CPCU 551: Chapter 7

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hborgert
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16914
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CPCU 551: Chapter 7
Updated:
2010-04-30 01:14:05
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Flood Earthquake Specialty Forms
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CPCU 551: Chapter 7
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  1. How do the emergency program and regular program of the National FLood Insurance Program (NFIP) differ?
    The emergency program uses subidized rates until flood insurance rat emaps become available and the regular program is addopted. Additionally the regular program provides higher coverage limits than the emergency program.
  2. Name coverages A , B, C, and D of the NFIP General Property Form.
    • A - Building Property
    • B - Personal Property
    • C - Other Coverages
    • D - Increased Cost of Compliance
  3. Name the three insuring agreements provided under Coverage C of the General Property Form.
    Debris Removal, Loss avoidance Measures, and Pollution Damage.
  4. Explain the purpose of Coverage D of the General Property Form.
    D - Increased Cost of Compliance is to pay the cost (up to $30,000) of complying with state or local floodplain management laws that drive up the cost of repairing a flood-damaged structure.
  5. How do deductibles apply under the General Property Form?
    They apply seperately to building property and personal property damaged in the same loss. If a $1,000 deductible applies to both categories of property damaged in a single loss, the insured will retain a $2,000 of the combined loss.
  6. Describe two ways in which the Residential Condominium Building Association Policy (RCBAP) and the General Property Form differ.
    1) the RCBAP can be written for a higher limit of insurance, equal to $25,000 times the times the number of units in the building, and 2) replacement cost coverage is available on buildings insured under the RCBAP but not on any property insured on the General Property Form.
  7. Describe three ways in which the ISO Flood Coverage Endorsement Endorsement can provide broader coverage than the NFIP flood policies.
    1) The ISO endorsement can cover a greater variety of property than the NFIP policies; 2) the ISO endorsement can be attached to a Business Income and Extra Expense Coverage Form, where as the NFIP policies provide no business income coverage and only very limited extra expense coverage; and 3) NFIP policies are primarily written on an ACV basis, whereas the ISO endorsement can be written subject to the replacement cost or functional valuation options available under commercial property forms.
  8. On what basis does the ISO Flood Coverage Endorsement pay for a loss that is also covered by an NFIP flood policy?
    The ISO endorsement (unless modified accordingly) applies in excess of the maximum coverage available to the insured under an NFIP policy, even if the insured has not purchased NFIP coverage.
  9. How do the two versions of the ISO Earthquake and Volcanic Eruption Endorsement differ with regard to limits and coinsurance?
    CP 10 40 is subject to the attached policy's coinsurance caluse, and therefore the limit for the endorsement should be the same as the policy limit applying to other perils. CP 10 45, the sublimit form, is not subject to coinsurance and thus permits earthquake coverage to be written subject to a sublimit that is lower than the regualr policy limit.
  10. How are deductibles expressed in the ISO earthquake endorsements? (Limit your answer to deductibles applicable to specific insurance that is not written on a blanket, value reporting, or builders' risk basis)
    The deductible is expressed as a percentage. In the coinsurnace form of the endorsement (CP 10 40), the deductible is the specified percentage of the limit of insurance on the damaged property. In the sublimit form, the deductible is the specified percentage of the value of the proerty that has sustained covered loss.
  11. Explain the Ensuing Loss provision of the ISO earthquake endorsements.
    In the event of ensuing loss caused by another covered peril (such as fire), the most the policy will pay for the entire loss (for example, all loss caused by earthquake and following fire) is the limit for the other covered peril (fire in this case). The insurer will not pay the sum of the two limits.
  12. What are three common reasons for buying a difference in conditions (DIC) policy?
    1) To cover flood and earthquake exposures not covered by commercial property policies, 2) to provide excess limits over flood insurance written by the NFIP, 3) to cover other loss exposures not covered in commercial property policies, such as property in transit or loss of business income resulting from theft or transit losses.
