3. property insurance · 2019-08-17 · 3. property insurance property policy introduction property...

3. Property Insurance

Property Policy Introduction

Property insurance provides protection against most

risks to property, such as fire, theft and some weather

damage. This includes specialized forms of insurance such

as fire insurance, flood insurance, earthquake insurance, or

homeowners insurance.

The three primary coverages of either the building or

the contents under a property policy are the building,

contents and the loss of use. You can insure specific

items such as jewelry, or purchase blanket coverage for

property at a particular location.

• Specific Insurance - This is when you insure a specific item.

• Blanket Insurance - This is when you insure several items, such as “all personal property

located at 123 Main Street.”

Perils Insured Against

If you recall from lesson one, the cause of a loss is called a peril. Perils are what we insure against

when we purchase an insurance policy.

With property insurance, policies can be written as named peril (broad form) policies or as open

peril (all risk or special). A named peril policy (broad form) provides lists of all the perils covered

in the policy such as wind, hail, fire or lightning. If a peril is not named or listed in the policy, then it

is not covered. With a named peril policy, it is the insureds responsibility to show that any loss was

the result of a covered peril listed in the policy.

2 3 Property Insurance

© 2014 0Chance2Fail.com. This PDF is made available for personal use only during your online course access time limits, subject to the 0Chance2Fail.com Terms of Use Agreement. Any other use requires prior written consent from the copyright owner. Unauthorized use, reproduction and/or distribution are strictly prohibited and violate applicable laws. All rights reserved.

With an open, special or all-risk peril policy, all perils will be covered unless it is specifically

excluded in the policy. When an insured files a claim, the company must pay the claim unless the

cause of loss is listed as an exclusion under the policy.

Quick Review: Remember that a hazard is a condition or the source that increases the probability

or severity of a peril. Hazards will typically be present before a peril occurs; however, remember that

it is the peril that actually causes a loss.

Property Policy Components

Property insurance provides protection against most risks to property, such as fire, theft, and wind.

Many states have adopted a set of uniform or standardized insurance laws which allow similar forms

to be used in these states. This is not to say that all policies are alike, because that is not the case.

For the states that have standardized form laws, property and casualty insurance contracts are

comprised of the following major components.



#1 Declarations (Dec Page)

Each Dec Page contains the same type of information, but is customized for each policy, providing

a summary listing as follows:

A. Who is Insured

a. Named Insured - The person or business that is insured.

b. First Named Insured - If there is more than one named insured, this is the person who has the

most responsibility and rights.

c. Additional Named Insured - This may be the bank that has the property financed.

b. What Property Is Covered and Where It Is Located

a. Specific Insurance: - This is when you insure a specific item.

b. Blanket Insurance - This is when you insure several items, such as “all personal property

located at 123 Main Street.”

c. Specifies the policy period by date, when coverage begins and ends, and time—where and

in what time zone.

c. How Much the Property Is Insured For

a. Policy Limits - This is the maximum amount for which an insured is protected under the terms

of the policy.

d. Premium amount

a. What's it going to cost you?

Policy Period and Coverage Territory

The policy period, which is usually 6 months or one year is defined by the contract. Coverage territory

is also defined in contract. For example, personal property is covered by your homeowners

policy anywhere in the world up to a certain limit. A commercial property policy will cover

business personal property on premises or within 100 feet of premises.

#2 Definitions

This is a simple one to remember. The definitions part of an insurance policy defines the meaning

of certain terms used in the policy.



#3 Insuring Agreement (Clause) The insuring agreement contains the insurer’s promise to pay. It also contains an explanation of what

property is covered and the perils insured against:

• Key policy coverages are described in detail

• Additional coverages, if any, are described and

• Lists the specific perils insured against such as fire, lightning, etc.

#4 Additional Coverages The insuring agreement will list any additional coverages that are a part of the policy. For example,

coverage extensions can provide additional coverages to a policy. Extensions provide separate or

additional limits of insurance and require the insured to meet certain requirements before they are

applicable. Extensions may be helpful in adding back coverage that the basic policy excluded or

limited. One example excluded from coverage as personal property in a homeowners policy would be

credit cards. However, the additional coverages give back a limited amount of this coverage.

Keep in mind that coverage extensions are typically available for a surcharge or extra premium

amount.

