shown in the policy. Termination may be voluntary, involuntary, or in mutual accordance with provisions contained in the policy.

Nonrenewal is the termination of an insurance policy at its expiration date by not offering a continuation of the existing policy or a replacement policy.

7. Deductibles

In property and casualty insurance, a deductible is a dollar amount an insured must pay on a claim before the insurance policy provides coverage. A higher deductible amount usually lowers the amount of the premium.

8. Coinsurance

The coinsurance clause states that, in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insurance on the insured property. This encourages the insured to insure the property closer to its full value. In case of a partial loss, the insurer will pay the partial loss in full if the insured has maintained the required percentage of insurance with relation to the value of the property. If the amount of insurance maintained is less than the coinsurance clause requirement, the insurer will only pay the percent of the loss that the insurance bears in relation to the amount of insurance that should have been carried. In the event of a total loss, the coinsurance clause does not operate, and the face amount of the policy is paid.

The formula for calculating coinsurance penalties is the amount of insurance carried over the amount of insurance the insured should have had, multiplied by the loss, which equals the reduced payment for loss.

(Insurance Carried ÷ Insurance Required) X Loss Amount = Loss Payment

For a $100,000 building insured with an 80% coinsurance percentage, the insured would have to carry at least $80,000 ($100,000 x .80) of insurance to meet the coinsurance requirement. If, instead, the insured only carried $40,000 of insurance and had a $10,000 loss, he would have to bear 50% of the loss due to the deficiency, or $5,000, and any deductible.

9. Other Insurance

Other insurance is a provision in an insurance policy that defines how the policy will respond if there is other valid insurance written on the same risk.

Nonconcurrency

Nonconcurrency refers to other insurance written on the same risk, but not on the same coverage basis.

Primary and Excess

A primary policy is the policy that pays first in the event of a covered loss — or in a layered program of insurance, the policy that covers the first layer of loss.

Excess policy is the policy that only pays for a loss after the primary policy has paid up to its limit. All other insurance must be exhausted before the excess policy will apply.

Pro Rata

Pro rata is a provision found in some property insurance policies that provides for the sharing of loss with other insurance that may be written on the same risk in the same proportion as their limits of insurance bear to the total of coverage of all policies covering the risk, whether collectible or not. To preserve the principle of indemnity, each policy pays a pro rata share based upon the share of the coverage. The insured cannot collect the full amount of loss from each policy.

10. Vacancy or Unoccupancy

Vacancy refers to an insured structure in which no people have been living or working, and no property has been stored for the period of time required as stated in the policy (usually 60 days).

Unoccupancy (nonoccupancy) refers to an insured structure in which no people have been living or working within the required period of time, but some property is stored.

For example, if the insured moved, the house would be considered vacant. If the insured went on vacation for 2 weeks, the house would be considered unoccupied.

11. Named Insured Provisions

First named insured is the individual whose name appears first on the policy's declaration. Under the terms of a policy, the first named insured is required to perform certain duties that include paying the premium and giving prompt notice of a claim to the insurer in the event of a loss.

Duties After Loss

In the event of a loss covered by the policy, the named insured is required to

• Protect the damaged property from further damage;

• Prepare an inventory of damaged property;

• Cooperate with the insurer in settling the loss;

• Notify the police in the case of a loss due to theft; and

• Submit to the insurer a signed sworn proof of loss within an allotted amount of time after being requested to do so.

• Assignment

• Assignment is the transfer of a legal right or interest in an insurance policy. In property and casualty insurance, assignments of policies are valid only with the prior written consent of the insurer.

Abandonment

Abandonment is the relinquishing of insured property into the hands of another, or into the possession of no one in particular. Most property insurance policies prohibit an insured from abandoning insured property following a loss, and require that the insured protect the property from further loss.

12. Appraisal

If there is a disagreement between the insured and the insurer on the value of any property loss, either party can make a written demand for an appraisal. Each party will select a competent appraiser who will then select an umpire if they are unable to agree on a fair value.

13. Insurer Provisions

Insurer provisions are used in the event of loss to repair or replace damaged property with property of like kind and quality or to adjust the loss and make payment to the insured or a person legally entitled to receive payment within 60 days of receiving the insured's proof of loss.

Liberalization

Liberalization is a property insurance clause that extends broader legislated or regulated coverage to current policies, as long as it does not result in a higher premium. For example, if the insurer introduces a new coverage that is free and improves coverage, the insured gets the benefit of the new coverage immediately (liberalization clause), and won't have to wait for their policy renewal.

