Study Guide

1. Insurance

• Transfers the risk of loss from an individual to an insurer
• Based on the principle of indemnity
• Based on the spreading of risk (risk pooling) and the law of large numbers

2. Hazards

Hazards give rise to a peril. There are 3 kinds of hazards:

3. Risk

Risk = uncertainty regarding financial loss.

2 Types of Risk

Methods of Handling Risk

• Avoidance
• Retention
• Sharing
• Reduction
• Transfer

4. Elements of Insurable Risk

All of the following elements apply to an insurable risk:

1. Elements of a Legal Contract

All of the following requirements apply:

2. Contract Characteristics

3. Legal Interpretations

• Ambiguities in the contract are always resolved in favor of the insured
• The insured can reasonably expect coverage based on the agent's words and actions
• Material misrepresentations (if intentional), breach of warranties, concealment, fraud — all can void the contract

Insurance Services Office (ISO)

• Creates forms for the standard market in accordance with state regulations
• Insurers pay for access to forms

Association for Cooperative Research and Development (ACORD)

• Publishes standardized forms for property and casualty insurers
• Develops electronic standards

1. Definitions

• Property — covers buildings, contents of a building, or both
• Casualty — covers compensation for harm or wrongdoing to others

2. Accident vs. Occurrence

• Accident — a sudden, unplanned, and unexpected event resulting in injury or damage
• Occurrence — includes losses caused by continuous or repeated exposure to conditions resulting in injury or property damage

3. Loss

Loss = reduction, decrease, or disappearance of value of insured property, caused by a named peril.

• Direct loss — physical damage to buildings and/or property
• Indirect loss (consequential loss) — loss resulting from a direct loss

4. Named and Open Peril

• Named peril — coverage for specific perils listed in a policy
• Open peril — coverage for any risk of loss not excluded in a policy

1. Cancellation and Nonrenewal

• Cancellation — termination of an in-force policy prior to its expiration date
• Nonrenewal — termination of a policy at its expiration date

Types of Cancellation

• Short rate
• Flat rate
• Pro rata

2. Ratings

• Class rating
• Judgement rating
• Schedule rating
• Experience rating
• Retrospective rating
• Merit rating

3. Claims

• First party — the insured's property or a person named in an insurance contract
• Third party — a person or persons not a party to the insurance contract
• Subrogation — the insurer's right to seek damages from a third party, after reimbursing the insured
• Arbitration — used when insurer and insured do not agree on how to settle a claim; sent to one or more arbitrators

4. Insurable Interest

• Must exist at time of loss
• No insurable interest results in a voided contract

1. Policy Components

2. Right to Cancel

• The insured may cancel a policy at any time
• Must provide notice of cancellation to the insurer
• The insurer may cancel a policy by providing advance written notice to the insured:

3. Additional Provisions

Types of Loss Valuation

1. Intentional Torts

A deliberate act that causes harm to another person.

• Libel — written or printed untrue statements intended to injure a person's or company's reputation
• Slander — oral or verbal untrue statements intended to injure a person's or company's reputation
• False arrest — unjustified physical restraint

2. Negligence

Negligence = failure to use reasonable and prudent care.

4 Elements of Negligence

• Legal duty
• Standard of care
• Unbroken chain of events
• Actual loss or damage

• Gross negligence — reckless behavior showing disregard for safety
• Assumption of risk — a defense against negligence if the person recognizes the danger and voluntarily chooses to encounter it
• Comparative negligence — the claim is not defeated; damages payable are mitigated
• Contributory negligence — negligence falls on the party contributing to the injury

3. Liability

• Absolute liability — applies to harm or injury resulting from negligence or omission
• Strict liability — often applied to product liability cases
• Vicarious liability — liability imposed on one party as a result of another party's actions

4. Damages

Comprised of bodily injury or property damage.