#5 Conditions The conditions section of an insurance policy shows the general duties or procedures that the

insurer and insured agree to follow under the terms of the policy. Provisions are used in the

policy that stipulate the conditions or place limitations on the insurer’s promise to pay or perform.

If the policy conditions are not met, the insurer can deny the claim.

Common conditions in a policy include the requirement to file a proof of loss with the company, to

protect property after a loss, and to cooperate during the company’s investigation or defense of a

liability lawsuit.

#6 Exclusions and Limitations This part of the policy eliminates coverage for certain perils. There are 4 broad categories of exclusions:

1. Non-Accidental Losses

These losses are excluded because they are certainties, not risks. Wear and tear, deterioration, rust,

decay, mechanical or electrical breakdown, are all examples of non-accidental losses. The company

will not pay to replace your 20 year old roof just because you think it's time to get a new one.



2. Losses You Can Control

These are losses that you could control or prevent with extra care or effort, such as scratching,

breaking, or chipping of valuable objects.

3. Extra-Hazardous Perils

An example of an extra-hazardous peril is earthquake or nuclear explosion.

4. Catastrophic Losses

This type of loss could bankrupt the insurance company. Losses resulting from war or nuclear

disasters are examples of catastrophic losses.

Limitations are similar to exclusions, but are not the same thing. Limitations eliminate or reduce

coverage only under certain circumstances.

For example, after a building has been vacant for 60 days, some policies will limit losses by

reducing any claims by 15%.

#7 Endorsements If you need to modify or change the original policy, such as adding or deleting insureds or certain

coverages, you can accomplish this by a procedure known as endorsement. An endorsement is a

written document attached to an insurance policy that modifies the original policy by changing the

coverage offered under the policy.

Loss Settlement Options

Loss settlement or valuation is how losses will be paid. In general, the insured can collect the lesser

of:

1. Insurable interest

2. Policy limits

3. Actual cash value

4. Cost to repair

5. Replacement cost

So what options do you have when buying a property policy?



Option #1, Actual Cash Value (ACV)

Today’s replacement cost minus the depreciation on the insured item is defined as Actual Cash Value (ACV).

Formula: Replacement cost minus Depreciation equals Actual Cash Value.

For example, Rhonda has a large-screen TV that was destroyed in a fire. The TV depreciated $300

in the first year, $150 the second year, and $150 each of the remaining three years. After the TV was

destroyed, Rhonda located a new TV that would cost $2800. The actual cash value of Rhonda’s old

TV is $1,900.

$2800 - ($300 + $150 + $150+ $150+ $150) = $1,900 ACV

Option #2, Replacement Cost The insurer agrees to automatically pay the replacement cost for covered losses, without subtracting

depreciation. Initially, the insurer will pay only the ACV of the covered item to be replaced. Once the

item has been replaced, the insurer will pay the remaining balance.

Option #3, Functional Replacement Cost The functional replacement cost is when damaged property is repaired or replaced with lower-

cost alternative materials that are functionally equivalent to the damaged materials. This allows

replacement of expensive and outdated items with less expensive, more modern and up-to-date

work. An example would be if you owned an older home with lathe and plaster walls. After a fire, the

insurer replaced the walls using more modern materials such as wallboard or plywood.

Option #4, Agreed Value This is a property policy provision where the insurer and insured agree, at policy inception, as to the

amount of insurance that represents a fair valuation for the property.

These contracts are often used to help determine the value of certain hard-to-value items such

as paintings or antiques.

Option #5, Stated Amount If stated value coverage is selected, the maximum amount paid at the time of loss is the value of the

policy, even if the loss amount is larger than the amount insured. The insurer's obligation is the cost

to repair, replace or cash out their insured, at their discretion, not to exceed the stated amount (or

maximum) of coverage.



Option #6, Fair Market Value Market value would be what the property could be sold for at the time of the loss.

For example, suppose Joe spends $400,000 to build a fancy house in an open area. Subsequently,

the land around the house becomes zoned for heavy industry and a bad-smelling oil refinery is built

nearby. Joe may now have trouble finding a buyer; therefore, his house may have a market value of

only $250,000, even though it would cost $400,000 to rebuild if it were destroyed.

Policy Provisions and Conditions

Deductible As the insured, you will pay the first part of every loss up to the amount of the deductible. You may

not like this, but the insurer knows that deductibles help reduce the cost of insurance by reducing

the number of small claims.