Subrogation

Subrogation is the insurer's legal right to seek damages from third parties, after it has reimbursed the insured for the loss. Subrogation is based on the principle of indemnity by preventing the insured from collecting on the loss twice: once from the insurer and a second time from the party that caused the damage.

Salvage

Salvage is the amount of money realized from the sale of damaged merchandise. An insurer may have a right to salvage the damaged property in an insured loss to recover part of the paid loss.

Claim Settlement Options

At the time of loss, the insurer's loss payment options, or claim settlement options, include paying the least of the following:

• The value of the lost or damaged property;

• The cost of repairing or replacing the lost or damaged property;

• The cost of taking all or part of the property at an agreed or appraised value; or

• The cost of repairing, rebuilding or replacing the property with other property of like kind and quality.

14. Third-Party Provisions

Third-party provisions address the rights of a third party that may have a secured financial interest in the insured property.

Standard Mortgage Clause

The standard mortgage clause, also known as loss payable clause, is a basis provision of all property policies for real property. Nonmovable property such as houses and other structures is classified as real property, while movable property such as autos, mobile homes, furniture, and equipment is classified as personal property for insurance purposes. In the event of a loss to real property, payment will be made to the insured and the mortgagee as their insurable interest appears. In other words, the mortgagee's right to recover is limited to the amount of the remaining debt, and at no time will the mortgagee receive more than the insurable interest in the property. If an insurance policy is to be cancelled, a mortgagee must receive prior written notice of such cancellation.

When a mortgagee is named in a mortgagee clause attached to a fire or other direct damage policy, the loss reimbursement will be paid to the mortgagee as their interest may appear. The mortgagee's rights of recovery will not be defeated by any act or neglect of the insured. The mortgagee is also given other rights, such as bringing a suit in their own name to recover damages, paying policy premiums, and submitting proof of loss. There is nothing that either the insurer or the insured can do to defeat the position of the mortgagee.

Loss Payable Clause

The loss payable clause is the clause used to cover the interest of a secured lender in personal property. If the insurer decides to cancel or not renew a policy, the loss payee must be notified in writing.

No Benefit to the Bailee

The no benefit to the bailee provision excludes any assignment or granting of any policy provision to any person or organization holding, storing, repairing, or moving insured property for a fee. A business that has temporary possession of property of another and will do something with that property for the mutual benefit of both parties is a bailee.

Role of Application and Binders in Insurance Transactions

The application is a printed form that includes questions about a prospective insured and the desired insurance coverage and limits. It provides the underwriter with information for accepting or rejecting the prospective insured and rating the desired policy. Some policies make the application part of the policy. Misrepresentations in the application can void the policy.

A binder is a temporary agreement issued by an agent or insurer providing temporary coverage until a policy can be issued. A binder is usually in writing, but may be verbal. Binders expire when the policy is issued. However, the policy effective date would be the same as the date when the binder was issued. If the insurer declines to issue the policy, the binder expires on the date after receipt of the notice of cancellation.

Michigan Laws, Regulations and Required Provisions

1. Insurance Claims Handling

An insurer's failure to pay a claim promptly is an unfair trade practice. Such failure will result in an interest rate of 12% per year.

Insurers must let claimants know what constitutes a satisfactory proof of loss within 30 days of receipt of the claim. 

Benefits must be paid within 60 days of receiving satisfactory proof of loss.

In Michigan, the following claim settlement practices are recognized as unfair trade practices:

• Misrepresenting pertinent facts or insurance policy provisions relating to coverage;

• Failing to promptly and reasonably acknowledge and respond to communications regarding claims;

• Failing to adopt and implement reasonable standards for the prompt investigation of claims;

• Refusing to pay claims without conducting a reasonable investigation;

• Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;

• Failing to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability is reasonably clear;

• Forcing insureds to file lawsuits to receive benefits due by offering substantially less than the amounts due under the insurance policy;

• Attempting to settle a claim for less than benefits a reasonable person would expect based on advertisements;

• Attempting to settle claims based on an application that was altered without notice to or consent of the insured;

• Making a claims payment that does not explain the coverage under which each payment is being made;

• Telling claimants there is a policy of appealing arbitration awards solely to compel them to accept settlements less than the amount awarded in arbitration;

• Delaying the investigation or payment of claims by requiring claimants to submit a preliminary claim report, then to submit subsequent forms that require essentially the same information;

• Failing to settle claims where liability is clear under one portion of coverage in order to influence settlements under other portions of coverage; and

• Failing to promptly provide a reasonable explanation for the denial of a claim or for the offer of a compromise settlement.

• Failure of an insurer to maintain complete records of every complaint received between examinations by the Commissioner is an unfair trade practice. Records must include the total number of complaints, their classification by line of insurance, the nature of the complaints, and how and when the complaints were resolved.