• Special damages — out-of-pocket expenses for medical, miscellaneous expenses, or loss of wages
• General damages — compensate for pain and suffering, mental anguish, or disfigurement
• Punitive damage — punishment for extreme behavior, gross negligence, or willful intent

5. No-Fault Insurance

• Insurance for automobile accidents
• Payment of loss claims from the insured's own insurer
• Protects the insured and passengers
• Designed to reduce the judicial impact of lawsuits

1. Purpose and Eligibility

The dwelling policy provides property coverage for a dwelling, its contents, or both. It's written solely for properties used for residential purposes:

• Owner-occupied, tenant-occupied, or both
• Properties in the course of construction
• Properties with up to 5 roomers or boarders
• Properties with up to 4 residential units
• Mobile homes (Basic form only) if they contain no more than one apartment
• Seasonal dwellings unoccupied for 3 or more months during a 12-month period
• Properties not designed as farm properties

2. Form Structure

Every dwelling policy form follows the same basic structure:

• Agreement
• Definitions
• Deductible
• Coverages, including Other Coverages
• Perils Insured Against
• General Exclusions
• Conditions

The dwelling policy's conditions section sets the ground rules for how coverage operates and how claims are handled:

Types of Properties Covered

• 1-to-4 family-owned residences
• No more than 2 families or 2 roomers/boarders per unit
• Tenants in nonowned dwellings (HO-4)
• Residential condominiums (HO-6)
• Seasonal dwellings and secondary residences
• Other types of ownership (e.g., dwellings under construction)

1. General Form Structure

Every homeowners form follows the same two-section structure:

• Agreement
• Definitions
• Section I — Property Coverage, Perils Insured Against, Exclusions, Conditions
• Section II — Liability Coverages, Exclusions, Additional Coverages, Conditions
• Sections I and II — shared Conditions

2. HO Forms

Additional Coverage

Paid in addition to the limit of liability (it doesn't reduce Coverage E):

• Claims expense — pays for expenses against the insured during a lawsuit in which the insurer defends
• First aid to others — pays for expenses incurred by the insured for first aid to a third party
• Damage to the property of others — pays up to $1,000 per occurrence for damage to property of others
• Loss assessment coverage — pays up to $1,000 per occurrence for the insured's share of a loss assessment charged by a corporation or association of property owners

Like the Dwelling Policy in Ch. 3, the homeowners policy's conditions are split by section:

Section I — Property

• Insured's duties after a loss
• Loss settlement
• Appraisal
• Other insurance and service agreement
• Loss payment
• Mortgage holders clause
• Volcanic eruption period
• Loss payable

Section II — Liability

• Bankruptcy
• Limit of liability
• Severability of insurance
• Duties after an occurrence
• Duties of an injured person
• Payment of claim
• Suit against the insurer
• Other insurance
• Policy period

Property and Liability (Applies to Both Sections)

• Liberalization
• Waiver or change of policy
• Cancellation and nonrenewal
• Assignment
• Subrogation
• Death

1. Policy Parts

2. Types of Auto

Part A pays for bodily injury and property damage, defense costs, and costs resulting from settlement or defense of the insured.

Limits of Liability

Exclusions

• Intentional injury or damage
• Use of the auto without permission
• Use of a commercial-type vehicle in business
• Damage to property being transported

Part B — Medical Payments

• Pays for necessary medical and funeral expenses caused by an accident and sustained by the insured
• Expenses must be rendered within 3 years of the accident
• Payments available from liability or uninsured motorist coverage reduce the amount of medical payments coverage

Part C — Uninsured and Underinsured Motorist

• Includes collision and other-than-collision coverages
• Pays for direct and accidental loss to a covered or nonowned auto

Transportation Expenses

• Paid if the loss is caused by collision or other-than-collision
• Applies to owned autos
• 24-hour waiting period for expense payments for losses other than theft
• 48-hour waiting period for expense payments resulting from theft

