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transfer of risk from a primary insurer to a reinsurer (example: AIG to SwissRE)
transfer of risk from a reinsurer to another reinsurer (example: SwissRE to GenRE)
specific % of premiums that must be kept readily available to pay out claims/ liabilities
What are the three typical coinsurance clauses for property insurance?
80%, 90%, 100%
What happens to premiums as CI increases?
rate decreases, but this is offset by the increase in the amount of required insurance, which results in higher premiums
What happens to premiums if the limit of insurance stays constant?
All else equal, premiums will decrease as CI requirement increases; however, there is less 'wiggle room' if the building increases in value, and there is most likely a guranteed penalty with 100% CI clauses
What do coinsurance provisions try to avoid?
underinsurance; a business only buying insurance for its maximum probable loss
Actual Cash Value (ACV) Formula
=Replacement Cost- Actual Depreciation
Note: NOT Accounting Depreciation
What effect do high deductibles have on premiums?
lower premiums bc a business is buying less insurance
What effect do low deductibles have on premiums?
higher premiums bc business is buying more insurance/ have higher risks/ are more likely to have a loss
Valuation- Small Building Losses
less than $2500, only covers actual building itself
Valuation- Stock Sold But Not Delivered
insurer will pay selling price of the property (which may or may not be >ACV); this provides some BIC (bc covering a lost sale)
Valuation- Safety Glass
insurer will pay for term installation (to replace broken glass) if required by ordinance/ law
Valuation- Tenants' Improvements and Betterments
- 1. If tenant replaces the property, he or she gets ACV
- 2. If tenant doesn't replace/ rebuild, pro-rata rate is enforced:
- I=(yrs remaining on lease/ total years of lease)*original cost
Valuation- Valuable Papers and Records (electronic and otherwise)
insurer will pay cost to recreate the lost data (but still subject to the $2500 limit depending on data type)
Insured's Duties in the Event of a Loss
- Notice of Loss
- Police Report
- Preservation of Property
- Inventory and Inspection
- Proof of Loss
- Examination Under Oath
Insurer's Options for Loss Payment
usually a check is written (for ACV) to the insured, which doesn't necessarily have to be used to replace the loss; however there are 3 other options
3 Other Insurer Options for Loss Payement
- 1. Pay Replacement Cost (higher than ACV)
- 2. Insurer pays to restore property; buys it from insured, repairs it, sells it at a later date (usually occurs when 2 sides cannot agree)
- 3. Insurer goes in and rebuilds building/ replaces property itself (to prevent fraud)
What is the rule for recovered property?
insured must notify the insurer of any recovered/ slavaged property (to prevent over indemnification)
When is a building considered vacant?
- Tenant: only applies to rented space; 60+ days of not enough property for general customer operations
- Owner:60+ days of <31% occupation; if building is 31%+ occupied, it is NOT
What are the 6 perils that are not covered for vacant buildings?
- 1. Vandalism
- 2. Building Glass Breakage
- 3. Sprinkler Leakage
- 4. Water Damage
- 5. Theft
- 6. Attempted Theft
What is the indemnity reduction for the non excluded perils resulting in losses to vacant buildings?
Mortgage Holders (MH) Protection
insurer pays MH to the extent of its financial interest in the property
Perils Covered by Basic and Broad Form(12)
- 4)Windstorm or hail
- 6)Aircraft or vehicles
- 7)Riot or civil commotion
- 9)Sprinkler leakage
- 10)Sinkhole collapse
- 11)Volcanic action
- 12)Fungus (at additional charge for limited coverage)
Additional Perils Covered by Broad Form (4)
- 1)Falling objects
- 2)Weight of snow, ice, sleet
- 3)Water damage
- 4)Collapse (at additional charge)
fire that does not stay contained/ where it is supposed to be which causes a loss; usually accidental
fire that is intentionally started and stays in a particular area (e.g. a fireplace)
What must happen for windstorm/ hail damage to be a covered peril?
exterior damage must occure before interior damage
What is the exclusion to the sinkhole collapse peril?
man made subsidence (i.e. from mining, etc) is excluded
What is the exlcusion to the explosion peril?
steam boiler losses are excluded
What is the exclusion to the vandalism peril?
What is the exclusion to the volcanic action peril?
volcanic eruption damages (earth movements) are excluded
Basic and Broad Form Exclusions (10)
- 1. Lead in Paragraph
- 2. Ordinance or Law
- 3. Earth Movement
- 4. Governmental Action
- 5. Nuclear Hazard
- 6. Utility Services (off premises)
- 7. War and Military Action
- 8. Water-damage from naturally occuring water sources
- 9. Fungus, Wet Rot, Dry Rot, Bacteria (Mold)
- 10. Terrorism
Additional Exlusions to Basic and Broad Form (5)
- 1. Artificially Generated Electric Current
- 2. Explosion of Steam Boilers
- 3. Mechanical Breakdown
- 4. Neglect
- 5. Limitation on Loss of Animals (only paid if animal dies)
Special Form Coverage
typically provided broader coverage; only lists exclusions to the policy, not named perils like the other types (covers "everything but...")
Advantages of Special Form Coverage (4)
- 1. Agreement simply provides coverage for risks of direct physical loss to covered property.
- 2. A cause of loss not specifically excluded is covered.
- 3. Shifts burden of proof from insured to the insurer for disagreements about covered perils.
- 4. Provides broader coverage.
Exclusions to Special, Basic and Broad (12)
- 1. Ordinance or Law
- 2. Earth Movement
- 3. Governmental Action
- 4. Nuclear Hazard
- 5. Utility Services
- 6. War and Military Action
- 7. Water
- 8. Fungus, Wet Rot, Dry Rot, Bacteria
- 9. Artificially Generated Electrical Current
- 10. Steam Boiler Explosion
- 11. Mechanical Breakdown
- 12. Neglect