Exposure
A condition or situation that presents the chance of loss
Risk
Uncertainty of financial loss
Pure risk
Chance of loss only
Can be covered by insurance
Speculation or Speculative risk
Chance of loss or gain
Gambling
Cannot be covered by insurance
Risk Management
Methods of Handling Risk
Avoidance
Retention
Control/Reduction
Transfer
Insurable Interest
All insurance contracts are required to contain an element of insurable interest
Personal/financial interest
Economic loss required
For property and casualty, must exist at the time of loss
The insurer will only insure the risk if the risk is known to the insurer
Indemnity
To restore policyholder to pre-loss condition; make whole
No better—no worse than before the loss
And we stop indemnifying at the limit, so we pay:
the lower of the loss or the limit
Hazards and Perils
Hazard – a condition that increases the likelihood of a loss or the likely size of a loss
Physical – a physical hazard could be a dead tree next to your garage or flammable materials
Moral – criminal element
Morale – hazard is when the insured doesn’t worry about something bad happening and submitting a claim, because they know they have insurance.
Peril – an activity which causes a loss to occur
HAZARDS ARE INACTIVE
PERILS ARE ACTIVE
Accident
Unforeseen
Unintended
Known place
Known time
Occurrence
An event that happens over time
Can be an accident
Can be continuous or repeated exposure to conditions
Property Insurance
Covers the insured’s property
It’s a two party contract
POV =
Perils
Objects
Value
Perils (causes of loss)
Basic
Broad
Special
Named PerilOpen Peril
BasicSpecial
Broad
Basic
Fire
Lightning
Hail
Windstorm
Explosion
Riot
Vandalism
Volcanic Action
Vehicles
Smoke
Sprinkler Leakage
Sinkhole Collapse
Broad Perils
Basic Perils plus …………
Falling Objects, Weight of ice, snow, sleet, Collapse, Water damage
Special
Open Peril Coverage
Everything is covered unless it is excluded
And the burden of proof is with the insurer
Burden of proof on:
Named Peril – is with the insured
Open Peril – is with the insurer
Exclusions
Catastrophic – flood, earthquake, war, nuclear
Activities that happen to everyone at the same time
Better Covered Elsewhere – exclude auto on homeowners policies, exclude workers injuries on a general liability policy
Predictable – eventually it will happen
Objects
Real Property – Buildings
Personal Property
Loss of Use
Loss Examples
Direct
Lightning strikes a house
Auto collides with tree
Indirect
Loss of rental income
Loss of profits
Property Coverage Forms
Specific coverage
One kind of property in one definite location owned by an individual or family
Property and location are specified
Blanket coverage
Single amount of coverage
One of the following
Same type of property in different locations
Different types of property in a single location
Valuation
The process of determining the value of the loss
Replacement cost
Today’s cost to fully replace lost or damaged property with like kind or quality property—without deduction for depreciation
NEW FOR OLD
Actual cash value (ACV)
Replacement cost minus depreciation
R/C – Dep = ACV
Agreed value
The value of the described property agreed on by both insurer and insured
At time of loss insured is paid the
SET AMOUNT
The amount of loss payment is
Determined before the loss
Loss Valuation
Stated amount
An amendment to the valuation provision of a policy that provides a stated maximum amount for payment of any loss
Loss payment amount determined after the loss
Functional replacement cost
Cost to repair or replace with functionally equivalent materials
Casualty Insurance
Protects the insured’s assets and pays on behalf of the insured to a third party
Types of Injuries and Damages Arising from Liability
Personal injury
Libel, slander, invasion of privacy, false imprisonment, mental anguish, or emotional distress
Advertising injury
Written or oral material that violates or infringes on copyrights, titles, or slogans
Negligence
Duty owed
Breach of duty
Damages
Proximate cause
Duty
Breach of Duty
Careless or thoughtless
OK
Intentional
NOT
Damages for Tort Liability
Compensatory – money paid to injured party
Special – pays actual damages; monetary (e.g., medical expenses)
General – pays for non-economic losses (i.e., pain and suffering)
Sometimes Special Damages are called Economic Damages
Punitive – court awards money to punish wrongdoer due to actions thought to be greater than simple negligence
Most insurance policies do not pay for Punitive Damages
Proximate Cause
The cause responsible for the loss
Closely related to direct loss; direct and foreseeable link
Unbroken chain of events
“Had it not been for this occurring, this would not have occurred.”