Part E — Duties After an Accident or Loss

• Prompt notification of loss
• Cooperation with the insurer
• Forwarding legal papers
• Submitting to physical or other examinations under oath
• Allowing the insurer to access medical records
• Notification of police of a hit-and-run or theft
• Protection of property from further loss
• Allowing the insurer to inspect and appraise damaged property

Part F — General Provisions

Covered Perils

• Fire (hostile fires only)
• Lightning
• Removal of undamaged property

Exclusions

• Accounts
• Currency
• Deeds
• Bills
• Evidence of debt, money, or securities

Features

• Filed (standardized) or unfiled (unique exposure) with state regulatory authorities
• Coverage on any property that is portable
• Policies are called floaters, since the coverage floats with the insured property, anywhere in the world

1. Components

• Insurance
• Floodplain management
• Floodplain mapping

2. Types of Coverage

3. Eligibility

• The community must meet the minimum floodplain management guidelines
• Eligible structures: 2 solid walls, a roof, and principally above ground
• 30-day waiting period before coverage takes effect
• Damage must be caused by a flood as defined by the NFIP

4. Flood Definitions

The NFIP only pays for damage that meets its specific definition of "flood":

• Overflow of inland or tidal waters
• Unusual and rapid accumulation or runoff of surface waters from any source
• Mudflow (a river of liquid and flowing mud on surfaces of normally dry land)
• Collapse of land along the shore of a lake or similar body of water, exceeding anticipated cyclical levels, that results in a flood

1. Boatowners Policy

• Used solely for private-use and pleasure watercraft
• Coverage excluded if the boat is hired out, chartered, or used in an official speed or race contest

2. Earthquake Coverage

• Applies to volcanic or seismic earthquake triggers
• Usually excluded from standard property forms
• Added by endorsement, or written in a Difference in Conditions (DIC) policy

Requirements

• The property must be located in a specific area defined by the state
• The property must be considered insurable based on reasonable underwriting standards
• Coverage could not be purchased through the normal insurance market

1. Types of Policies

2. Personal Umbrella

• Also referred to as catastrophic insurance
• Protects the insured from large claims and lawsuits
• Minimum $1,000,000 in additional coverage
• Self-insured retention (SIR) — a retained limit the insured must pay before the umbrella policy will respond to certain losses
• The insured must maintain their underlying insurance
• The insurer is not liable beyond what it would have paid if the underlying insurance had been in effect

Features

• Provides coverage for veterinary expenses (medical advice, diagnosis, care, treatment, prescription drugs)
• Similar to health insurance for humans
• 30-day free-look period
• Insurers must provide policyowners a disclosure, including (but not limited to) policy exclusions, provisions, and claim formulas

1. Policy Types

2. Coverage Parts

A Commercial Package Policy (CPP) can be built from any combination of:

• General Liability
• Commercial Property
• Inland Marine
• Commercial Auto
• Equipment Breakdown (also known as Boiler and Machinery)
• Crime
• Farm

1. Modular Parts

• Policy cover
• Common policy declarations
• Interline endorsements — endorsements that apply to more than one coverage part, to eliminate redundancy
• Line(s) of insurance declaration page(s)
• Line(s) of insurance coverage form(s)
• Common policy conditions
• Line(s) of insurance condition
• Causes of loss forms
• Endorsements

2. Common Policy Declarations

• List who, what, when, where, and how much of coverage
• Typically state that policies take effect at 12:01 AM at the mailing address of the insured

3. Common Policy Conditions

• The insured must maintain a minimum amount of insurance on the property
• A partial loss is paid in full if that minimum is met
• The coinsurance clause is not a factor in a total loss
• Insurance to value — replacement cost settlement for a policyholder who carries the minimum required insurance

Terrorism Risk Insurance Act (TRIA)

• A temporary federal program
• Intended to share the risk of loss from terrorist attacks with insurers
• The insured must meet deductibles and retentions before government reimbursements begin

