Property and Casualty Insurance (Pre-License)

Module 1: Property Insurance

Lesson 1: Insurance Terms and Related Concepts

Purpose of Insurance

The purpose of insurance is to spread risk amongst others and provide a

practical solution to economic uncertainties and unexpected losses.

For test purposes, insurance is defined as a social device for handling risk

by transferring it.

Parts of the Insurance Contract

Since an insurance policy is a legal contract, it must be very specific about the

agreements between the insured and the insurer. To do this, most policies

contain five parts:

� Declarations: These can usually be found on the first page of the

policy.

• It contains information such as the name of the insured,

address, amount of coverage, description of the property, and

the cost of the policy.

� Insuring Agreements: This is the �heart� of the policy as it states

what is to be covered or, in other words, the losses for which the insured

will be indemnified.

• The insuring agreement also describes the type of property

covered and the perils against which it is insured.

� Conditions: This part of the contract describes the responsibilities

and obligations of both the insurance company and the insured. In

other words, everyone knows what they have to do.

� Exclusions: Describes the losses for which the insured is not covered.

If an excluded loss occurs, the insured will not be indemnified.

� Definitions: This section clarifies the meaning of certain terms

used in the policy.

Insurable Interest

Before a person can benefit from insurance, that person must have a chance of

financial loss or have a financial interest in the property. The insured must have

an insurable interest in his/her home or any subject of the insurance. It is

important to note that it is at the time of a loss when the insured must have an

insurable interest as it relates to property and casualty insurance.

Risk

A risk is the uncertainty or chance of a loss

Types of Risks

1. Speculative Risk: This risk implies that an individual has the potential

of improving his/her financial position and also has the potential

of being placed in a worse financial position by losing something. The

best example of speculative risk is GAMBLING. Therefore, insurance

policies will NOT protect speculative risks.

2. Pure Risk: On the other hand, this risk is what insurance is all

about. It covers losses only, and does not imply that the insured can

�make money� after a covered loss. The goal of insurance is to place

the insured back into his/her financial position just prior to the loss.

Obviously, in the case of life insurance, the deceased cannot be replaced,

but instead, the insurance will provide financial stability to the family or

loved ones. In property and casualty, dollars are provided to replace

the lost/damaged property.

Hazard

A hazard is any factor or situation that increases or contributes to the probability

that a peril will occur, so as to increase the chance of a loss.

Types of Hazards

� Physical Hazard: A visible or tangible condition of the premises that

increases the chances of a peril occurring such as faulty wiring, slippery

floors, icy roads, gasoline cans, etc.

� Moral Hazard: Concerns the insured�s attempting to defraud the

insurance company through intentional and deliberate destruction of the

property, such as arson.

� Morale Hazard: Has to do with the insured�s indifference, carelessness,

laziness or lack of concern for the property, such as leaving your keys in

the car, smoking in bed, or exceeding the speed limit.

Peril

A peril is the immediate, specific cause of a loss. For example, if a home is

destroyed by a fire, the fire is a peril.

Policy Perils

� Property and casualty insurance policies are written in one of two ways

concerning the perils covered. The first are named perils and the

second type is known as all risk or open perils.

• Named perils lists the specific perils that it will cover.

Obviously, in order for the insured to collect, the specific loss

must be covered or the insured will not recover.

• On the other hand, an all risk or open perils policy covers all

risk of loss or all perils, except those that are specifically

excluded.

Loss

A loss is an unintended or unforeseen reduction or destruction of financial or

economic value. If an insured�s building burned to the ground, this event would

be considered a total loss because the value of the ashes would be drastically

different than the value of the building before the loss.

� Direct Loss is a loss which occurs directly through an �unbroken chain

of events� as a result of an insured peril. This is done without any

intervening cause.

� Indirect or consequential loss is a loss or damage which results

from a hazard or peril, but the loss was not actually caused by that hazard

or peril. These are losses which result from the actual physical loss itself.

• Example: A fire burns a clothing store to the ground. The

direct loss from the fire peril would be the total destruction

to the building and its contents. The indirect loss from the

fire peril would be the inability of the clothing store owner to

conduct business following the fire loss.

Proximate Cause of a loss is an action that, in a natural and continuous

sequence, produces the loss. This sequence is unbroken by any other factors or

events.

Example: Everyone eating catfish in a restaurant gets ill. Even though

these patrons did something else after leaving the restaurant, the fact is,

they were served food that was the proximate cause of the injury

(sickness).