For example, if Joe has a homeowner policy with a $500 deductible, and a hail storm damages his

roof causing $4,000 in damages, his policy will pay $3,500 ($4,000 - $500).

Restoration/Nonreduction of Limits Each property policy has a limit that reflects the total amount that the insurer will pay for a loss.

Most claims that are filed by insureds are for partial losses rather than total losses. When a partial

loss claim is filed, if covered by the policy, the insurer will pay for only the amount of the partial

loss. In paying for a partial loss, the total limit of the policy is reduced by the partial loss amount;

however, after the repairs are made to the property, the insurer restores the total limit of the

policy back to the original amount.

Coinsurance Remember that coinsurance helps persuade policyholders to insure their property to value. It shows

the minimum amount you should have the property insured for. It is expressed as a percentage of

the property’s value, usually a minimum of 80%. If you carry the amount of insurance required by

the coinsurance condition at the time of a loss, the insurer will pay losses up to the policy limits. If

not, the insurer will pay only a percentage of what the full reimbursement would have been. This is

called the coinsurance penalty.



The coinsurance formula is calculated as follows:

Insurance carried ÷ Insurance required x loss amount = loss payment

For example, Joe purchased a new house. Shortly after moving in, he had a $5,000 loss. Joe's house

is valued at $100,000; however, he insured the house for only $60,000 to save a few dollars on

premium. Remember Tightwad Hardware Store? So how much will the insurance company pay on

this loss?

Using the coinsurance formula, let’s find out.

$60,000 ÷ ($100,000 x 80%) x $5,000 = $3,750 is the amount the company will pay for the loss

The coinsurance penalty in this situation was $1,250 ($5,000 -$3,720). Costly penalty for Joe being

cheap!

Policy Period and Coverage Territory

The policy period, coverage territory condition, states that a loss must occur during the policy period

and in the coverage territory to be covered. The coverage territory means the United States of

America (including its territories and possessions), Puerto Rico and Canada.

Mortgage Clause

This clause specifies the rights and duties of the mortgagee,

or loss payee, under the policy. The mortgagee is generally

named in the declarations since the mortgagee has an

insurable interest in the property.

If a covered property suffers a loss and the insured fails

to file a proof of loss, the insurer notifies the mortgagee,

and the mortgagee must file the proof of loss to protect

its rights under the policy. Also, the mortgagee may be

required to pay the premium if the insured fails to pay it.

If for some reason the insurer denies a claim made by the

insured because of some condition caused by the insured, and the loss would have otherwise been

covered, the denial may not apply to the mortgagee.

The insurance company generally has the option of paying off the mortgage and receives full

assignment and transfers all rights to the property. The mortgagee will then have no interest in the

property.



Other Insurance

What happens when you have two insurance policies that cover the same risk, do you get to collect

twice for the same loss? The answer is: maybe. It depends on how the Other Insurance provision

in your policy is worded. This provision helps to comply with the Principle of Indemnity we

discussed in an earlier lesson which states that an insured should not profit from an insured loss.

Five important definitions you should learn:

1. Concurrency and Nonconcurrency

Concurrency is when two or more policies cover the same risk with identical coverages.

Conversely, nonconcurrency is when two or more policies cover the same risk, but the coverages

are not identical as to the extent of coverage provided. This situation could result in coverage gaps

or other problems and should be avoided.

Let's take a closer look at a few methods the Other Insurance clause uses to pay losses.

2. Escape Clause

Other insurance clauses may have an "escape" clause, which is the most basic type. It simply denies

any coverage for a claim if other insurance is available.

3. Pro Rata

Many policies will have an Other Insurance provision using the pro rata method to pay the loss.

This provision may read something like this:

- If a loss covered by this policy is also covered by other insurance, we will pay only the proportion

of the loss that the Limit of Liability applies under this policy bears to the total amount of

insurance covering the loss.

This wording limits the amount the policy will pay to a proportion (pro rata) of total coverage

in place for all policies covering the same risk. The amount each company pays is determined by

adding up the limits of all policies that cover the loss, and then dividing the limit of each policy by

the total amount of insurance available to arrive at the percentage each policy will pay toward the

loss. Each policy's percentage is then multiplied by the amount of the loss to determine the loss

payment amount.