2. Mandatory Fire Policy Provisions

In Michigan, the Standard Fire Policy (SFP) insures against loss from the perils of fire, lightning, and removal. Loss payment is determined on the basis of actual cash value.

If the insured cancels the policy, any unearned premiums are returned on a pro rata basis.

Every fire insurance policy must contain the following:

• Coverage for the actual cash value of the property at the time of loss;

• Coverage for loss by fire and lightning and pro rata coverage for 5 days for insured property removed to another location to protect it from further damage;

• Language stating that the policy may be void on the basis of misrepresentation, fraud or concealment;

• A list of the property and perils not covered under the policy.

• Language stating the policy may be cancelled at any time by the insured;

• Language stating that the policy may be cancelled at any time by the insurer with at least 10 days' notice of cancellation; and

• Language stating that if the insured and insurer fail to agree on the actual cash value or amount of the loss, then either party can request that the actual cash value be set by appraisal.

Under the replacement cost endorsement, the insurer agrees to reimburse the insured for the difference between the actual cash value of the insured property at the time the damage occurs and the amount actually spent to repair, rebuild or replace the property with new material of like size, kind and quality. Such a policy may provide that the insurer does not have to pay these amounts unless the property actually is repaired, rebuilt or replaced.

3. Cancellation and Nonrenewal

Insurers must give written notice of terminations of insurance at least 30 days prior to the date of termination. The notice must state the effective date of termination and the specific reason for the termination.

Fire insurance policies may be canceled at any time at the request of the insured. The minimum earned premium may not be less than the pro rata premium for the expired time or $25, whichever is greater. The insurer may cancel a property policy at any time by mailing notice of cancellation to the named insured no less than 10 days before cancellation is effective.

4. Termination of Authority to Represent Insurer

If a producer's authority to represent an insurer is terminated, the responsibility of an insurance producer with property rights in the renewal will continue until the existing policies of insurance are canceled, replaced, or have expired. The producer's authority during the period following notice of termination is governed by the written agreement between the producer and insurer. An insurer may not cancel or refuse to renew the policy of an insured because of the termination of a producer's contract. If the written agreement does not cover the producer's authority during this period, the producer may continue to represent the insurer in servicing existing policies, but cannot bind a new risk, renew a policy, nor increase the obligation of the insurer under the policy without the approval of the insurer. This does not apply to a life insurer, a producer of a life insurer, a producer who is an employee of an insurer, or to a producer who by contractual agreement represents only one insurer or group of affiliated insurers if the property rights in the renewal are owned by the insurer or group of affiliated insurers and the alteration of the producer's contract does not result in the cancellation or nonrenewal of any insurance policy.

As a condition of maintaining its authority to transact insurance in this state, an insurer transacting automobile insurance or home insurance cannot cancel a producer's contract or otherwise terminate a producer's authority to represent the insurer with respect to automobile insurance or home insurance, except for one or more of the following reasons:

• Malfeasance;

• Breach of fiduciary duty or trust;

• A violation of the Insurance Code;

• Failure to perform as provided by the contract between the parties; or

• Submission of less than 25 applications for home insurance and automobile insurance within the immediately preceding 12-month period.

This will not be construed as permitting a termination of an insurance producer's authority based primarily upon any of the following:

• The geographic location of the producer's home insurance or automobile insurance business;

• The actual or expected loss experience of the producer's automobile or home insurance business, related in whole or in part to the geographical location of that business; or

• The performance of the producer's obligations.

5. Michigan Property and Casualty Guaranty Association

The Michigan Property and Casualty Guaranty Association was established to protect insureds against financial loss because of insurance company insolvencies. All insurers authorized to sell insurance, other than life and health insurance, are required to be members of the Association.

Claims covered by the Association in the event of an insurer's insolvency are those that meet the following requirements:

• Derive from insurance policies issued or payable to Michigan residents;

• Are unpaid by an insolvent authorized insurer;

• Are presented to the Association before the fixed filing date;

• Existed before or were incurred within 30 days of the appointment of the receiver;

• Arise out of insurance other than life or health insurance; and

• Arise out of insurance policies issued on or before the last date the insurer was a member insurer.

No coverage is provided for the following claims:

• Involving refunds of unearned premium over $500;

• A refund for an amount less than $50 for unearned premiums;

• Obligations incurred after the expiration date of the insurance policy, after the insurance policy has been replaced or canceled; or

• Obligations arising out of fraud.

The Association will have all the rights and duties of the insolvent insurer and may appeal, investigate or defend a claim.

