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Protection thru reimbursement for a covered loss, provided by a written contract, against the happening of a specific change or unexpected event. A written contract or policy is usually between two parties, where one party (the insurer) for a consideration (premium) agrees to reimburse another party (the insured) in the event of a loss (the risk)
Relies on the principle that the larger the pool of insureds, the more predictable the amount of losses will be in a given period. Since not all mbrs of the pool are the same risk factors or located in the same area, we can assume not all of them will make a claim at the same time.
The Law of Large Numbers
It is an unexpected event that is unforeseen and unintended that occurs at some fixed time and place resulting in financial loss.
Refers to the insurance for individuals and families like homeowners, renters and personal auto coverages
Insurance policies designed to cover businesses and professional practices
These policies cover risk that generally are not available in the standard market because of unusual characteristics like aviation, earthquake, oil tanker, etc. The state maintains a list of approved surplus lines companies where coverage can be purchased that are not licensed in the state.
Each insurance companies set limits on the amount of risk that they are willing to keep on any one risk. Amounts over that limit are pooled with others through the use of a reinsurance company. The reinsurer accepts the risk and gets a pro rata portion of the premium.
Sometimes the Federal government steps in to provide coverage that is not available from the private insurance companies. Examples of this type of coverage are nuclear energy liability, flood insurance, federal crop, war or terrorism insurance, FAIR plan. etc
The insured must lose financially if a loss occurs or must incur some other kind of harm if the loss takes place. In property insurance, "it" is the ownership of potential legal liability caused by the loss.
A condition in which there is a possibility of a loss
risk (also called Exposure)
Involves chance of both loss and gain, example stock market, blackjack
Involves risk because of the activity, i.e. riding a bull
Involves only the chance of loss
Methods for handling risk:
- Avoidance of risk by not participating in a particular activity
- Retention is keeping the loss and not purchasing insurance (higher deductible)
- Reduce or control losses by use of training or alarms
- Transferring the risk means purchasing insurance
A specific situation or condition creating or increasing the possibility of a loss.
- Physical - slip and fall
- Moral - dishonest on application
- Morale - Careless attitude
The specific cause of a loss
8 different Peril
- Sprinkler damage
The amount of reduction in the value of an insured's property caused by an insured peril
Two kinds of loss
- Direct - Physical damage to an object
- Indirect - (consequential) loss or damage resulting from an insured peril but not actually caused by that peril (storekeeper's loss of income). Most policies exclude or limit indirect losses.
Policy pays for the cost to repair or to replace the damaged property at the time of the loss, less depreciation. Property insured is depreciated over time. Not the same as market value.
Actual Cash Value (ACV)
A form of settlement under which the insurance company, after a covered loss, will pay the insured enough to replace the destroyed property with new property of a like kind of quality w/out deducting depreciation.
A form of settlement under which the insurance company, after a covered loss, will pay the insured on a total loss the amount that someone would purchase the asset in its particular market.
The insurers agrees to pay a specify amount for a covered loss. This is done by endorsement in the insurance contract because the property is unusual or valuable and does not fit a standard description. The property retains value instead of declining in value.
One of the conditions of a property insurance policy is that the insurance company has the option to take all or any part of the damage property at its agreed to/appraised value as salvage or to repair damaged property, replace it with similar property rather than paying the actual cash value of the property. Its reduces the Company's loss by selling the salvage.
Right of Salvage
A specified amount or percentage the insured is required to pay on a loss with the insurer paying the balance. The purpose of the deductible is to eliminate small claims that the insured can afford to pay which cost the insurance company to administer. Higher the deductible result in the lower the premiums.
Immediate or legal cause that brings about a loss
Payment of an amount to offset all or part of an insured loss to compensate an insured but not to make him better off from the loss
Maximum amount payable for a given loss or occurrence
Limits of Liability
Specified amount of insurance required which is based on the value of the property
if the coinsurance is satisfied, the insured may choose to provide a certain amount of their coverage to property not normally covered (this clause extends existing coverage to apply to new situations)
Extensions of coverage
Coverage provided that is in addition to the main coverage (item one extends coverage while this clause provides additional coverage)
Repeated and continuous exposure to harmful conditions or unsafe materials that occur over time resulting in financial loss. This is a broad definition of accident.