Other Types of Commercial Coverages

• Cyber attacks
• Identity theft
• Intellectual property

Purpose

• Previously called the Boiler and Machinery coverage form
• Covers direct loss to covered property caused by a covered equipment breakdown
• Insured on a replacement cost basis
• Settlement drops to the smaller of ACV or repair costs if the property is not repaired or replaced within 24 hours
• Fungus, wet, or dry rot is limited to 12 months and $15,000 for testing, removal, and restoration

Section II — Who Is an Insured

• Individual (sole proprietor)
• Partnership/joint venture
• Limited liability company (LLC) or trust
• Organization other than a partnership, joint venture, or LLC

Section III — Limits of Liability

Section IV — Conditions

• Bankruptcy
• Insured's duties in the event of an occurrence, offense, claim, or suit
• Legal action against the insurer
• Other insurance
• Primary basis
• Premium audits
• Representations
• Separation of insureds
• Subrogation
• Nonrenewal
• Insured's right to claim/occurrence information

Pollution

• A potentially catastrophic exposure
• Written on a claims-made basis
• Coverage: bodily injury/property damage, and clean-up costs

Occurrence vs. Claims-Made (Coverage Triggers)

Purpose and Characteristics

• Protects against legal liability
• Usually written on a claims-made basis

Errors and Omissions (E&O)

• Protects insurance agents and brokers from financial loss due to a lawsuit by an insured
• Covers financial loss resulting from incorrect advice, not placing the correct coverage, or not informing the insured of important issues
• Written on a claims-made basis

Medical Malpractice

• Written for doctors, hospitals, and other medical practitioners
• Indemnifies the insured for injuries to patients

Directors and Officers (D&O)

• Protects directors and officers from losses arising from wrongful acts committed in their official capacity
• Triggered by a wrongful act
• Does NOT pay for fines, penalties, or punitive damages

Employment Practice Liability (EPLI)

Protects the employer for liability resulting from:

• Refusal to employ, termination, demotion, failure to promote, negative evaluation, reassignment, defamation, or humiliation based on discrimination
• Sexual harassment
• Verbal, physical, mental, or emotional abuse relating to race, color, national origin, gender, marital status, age, sexual orientation, or physical/mental condition

Products and Completed Operations

• Injuries and/or damages occurring after the insured completes the job or relinquishes control of the contract
• Coverage is optional

Umbrella and Excess Liability

• Provides higher limits of liability over other liability coverage
• Requires a minimum limit of liability
• The insured pays the self-insured retention (SIR) before the umbrella policy responds to certain losses

Commercial auto covers commercial auto exposures, excluding truckers, garages, and motor carriers — those get their own specialized forms, covered later in this chapter.

Covers businesses that regularly have autos of others in their care, custody, or control — such as repair shops and dealerships.

• Covers businesses that transport owned or nonowned property
• Trailer interchange coverage — covers loss or damage to a nonowned trailer in the insured's care, custody, or control, if the insured is legally liable for the damage

1. Definitions

2. Coverage Triggers

3. Coverages

Features

• Filed (standardized) or unfiled (unique exposure) with state regulatory authorities
• Coverage on any property that is portable
• Policies are called floaters, since the coverage floats with the insured property, anywhere in the world

Coverage Forms

Hull

• Physical damage coverage for the ship while it is in transit
• Terminates upon: ownership change (if voluntary); 15 days after ownership transfer (if involuntary); or arrival at the final port
• Other coverage: Taylor Hull form; Coastwise and Inland Hull Clause (CIHC); Increases Value and Excess Liability (IVEL) clauses

Cargo

• Covers loss or damage to cargo (actual total loss or constructive total loss)
• Total loss — damage to the entire property
• Constructive loss — damage costs exceed the policy limits
• Open cargo policy — covers all insured cargo for specific time periods and number of shipments
• Principle average clauses — define partial losses covered

Freight

• Indirect loss an insured would suffer if insured cargo is lost or damaged
• Losses include generated income or charges paid for transport
• May be prepaid