To secure funds for payment of claims, the Association may levy assessments on all member insurers up to 1% of each insurer's direct written premium during the previous calendar year. Each member insurer assessed will have at least 30 days advance written notice of the date the assessment is due and payable.

The Association will continue coverage under each policy in force until the earliest of 30 days after the receiver is appointed or the policy has expired, been replaced or cancelled. The Association may cancel policies by mailing 10 days' written notice to the last known address of the insured.

Essential Insurance Act

1. General

Producer Duties

An insurance producer licensed to represent one or more insurers must, as a condition of licensure, do all of the following:

• Provide each eligible person seeking auto or home insurance the lowest available premium quotation for the forms or types of insurance coverages that are offered by the insurers represented;

• Inform the eligible person of the number of insurers that the producer represents;

• Not attempt to channel an eligible person away from an insurer or insurance coverage with the purpose of avoiding a producer's obligation to submit an application or an insurer's obligation to accept an eligible person;

• Upon request, submit an application of the eligible person for auto insurance or home insurance to the insurer selected by the eligible person;

• For auto insurance only, at least annually provide to each insured information regarding the renewal of a policy, including all of the following:

  • An explanation of the point system;

  • A statement that if the insured is eligible, they may qualify for insurance from more than one insurer, and possibly at a lower rate; and

  • A statement that the producer will, upon request, furnish to the insured a set of quotations from insurers represented by the producer.

With respect to auto insurance or home insurance, an insurer may not penalize an individual producer by paying less than normal commissions because of the expected or actual experience produced by the producer's business or because of the geographic location of the business written by the producer.

Risk Classification

Classification established for home insurance, other than Inland Marine insurance, will be based only upon one or more of the following factors:

• Amount and types of coverage;

• Security and safety devices;

• Repairable structural defects reasonably related to the risk;

• Fire protection class;

• Construction of structure based on structure size, or building material components;

• Loss experience of the insured;

• Use of smoking materials within the structure;

• Distance from a fire hydrant; or

• Availability of law enforcement.

• Insurance Declined

An insurer or producer, upon making a declination of insurance, must inform the applicant of each specific reason for the declination. If the application or request for coverage was made in writing, the insurer or producer must provide an explanation of reasons in writing.

Termination of Insurance

A termination of insurance will not be effective unless the insurer, at least 30 days prior to the date of termination, delivers or mails to the named insured at the person's last known address a written notice of the termination. The notice must state the effective date of termination and each specific reason for the termination.

A notice of termination mailed or delivered within the first 55 days after the initial issuance of a policy may be made effective no sooner than 20 days after the mailing or delivery of the notice.

Exemptions

Each insurer whose surplus as shown in the annual financial statement filed with the Commissioner was $4,000,000 or less is exempt from the Essential Insurance Act. The exemption granted will continue indefinitely, as long as that insurer experiences no disproportionate growth in premium volume in automobile insurance or home insurance.

Grievance Procedures

A person who has reason to believe that an insurer has improperly denied automobile insurance or home insurance coverage, or has charged an incorrect premium for that insurance, is entitled to a private, informal, managerial-level conference with the insurer and to a review before the Commissioner if the conference fails to resolve the dispute.

2. Homeowners

Eligible Person

An eligible person for Homeowners insurance is a person who lives in and rents or owns a house, condominium, cooperative unit, room, or apartment. The eligible person may be the owner and occupant of a dwelling containing not more than 4 units. The eligible person must occupy the dwelling.

Persons who are not eligible for homeowners insurance are those who have done any of the following:

• In the last 5 years have been convicted of arson or conspiracy to commit arson, malicious destruction of property or violations regarding the use of explosives;

• In the last 5 years have been successfully denied payment of a claim for evidence of arson, misrepresentation, or fraud;

• Have property that is used for illegal or particularly hazardous purposes;

• Refuse to purchase insurance for at least 80% of the replacement cost of the dwelling when applying for a replacement cost policy;

• Refuse to purchase insurance for at least 100% of the market cost of the dwelling when applying for a repair cost policy;

• Have policies that were canceled for nonpayment in the last 2 years;

• Wish to insure a dwelling for less than $15,000 for a repair cost policy or $35,000 for a replacement cost policy;

• Wish to insure a dwelling that does not meet the Commissioner's minimum standards of insurability; or

• Have not paid real property taxes due on the property in the last 2 years.

Underwriting Rules

Under the Michigan Essential Insurance Act, an insurer cannot refuse to insure, continue to insure, or limit coverage unless the insurer has specific written underwriting rules that would allow the insurer to reject an eligible applicant.

An insurer may develop underwriting rules that can be applied to determine whom it will insure, continue to insure, or for whom it will limit available coverage. These guidelines must be in writing and filed with the Commissioner. All underwriting rules must be applied throughout the state.