Refers to a building which is unfurnished and not being used as a dwelling or for business in the past 30 days (MO 60 days)
refers to a building which is furnished but not being used as a dwelling or for business and has had utilities turned off.
Any legally enforceable obligation and there are three types
Liability - Absolute, Strict, & Vicarious
Failure to use ordinary care under given circumstances.
To prove Negligence, four specific factors must be established
- 1. Duty
- 2. Breach of Duty
- 3. Proximate Cause
- 4. Damages, Settlement, or Judgment
Written or oral acknowledgement of insurance in force and evidence or acceptance of the applicant's offer to purchase the insurance, pending issuance of a policy.
How long are binders good for
maximum of 60 days. the binder is proof of insurance
Issued by the insurance company or their agent as proof that the policy is in force for the mortgagee or others involved in a contract. The certificate provides policy #, insureds, and limits applicable to the policy and inception and expiration dates.
certificate of Insurance
Added to a current insurance policy to change the original insurance policy terms and/or coverages. Insurance endorsements can be used in may ways to enhance an insurance policy and provide more coverage for the policyholders.
Coverage designed to pay for medical expenses to others who are accidentally injured on an insured location or by the activities of an insured, resident employee or an animal owned by or in the care of an insured. These payments are not based on the law of negligence; that is, no negligence on the part of the insured has to be proven for payment to be made
Blanket coverage provides coverages without getting into details of location, numbers of covered items and perils. Specific coverage lists perils, location and specific insured items
Blanket versus Specific
Occurs when there is a theft of property from with in a premise by a person who unlawfully enters or exits from the premises.
a theft during which force is used or threaten
the act of stealing property due to burglary, larceny, or robbery
refers to the insured item that is missing form its usual location and the owner cannot recall when it was lost. In policy it will say if it is covered or not.
Insurance Company rate's are based on:
- 1. Claims they pay
- 2. Operating expenses
- 3. Profit
the Illinois and missouri department of insurance does not set rates, policy forms, and provisions must be approved by...
the Insurance Dept
The rates charged an individual property owner or tenant are based mostly on:
- 1. Answers to questions on an application
- 2. Age of building, maintenance and condition
- 3. construction style
- 4. Fire department ISO Rating (1-10)
- 5. Claims history
- 6. Credit Report
one that would qualify standard rates and considered normal
credits are provided
for those outside of the normal rates, the underwriter adds debits (increases premiums)
Types of Construction
- 1. Fire Resistive
- 2. Modified Fire Resistive
- 3. Masonry Non-combustive Construction
- 4. Non-combustible Construction
- 5. Joint Masonry Construction
- 6. Heavy Timber Construction
- 7. Framed Construction
approved reinforced concrete or masonry must be used in the construction of floors, roofs, exterior and interior walls and expected to resist fire for not less than two hours
materials expecting to resist fire for one or two hours for floors, roofs and walls.
Modified Fire Resistive
Has exterior walls, roofs, floors made of bricks, stone or similar materials, concrete, steel, etc.
Masonry Non combustive Constructive
Requires the floors, roofs and exterior walls built be supported by this material
Exterior walls are masonry with floors, roofs constructed from wood or other combustible product
Joint Masonry Construction
building is constructed using large dimensions of wood. The walls are wood with large wooden beams
Heavy Timber construction
walls and interior are wood or some other combustible materials. Construction material used is a factor in determining insurance rates.
Rates are determined by use of a published manual listing by location (ISO Rating or insurer's experience) developed by actuarial analysis
6 manual rates
- Class rating
- Experience rating
- Individual rating
- merit rating
- Retrospective rating
- Schedule rating
Rates are developed based on the underwriter's experience and skill as opposed to actuarial analysis
The underwriter's best guess not based by actuarial analysis
Occurs when the underwriter selects more poor risks than good risks.
results of adverse selection
- a. High number of policy in a given area (high exposure)
- b. Losses are greater than expected
- c. Premium doesn't cover the losses.
Legally transferring a policy owner's right or interest in an insurance policy to another party. It is not valid unless the insurer gives their written consent
The insured transfers the right of recovery form a third party, who has caused the loss to the insurance company
Types of authorty
- Expressed - those set out in their contract
- Implied - not expressed, but agent is assumed to have
- Apparent - Authority based on facts or action