• Liability insurance that protects the owner of the ship from the consequences of negligent acts by the owner or their agents
• May be written with other marine coverage, or as a stand-alone policy
• Intentional acts are not covered
• No right of recovery

Features

• Insures property and liability exposures, and personal residential exposures of property and liability, of a family living on farm premises
• Written as a single package, or as separate coverages (monoline)

Coverage Forms

1. Eligibility

• More than 200 different crops are eligible
• Varies geographically
• Classifications: large grain crops (corn, maize, or soybeans); small grain crops (barley, oats, or wheat); cotton; tobacco; fruits and vegetables

2. Application

Required information:

• Type of crop to be insured
• Location of the crop by section, township, range, and county
• Applicant's percentage interest in the crop
• Number of acres to be insured
• Amount of insurance per acre

If the applicant's interest is less than 100%, the applicant must state whether they are the landlord or tenant, and the name of any other such party.

3. Terms of Coverage

• Coverage becomes effective at 12:01 a.m. on the day following the signing of the application
• If the crops are damaged by hail during this waiting period, the applicant must notify the insurer of such damage within 72 hours of the damage

4. Other Information

• Covered perils: hail, fire, and lightning
• Fire and lightning coverage applies before the harvest, and while the crop is in the field or being transported to first storage
• Crop-hail insurance coverage can be purchased in any amount up to the full value of the expected crop

Basic and Catastrophic Crop Insurance

• Protects against losses caused by natural conditions beyond the farmer's control
• Crops are eligible if they're viable for the location, and the farmer uses approved farming methods
• Uses a "yield guarantee plan"
• Not covered: losses due to mismanagement, theft, neglect, or poor market conditions

Multiple Peril Policy Options

• Yield coverage options are 50%, 65%, and 75% of average yields
• Price election coverage varies from crop to crop
• Unit insurance permits the writing of separate coverage for separate acreage:

1. Definitions

2. Principal, Obligee, and Surety

3. Contract Bonds

Guarantee performance of a written contract; primarily used in construction contracts.

4. Judicial Bonds

Filed for a legal or fiduciary obligation.

Features and Types

• Issues a bond to a principal/contractor
• Compensation comes after the obligee's unsuccessful attempt to collect from the principal
• Good faith guaranty — given to one party who relies on the good faith intentions of a third party
• Financial guaranty — pays a portion on behalf of the obligee if the principal or beneficiary fails to meet its obligations

Purpose

• For small to medium businesses
• A prepackaged policy that includes both property and liability coverages
• Coverage automatically included in the package policy cannot be excluded by the insured

Eligible Businesses

• Office buildings
• Apartments
• Mercantile/processing/service establishments
• Contractors (certain types)
• Fast-food restaurants
• Convenience stores

Be sure to carefully review additional underwriting criteria for each type of business listed above.

Ineligible Businesses

• Auto sales and servicing operations
• Household personal property
• Manufacturing operations
• Places of amusement
• Bars/grills
• Banks
• Contractors (certain types) and self-storage facilities

Coverage Features

• Property covered: buildings and/or business personal property
• Direct physical loss to covered property
• Coverage limitations and exclusions — the policy will not pay for certain losses or damages (similar to the CPP)
• Additional coverages (e.g., debris removal, preservation of property, and fire department service charge)
• Coverage extensions — extend the policy limits

Policy General Conditions

Features

• Similar to CGL policies
• Cannot be written on a monoline basis
• Covers bodily injury, property damage, personal injury, advertising injury, and medical expenses
• Pays for medical, dental, hospital, and funeral services on or near the insured premises, within 1 year of the accident

Exclusions

• Expected/intended injury
• Contractual liability
• Liquor liability
• Pollution
• Mobile equipment
• Professional services
• Electronic data
• War

Who Is Insured

Limits of Insurance

• Aggregate limit for product and completed operations exposures (2× the occurrence limit)
• Aggregate limit for bodily injury, property damage, personal/advertising injury, and medical expenses (2× the occurrence limit)
• Separate limit for fire damage legal liability