Inspection of Dwellings “property”

If an insurer uses an inspection of a dwelling to determine whether an applicant is eligible for home insurance, the criteria for selecting dwellings for inspections may not be based on the following:

Location of the dwelling;

• Age of the dwelling or its heating, electrical, or structural components;

• Market value of the dwelling;

• The amount of insurance; or

• The race, occupation, color, creed, marital status, sex, national origin, residence, age or handicap of the applicant.

Terrorism Risk Insurance Program

The purpose of the Terrorism Risk Insurance Act (TRIA) was to create a temporary federal program that would share the risk of loss from future terrorist attacks with the insurance industry. The act requires that all commercial insurers offer insurance coverage for acts of terrorism. The federal government will then reimburse the insurers for a portion of paid losses for terrorism.

TRIA defines an act of terrorism as an act certified by the Secretary of the Treasury, in concurrence with the Secretary of Homeland Security (as of 2015), and the Attorney General of the United States with the following characteristics:

• The act must be violent or dangerous to human life, property, or infrastructure;

• The act must have resulted in damage within the United States, to an air carrier as defined in the U.S. Code, to a U.S. flag vessel or other vessel based principally in the U.S. and insured under U.S. regulation, or on the premises of any U.S. mission;

• The act must have been committed by someone as part of an effort to coerce the U.S. civilian population, to influence U.S. policy, or to affect the conduct of the U.S. government by coercion; or

• The act must produce property and casualty insurance losses in excess of a specified amount.

TRIA applies to commercial property and liability insurance, including excess insurance, workers compensation, and directors and officers insurance. The TRIA statutory definition specifically excludes the following types of insurance:

• Federal or private crop insurance; 

• Private mortgage insurance or title insurance; 

• Financial guaranty insurance issued by monoline insurers; 

• Medical malpractice insurance; 

• Life and health insurance, including group life insurance; 

• Federal flood insurance;

• Reinsurance; 

• Commercial automobile insurance; 

• Burglary and theft insurance; 

• Surety insurance;

• Professional liability insurance (except for directors and officers liability); or

• Farm owners multiple peril insurance.

The Terrorism Risk Insurance Act (TRIA) has been renewed and modified multiple times since 2002.

The Reauthorization Act of 2007 amended the Terrorism Risk Insurance Program to

• Redefine “an act of terrorism” to eliminate the requirement that the individual or individuals committing a terrorist act be acting on behalf of a foreign person or interest;

• Require the Secretary of the Treasury to notify Congress within 15 days of an act of terrorism for which the secretary estimates a loss of more than $100 billion and devise a way to determine the pro rata share of insured losses that exceed $100 billion; and

• Require insurers to disclose to policyholders the $100 billion cap on their liability.

The Terrorism Risk Insurance Program Reauthorization Act of 2015 established the mandatory recoupment of the federal share through policyholder surcharges at 140% and revised requirements for mandatory repayment form insurers of federal financial assistance provided in connection with all acts of terrorism.

The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) in 2019 renewed the program through December 31, 2027. The reauthorization

• Requires the Secretary of the Treasury to include in its biennial report to Congress an evaluation of the availability and affordability of terrorism risk insurance, including specifically for places of worship;

• Requires the U.S. Government Accountability Office (GAO) to conduct a study on cyberterrorism risks, including an analysis of whether the states’ definition of cyber liability under a property and casualty line of insurance is adequate coverage for an act of cyber terrorism, the potential costs of cyber attacks, the private market’s ability to adequately price cyber risks, and whether the TRIA structure is appropriate for covering cyberterrorism; and

• Sets the reimbursement level of covered terrorism losses exceeding the statutorily established deducible at a fixed 80%.

Chapter 2 recap:

Video recap: Pop quiz:

When must insurable interest exist in property insurance?

At the time of the loss

What information can be found on the policy of Declarations page?

The name insured, the covered property and its description, the policy period and the amount of coverage

What is the binder?

Temp policy before actual is in place.

Property Vs. Casualty:

Property: protects things you own (it is 2 party)

Casualty: the insurer usually causes this- 3rd party- 3 people typically- pays victim 

Direct vs. indirect

Direct: 

House fire is the cause, chain of events- house catches fire, fireman apply water- water damage (water damage will be covered) 

Indirect: 

Economic loss as a consequence of the direct loss

Coverage usually added to property 

Rentals: Loss profits from a rental house use after a fire

Named Peril vs. Open peril

Named peril: 

Lists specific covered- only what is named

Open peril:

Any risk of loss-lists what you are not covered for