  13. If a DIC policy covers flood and earthquake, what special provisions are likely to apply to those perils?
    DIC policies often apply sublimits to covered flood and earthquake losses. When the property is in a high risk area, the policy may cover only a stated percentage of flood or quake loss above the deductible. Also, some DIC policies may provide broad coverage for most types of water damage excluded by primary policies, or they may only cover flood as defined in the NFIP.
  14. DIC policies usually do not contain a coinsurance clause. The absence of coinsurance has obvious advantages for insureds. What advantage(s) does "no coinsurance" have for DIC insurers?
    If no coinsurance clause applies, the insurer can write the policy for a lower limit than the full value of the property. Keeping the limit low has the advantage of allowing the insurer to reduce the cost and to increase the availability of its reinsurance.
  15. From the insured's standpoint, what are two advantages and possible disadvantages of DIC policies?
    • Advantages: 1) DIC can be a cost-effective method of obtaining flood and earthquake coverage and 2) DIC policies are nonfiled in many states and are therefore often easier to modify to meet the insured's particular needs.
    • Disadvantages: 1) the DIC market tends to be small, and the terms of coverage that insurers are willing to provide can vary over time, and 2) insurance regulators have not evaluated or approved the policy language in states where DIC is nonfiled.
  16. What are the advantages of using an output policy?
    Broader coverage and and a flexible approach to rating.
  17. Describe two significant ways in which output policies often provide broader coverage on business personal property than do standard commercial property forms.
    An output polciy may cover 1) personal property at locations that are not specicifed in the policy and 2) personal property in tranist.
  18. In addition to having managers who are committed to controlling the organization's losses, what are three characteristics that a property generally must have to be eligible for an HPR (highly protected risk) policy?
    1) Fire-resistive, non-combustible, or heavy timber construction; 2) automatic sprinkler systems and other loss control equipment; and 3) adequate public or private fire protection.
  19. What are four advantages of layering property coverage?
    1) It enables the insured to obtain adequate limits, 2) it enables the insured to obtain pricing advantages, 3) it enables the insured to obtain broader coverages, 4) it enables access to additional markets (for the insurer).
  20. Give two reasons why the combined premium of layered policies is often lower than the premium for a single policy subject to coinsurance rules.
    • 1) the insured may not need to purchase insurance to value
    • 2) The underwriter participating in a layered insurance program can use his or her judgement in rating the coverage instead of being locked into a manual rating plan.
  21. What are two possible disadvantages of layering property coverage?
    1) Minimum premium requirements for each layer may make the cost of layered coverage higher than the cost of a standard policy, 2) conflicts is wording and interpretation may arise when claims are filed involving various layers.
  22. The Riverside Country Club insures its buildings and personal property under a General Property Form issued by the NFIP. Indicate whether each of the following losses, which resulted from flooding (as definedby the NFIP) of the adjacent river, would be covered under Riverside's flood policy. If a loss is not covered, explain why.
    a. A shelter on the golf course (which had a roof and one wall) was washed away.
    a. Not covered. Structures that do not have two or more outside walls are not covered property.
  23. The Riverside Country Club insures its buildings and personal property under a General Property Form issued by the NFIP. Indicate whether each of the following losses, which resulted from flooding (as definedby the NFIP) of the adjacent river, would be covered under Riverside's flood policy. If a loss is not covered, explain why.
    b. Riverside's boat pier was washed away.
    b. Not covered. Property located on or over water is not covered property.
  24. The Riverside Country Club insures its buildings and personal property under a General Property Form issued by the NFIP. Indicate whether each of the following losses, which resulted from flooding (as definedby the NFIP) of the adjacent river, would be covered under Riverside's flood policy. If a loss is not covered, explain why.
    c. Silt and debris from the river were deposited on several greens and fairways, requiring extensive cleanup efforts.
    c. Not covered. The policy will cover only removal of silt and debris that is on covered property (building and personal property, not land).