As an example, assume you have two homeowners policies that specifically cover fire losses. Policy

A has a limit of $100,000, and Policy B has a limit of $300,000. If you suffer a fire loss in the amount of

$100,000, Policy A will pay ¼ of the loss ($25,000) and Policy B will pay ¾ of the loss ($75,000).



Step 1: The amount each insurer will pay is determined by adding the total limits of all policies that

cover the loss. This sum is the total amount of insurance available.

Do the math: Policy A $100,000 + Policy B $300,000 = $400,000 total coverage on your home

Step 2: The next step is to divide the limit of the first policy by the total amount of insurance

available, which is shown in Step 1.

Do the math: ($100,000 ÷ $400,000) = .25 x $100,000 = $25,000 Policy A

Step 3: The amount from Step 2 is then multiplied by the amount of the loss to establish that

policy’s payment amount.

Do the math: ($300,000 ÷ $400,000) = .75 x $100,000 = $75,000 Policy B

4. Contribution by Equal Shares But what happens if you have the other Insurance condition in multiple policies covering the same

property? Then all insurers contribute equally up to the policy with the lowest limit. After the policy

with the lowest limit has been reached, the remaining policies with higher limits continue to pay

until all limits are exhausted or the loss is paid, whichever comes first.

5. Primary and Excess Your policy may stipulate that when other insurance exists, they will pay only the excess above what

the other insurance pays for a loss. So if Policy A would pay $100,000 of a $150,000 loss, Policy B would

pay no more than $50,000 of the loss. In this example, Policy A is considered primary insurance and

Policy B is excess insurance.

Assignment This condition specifies that a policy cannot be transferred to another person without the written

permission of the insurer, with the only exception being the death of the insured.

Abandonment This condition states that the insured may not abandon his or her property to the insurer and then

ask to be reimbursed for the property’s full value.

For example, Joseph wrecks his 7-year-old pick-up, causing significant body damage. The

abandonment condition protects the insurer from having to accept the truck if Joseph decides to

abandon it.



Salvage

This condition allows the insurer to settle with the insured by taking possession of the car and

reimbursing the insured for the loss of the auto. When the insurer sells the salvaged goods, the

proceeds can reduce the cost of the claim to the insurance company.

For example, Joe wrecks his car and his insurance company considers it a total loss. After the insurer

pays the claim, they sell the car to a salvage dealer. The proceeds from the sale will help offset the

claim paid.

Legal Action against the Insurer

The insurance company may not be sued unless the insured has fully complied with the terms of the

policy and the suit is brought within 2 years of the date of loss.

Vacancy and Unoccupancy

This provision allows the insurance company to limit or restrict

coverage if the insured property is unoccupied or vacant. There

may be a greater chance for loss to occur when a property becomes

vacant or unoccupied.

There is a difference between the two terms: Vacancy means the

absence of both people and property, while unoccupied means

that there are no people present.

Liberalization

In some cases, your insurance company will decide to add or enhance coverage at no cost. When

this happens, your policy's liberalization clause gives you immediate access to the new or enhanced

coverage.

For example, the Insurance Commissioner starts receiving numerous complaints about homeowner

policies with XYZ Insurance Company. The complaints center on XYZ’s refusal to pay for seepage

and leaking on these homes. The Commissioner gets XYZ to change or broaden their coverage to

include the seepage and leaking on this policy. This change affects all existing similar policies issued

by XYZ.



Subrogation Most policies come with a subrogation clause. If another party is legally responsible for damages,

the insurer will pay you and then sue the negligent party to recover damages. The insurance company

will not pay you and also allow you to recover damages from the negligent party for the same loss.

For example, Joe is injured in an auto accident caused by another driver. The other driver refuses to

pay for the damages, so Joe’s insurance company intervenes and pays for the damages. His insurer

then sues the other driver and/or the driver’s insurance company to recover the amounts paid on his

behalf.

No Benefit to Bailee A bailee is someone to whom personal property is temporarily entrusted to for cleaning, storing, or

repairing. The bailee is not covered under the insured’s policies while they have the possession of

the insured’s property. Examples of bailees would be dry cleaners, jewelry repair shops, and storage

facilities.