General Conditions (In Addition to Common Policy Conditions)

• Bankruptcy — does not relieve the insurer from its obligations
• Duties in the event of occurrence, claim, or suit — the insured must notify the insurer of the occurrence, provide written notice, forward related legal papers, and cooperate with the investigation
• Legal action against the insurer — cannot be brought until all policy terms have been complied with
• Separation of insured — the limit is paid only once per occurrence

These conditions apply to both Section I and Section II:

Monopolistic vs. Competitive

Compulsory vs. Elective

Federal Employers Liability Act (FELA)

• A liability law
• Insured interstate railroad workers may sue their employer for negligence
• Covered under Section II of workers compensation

U.S. Longshore and Harbor Workers Compensation Act (LHWCA)

• Offers workers compensation benefits to workers engaged in maritime employment
• Provides medical benefits, lost wage compensation, and rehabilitation services

Jones Act

• Covers ships' crew who are injured while working on a vessel
• Applies to navigable waters for international/interstate commerce

General Section

Part One — Workers Compensation Insurance

• Benefits are referenced in the individual state's law
• Supplemental payments: defense costs, expenses incurred, bond premiums, litigation costs, interest in judgements, expenses incurred by the insurer

Basic Limits

• Insurers may purchase higher limits
• Other insurance clause — losses are paid on a contribution-by-equal-share basis
• Limit of liability provision — the accident limit applies per accident; the bodily-injury-by-disease limit applies per person

Part Three — Other States Insurance

• Allows coverage for employees in states different from where the employer is based
• States other than the one in which the policy is written must be included for coverage to apply there
• Coverage applies on an automatic/temporary basis

Part Four — Your Duties If Injury Occurs

The insured must:

• Notify the insurer
• Provide immediate medical care
• Provide the names and addresses of the injured worker and witnesses
• Send notices and legal papers
• Cooperate with the insurer
• Not make voluntary payments or assume obligations on their own

Part Five — Premium

• Explains premium determination, record retention requirements, and the insurer's auditing rights
• Premium is determined by classification
• The initial premium is a deposit, subject to adjustment at the end of the policy period
• Remuneration — includes payroll and other compensation

Part Six — Conditions

Job Classification — Payroll and Rates

• Rating is developed by applying the bureau's job classification rate to each $100 of payroll
• An audit determines the final premium

Experience Modification Factor

• Developed by the rating bureau
• Coverage is based on the employer's losses, payroll, and premiums

Premium Discounts

• Occur when the insured owes a total standard premium greater than $5,000

Regulations

Commissioner of Insurance

• Elected for 4 years (maximum 2 consecutive terms)
• Regulates the internal affairs of the Department of Insurance
• Does NOT write laws
• Examines all authorized insurers

Insurance Guaranty Association

• Protects policyowners, insureds, and beneficiaries against insolvent insurers
• All admitted insurers must be members of the Association
• Unfair trade practice: stating that an insurer's policies are guaranteed by the existence of the Association

Licensing Process

• Pass the examination and meet prelicensing education requirements
• Submit application and fees
• Be a state resident
• Be of good character

Types of Licenses

Maintenance and Duration

• Must be renewed every 2 years
• Continuing education — must be completed every reporting period (24 hours, including 3 hours of ethics)
• Report changes in name and address immediately
• Report administrative actions within 30 days
• A license is not required if a person does not receive commissions
• Inactive license — no active appointments

Disciplinary Actions

• Cease and desist order
• Denial, suspension, revocation, or refusal to renew
• Monetary fines

Producer Regulation

• Must be licensed in the line of authority for which the agent transacts insurance
• Must be appointed by the insurer to transact on its behalf
• Maintain records of transactions for 5 years
• Avoid unfair trade practices

Domicile

Ownership

• Licensed and authorized to transact business in this state
• Must obtain a Certificate of Authority