  25. The Riverside Country Club insures its buildings and personal property under a General Property Form issued by the NFIP. Indicate whether each of the following losses, which resulted from flooding (as definedby the NFIP) of the adjacent river, would be covered under Riverside's flood policy. If a loss is not covered, explain why.
    d. Silt and debris were deposited on and within the clubhouse.
    d. Covered, because the silt and debris were on covered property.
  26. The Riverside Country Club insures its buildings and personal property under a General Property Form issued by the NFIP. Indicate whether each of the following losses, which resulted from flooding (as definedby the NFIP) of the adjacent river, would be covered under Riverside's flood policy. If a loss is not covered, explain why.
    e. Several self-propelled vehicles used to maintain the golf course were destroyed while located in the club's fully enclosed garage.
    e. Covered , because they were used to service the premises.
  27. The Riverside Country Club insures its buildings and personal property under a General Property Form issued by the NFIP. Indicate whether each of the following losses, which resulted from flooding (as definedby the NFIP) of the adjacent river, would be covered under Riverside's flood policy. If a loss is not covered, explain why.
    f. Outdoor pool and patio furniture was swept away by the flood waters.
    f. Not covered. The flood policy excludes property not inside an enclosed building.
  28. The Riverside Country Club insures its buildings and personal property under a General Property Form issued by the NFIP. Indicate whether each of the following losses, which resulted from flooding (as definedby the NFIP) of the adjacent river, would be covered under Riverside's flood policy. If a loss is not covered, explain why.
    g. As the flood waters were rising , the club had the foresight to remove various items of personal property to storage at a safer location, at a cost of $1,000.
    g. Covered under Loss Avoidance Measures (also has a $1,000 limit for any action taken to hold off flood waters)
  29. A Building and Personal Property Coverage Form with the Causes of Loss - Special Form covers a building and its contents for a blanket limit of $2.5 million on an agreed value basis. Attached to the policy is the ISO Flood Coverage Endorsement, subject to a limit of $1 million and a waiver of the policy provision requiring primary flood insurance from the NFIP. The insured property suffered a covered flood loss of $2,000,000. As a consequence of the flooding, a natural gas explosion in the building's basement resulted in a fire that destroyed the building and its contents. The combined amount of the flood loss and ensuing explosion and fire loss was $3,000,000. Disregarding policy deductibles, how much of this loss will the insured be able to recover from the insured?
    In accordance with the Ensuing Loss provision, the insureer will be obligated to pay only the policy limit of $2,500,000.
  30. A commercial building valued at $3,000,000 was insured on a specific basis under the ISO Earthquake and Volcanic Eruption Endorsement (Sub-Limit Form) for a limit of $1,000,000 with a 5 percent deductble.
    a. An earthquake caused damage valued at $600,000. How much should the insured be able to recover for this damage?
    b. Forty-eight hours later, an aftershock caused additional damage valued at $50,000. How much should the insured be able to recover for this damage?
    • a. Amount of deductible = 0.05 x $3,000,000 (building value) = $150,000
    • b. $50,000. The deductible does not apply again because the aftershock occurred within 168 hours of the first earthquake.
  31. An output policy can cover which exposures that would not be covered (or not fully covered) under a standard commercial property policy?
    • - Property more than 1,000 feet from the warehouse premises
    • - Customers' property being transported by the insured
    • - The insured's trucks while garaged or parked at the insured's locations
    • - The insured's property while off the insured premises
    • - Property in transit
    • - Building and property in new locations that have not been reported to the insurer
  32. ATL Industries owns twenty entertainment complexes throughout the United States. The largest property exposure for any one entertainment complex is $25 million, and the company purchased a total of $40 million in layered property insurance. Company A provides the first later of $750,000 above a $250,000 deductible. Company B provides the second layer, beginning at a $1 million attachment point, and Company C provides the third layer, beginning at an $11 million attachment point.
    A hurrincane nearly destroyed ATL's Miami entertainment complex, and covered losses totaled $15 million. What dollar amount will each of the insuance companies pay for the combined losses.
    Company a will pay $750,000; company B will pay $10 million; Company C will pay $4 million.

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