Insured's Duties Following a Loss The insured's duties following a loss include:

• giving prompt notice of claim to the insurance company or agent;

• protecting the property from further damage;

• completing a detailed proof of loss (inventory of the damages);

• making the property available for inspection by the company;

• submitting to examination under oath if required; and

• assisting the insurer as required during the claim investigation procedure.

Valuation Condition The valuation or how losses will be paid condition determines what an insurance company will pay

when a covered loss occurs. Generally, the insured can collect the lesser of:

• insurable interest;

• policy limits;

• actual cash value.



Appraisal If the insurance company and the insured disagree on the value of the property or the amount of

loss, either may make written demand for an appraisal of the loss. In this event, each party will select

a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree,

either may take the matter to court. The appraisers will state separately the value of the property

and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision

agreed to by any two will be binding.

Each party will:

1. Pay its chosen appraiser; and

2. Bear the other expenses of the appraisal and umpire equally.

If there is an appraisal, the insurance company will still retain their right to deny the claim.

Arbitration If the insurance company and the insured disagree on whether the insured is legally entitled to

recover damages or to the amount of damages which are recoverable by the insured, then the

matter may be arbitrated.

Both parties must agree to arbitration. If so agreed, each party will select an arbitrator. The two

arbitrators will select a third. If they cannot agree within 30 days, either may take the matter to court.

Each party will:

1. Pay the expenses it incurs; and

2. Bear the expenses of the third arbitrator equally.

Recovered Property If property is recovered after loss settlement, the insured may choose between the recovered

property and the insurer's loss payment. If the insured chooses the recovered property, the insurer's

loss payment must be returned, but the insurer will pay for any necessary repairs to the recovered

property plus the recovery expenses.



Pair or Set Clause

A Pair or Set condition is a loss settlement condition that appears in many

property contracts dealing with losses involving part of a set or one of a pair. In

this case, the insurer can either:

1. Repair or replace any part to restore the pair or set to its value prior to the loss, or

2. Pay the difference between the actual cash value of the property before and after the loss.

Suppose that Joe's wife, Jane, has a pair of diamond earrings valued at $2,000. If one of them is

damaged, destroyed, or stolen, the remaining earring might only be worth $650. You might think

that the loss is $1,000 because one out of two items was lost. But to Jane, the loss is $1,350—the

difference in value before and after the loss.

Cancellation and Nonrenewal An insurer may start a cancellation on a property or casualty policy by mailing or delivering a notice

of cancellation to the named insured—usually at least 30 days before the policy cancellation date.

If the cancellation is due to nonpayment of premium, the cancellation notice must be mailed or

delivered at least 10 days before the policy cancellation date.

Cancellation Cancellation is the termination of an insurance policy before its expiration date by either the insured

or the insurer. State laws govern when and why an insurance company can cancel a contract but

you as the policyowner have the right to cancel your policy at any time for any reason. Insurance

policy cancellation provisions require insurers to notify insureds in advance of canceling a policy and

stipulate the manner in which any unearned premium will be returned.

For example, if you pay in advance for an auto policy with a term of 6 months, your insurance

company could cancel you after 3 months if you were using your personal auto in your limo business

(livery services are excluded). The company would refund your unused premium (3 months) on a

prorata (proportional) basis…50% of your money back.

A short-rate cancellation means you will receive a pro-rated refund minus a penalty. The penalty

is usually for administrative costs incurred by the company. We commonly see short-rate refunds

when you cancel your existing policy midterm to replace it with a new policy from a different

company.



Then there is the flat rate cancellation in which you will receive your entire premium back. For

example, life insurance comes with a free-look period. If you decide that you do not want to

keep the policy for any reason during the free-look period, the company will process a flat rate

cancellation.

Non-Renewal A non-renewal is simply the decision to not renew your policy at your renewal date. Either you or

your insurance company can decide not to renew the policy when it expires. State law requires your

insurance company to give you a certain number of days’ notice and explain the reason for non-

renewal before it drops your policy.

Lesson Wrap-Up

You should see by now that there is no secret to this—no magic formula. Take notes, review this

lesson several times, and then proceed to your lesson Driller-open book end of chapter quiz. Learn

the information, don't memorize Driller questions. Think through your Driller questions. Not all of

the question answers are obvious.

3. property insurance · 2019-08-17 · 3. property insurance property policy introduction property...

Documents