Negligence – Defense
Comparative Fault
Other
Liability Exposures
Strict Liability
Exposure from defective products
Implied warranties
Absolute Liability
Inherently dangerous activities
Pays without regard to fault
Categories of Liability Exposures
Vicarious
Exposure from one person’s legal responsibility for the negligent behavior of another person
Supplementary Payments
Paid in Addition to the limit
Paid without regard to fault
Medical Payments
Pays without regard to fault
Pays medical bills
Law of Large Numbers
Large group of similar risks and examines their tendencies
Losses over a specific period of time are known, who specifically will suffer the loss is unknown
Rates
LOSS COST
how much will be paid out on the actual loss
plus EXPENSES
less INTEREST EARNED
___________________________
PREMIUM
Rating Organizations
Rating organizations
VERIFY THE FINANCIAL STRENGTH OF AN INSURER
Based on an analysis of claim experience, investment performance, management, and other factors
Length of time in business is not a factor
Measures claims ability to pay
Examples of rating organizations include
Standard & Poor’s Insurance Rating Services
Moody’s Investors Service
Weiss Ratings
A.M. Best, Inc. Rating Service
Dunn and Bradstreet
Stock Insurers
Owned by their stockholders (investors) who receive dividends as stock value or periodic dividend payments
Incorporated as a for-profit company
Issues nonparticipating policies (nonpar)
Pays taxable dividends to shareholders if a profit is made
Mutual Insurers
Mutual are incorporated and managed by a board of directors
Par—participating policies
Participating dividends are a partial return of premiums and are not taxable. The dividends are not guaranteed and are considered an overpayment of premiums
The Producer/Principal Relationship
Agent
Someone who acts on behalf of another
Principal
Party to whom action is taken
Producer Authority
A producer is provided authority through the agency contract
The producer needs to make sure that the insured understands the coverages they are buying.
The producer will also help the insured file a claim and follow-up on the claim as well.
Three Types of Authority
Actual/expressed authority
Authority as specified in the producer’s contract, could be written or oral
Implied authority
Authority that is not expressly granted, but which a producer is assumed to have in order to transact the business of the principal
Apparent authority
Authority a reasonable person would assume a producer has based on the producer’s actions and statements
Legal Issues Affecting
Insurance Contracts
Warranty
Guarantees answers on the application
A false statement can void the policy
Application
Doctrine of Utmost Good Faith
Legal Issues Affecting
Insurance Contracts
Representations
Oral or written statements by individual seeking to enter into a contract
True to the best knowledge and belief of party making statement
The Elements of a Contract
Competent Parties
Legal Purpose
Agreement
Offer and acceptance
Consideration
Competent Parties
Sane
Sober
Of legal age
The Elements of a Contract –not necessary to be in writing
Agreement
Offer and acceptance
Consideration
Competent Parties
Legal Purpose
Special Features of Insurance Contracts
Contract of adhesion
The contract must be accepted by the insured exactly as written by the company
Insured can take it or leave it
Because only insurers draw up contracts, courts generally have held that any ambiguity in the contract should be interpreted in favor of the insured
Doctrine of Reasonable Expectations
What would one reasonably expect …
Unilateral contract
Only enforced by one party to the contract
One sided, only the insurer has promise to keep
Aleatory contract
The insurance contract is valid even though there are unequal exchanges between the parties
Small premium paid, large coverage benefit
Conditional contract
The contract may be voided if all policy conditions are not met
Personal contract
Insures the person’s insurable interest in the property, not the property itself. The contract cannot be transferred to another person without the insurer’s approval.
Policy Structure
Declarations
Who
What
Where
How much
Mortgage interests
Endorsements
Policy Period – Effective and Expiration Date
Insuring agreement
Is where we find the insurer’s promise to pay
Defines YOU and YOUR,
Defines WE, US, OUR
Lays out the coverage provided, such as the covered perils in a property policy
Conditions
Obligations of each party to the contract; stated as ground rules
Conditions – Loss Conditions
Notify the insurance company – PROMPTLY
Protect the property from further damage
Notify the police
Separate damaged/undamaged property
If REQUESTED complete a PROOF OF LOSS
Give a description of loss
Answer questions under oath
Produce records
Insurer must respond in a timely manner
Policy Structure Condition – Appraisal
it deals with VALUE
Condition – Liberalization Clause
Broadens or extends coverage either due to company voluntary action or legal determination
No additional premium charged
No action required by the insured
Policy Structure
Condition – Subrogation
Insureds are required to assign their rights to recovery after a loss to the insurance company
Insurer then has legal right to recover the amount paid for the loss from the at-fault party and take any further legal action necessary
The deductible is returned to the insured when or if the loss payment is recovered
Policy Structure
Condition – No Benefit to the Bailee
A bailee is not covered under an insured’s policy while the bailee has possession of the insured’s property
Policy Structure
Condition – Salvage
After paying insured for his loss of property, insurer can recover the damaged property and sell it to reduce the insurer’s financial loss
Policy Structure
Condition Mortgagee Clause
Mortgage Company will collect
Despite insured’s actions—policy voidance
Mortgagee notification
Mortgagee and insured must be notified in the event of an insurer cancellation
A loss payable clause doesn’t have the same power
Policy Structure
Declaration
Insuring Agreement
Conditions
Exclusions
Catastrophic
Better Covered Elsewhere
Predictable Losses
Concurrent Causation
Definition
Vacancy Versus Unoccupancy
Vacancy
No people/activity
No property/contents
Unoccupancy
No people/activity
Yes property/contents
Cancellation/Non-renewal
Cancellation
Termination during the term
Non-renewal
Not continuing coverage at the end of the term
Termination of Policies
Cancellation
Insurer or insured cancels contract before end of policy period
Premium refunds
Earned -Company keeps proportionate premium used
Unearned premium -Proportionate premium not used is returned to the insured
Methods of returning premium to insured
Short-rate method
Commercial lines—used when insured cancels
Insured cancels; service charges!
Pro rata
Commercial and personal lines
Insurer cancelled; insured received full unearned premium; no penalty
Personal lines
Always use pro rata (no penalty or service charges)