Deductibles

In order to avoid minor claims, companies usually write deductibles into their

property contracts. This means that the insured must pay some portion of the

loss. Just like in health insurance, the insured will pay the deductible first, and

then the insurance company will pay the remainder of the claim within covered

limitations.

Indemnity

All property and casualty insurance contracts are contracts of indemnity and their

purpose is to make the insured �whole again�, or pay he/she back. The purpose

is to put the insured back into the same financial positions as he/she was, prior to

the insured loss.

Actual Cash Value (ACV)

Many losses are settled with the insurance company

on an actual cash value basis. This is usually

calculated by determining what the item would cost to replace (replacement cost)

and subtracting an amount for depreciation (use).

� The formula is ACV = Replacement Cost � (minus) Depreciation

� If the insured were paid the full replacement cost without deducting

anything for having used the insured item, the principle of indemnity

would be violated.

Replacement Cost (RC)

This is the exact amount of settlement needed to replace damaged or destroyed

property at the point the loss occurred, with one of like kind and quality. As

Example: Billy Bob bought a Z28 Camaro three years ago for $22,000.

Today, it has a book value of $7,000. According to the principle of indemnity, the

depreciation is not a factor, this represents a departure from indemnity rules.

Limit of Liability

These limits represent the maximum amount the insurance company will pay for

a loss. Within this framework, the principle of indemnity and applicable policy

conditions are used to determine the exact reimbursement, in the event of a loss.

The limits of liability are found on the Declarations page.

Coinsurance

This feature encourages policyholders to insure property to value. Coinsurance

is found in many property policies in order to require policy holders to carry

adequate insurance on their property at the time of loss. A coinsurance clause is

an agreement between the insurer and insured in which:

� The insurer agrees to charge a reduced premium rate for coverage.

� The insured agrees to carry a specified percentage of the replacement

cost of the building.

A typical coinsurance clause of a property policy will state that an insured has to

satisfy an 80% level. This means that the insured must carry insurance equal to

at least 80% of the value of the insured property.

If the coinsurance clause is satisfied, partial losses will be paid in full. If the

coinsurance clause is not satisfied, partial losses will be subject to a penalty

payment.

Extensions of Coverage

Extensions of coverage are really additional coverages that would apply in an

insurance policy. These may have reduced or separate limits of liability or require

the insured to meet certain policy requirements before they apply.

Additional Coverages

These are similar to extended coverages, as they offer some additional policy

coverage under certain conditions. Some examples will be discussed in later

chapters of this workbook.

Accident vs. Occurrence

Property and casualty contracts are usually written in two ways:

Accident

An accident is a sudden, unexpected, unforeseen event resulting in

financial loss.

� Examples

•Man trips on a cracked sidewalk.

•A truck hits a car.

•Lightening strikes a house, causing a fire.

Occurrence (very close to an accident)

An occurrence is a sudden, unexpected, unforeseen event resulting in

financial loss, including repeated and continuous exposure to conditions.

� Examples

• Industrial waste gradually pollutes a river.

•An insured worker gradually becomes ill due to repeated

handling of asbestos on the job.

Cancellation

Either the insured or insurer may cancel provided coverage. Each property and

casualty policy details the reasons for which the insurer can cancel the policy. Of

course, these reasons must be in compliance with individual state laws. While

the insurance company must give some specified written notice required by the

state, the insured, on the other hand, can request immediate cancellation,

without any notice.

If the insurance company cancels the policy, any unearned premium will be

returned on a pro rata basis. There is no allowance for deductions, such as

service fees. This allows the insured to get back all of the money which has not

been used or applied to premium cost.

If the insured cancels the policy any unearned premium will be returned on a

short rate basis (with deductions made for servicing the policy, etc.) With the

short rate basis, the insurance company can recoup some of the costs of

underwriting and policy processing.

If either the insured or the insurance company cancels the policy on its effective

date, this is known as a flat cancellation, with no return of premium or service

fees.

Nonrenewal

This is the act of terminating an insurance policy after the specified policy period.

Nonrenewal is a notice given by the insurance company to the insured, indicating

the intention not to renew the policy upon the normal termination date. There

may be, however, some limitations on the insurance company for nonrenewal.

Vacancy and Unoccupancy

Vacancy refers to a building which is unfurnished and not being used as a

dwelling or for a business.

Unoccupancy refers to a building which is furnished, but not being used as a

dwelling or for business.

� Insurance policies treat these differently, so make sure you

understand the differences and analyze the questions carefully.

Right of Salvage

When an insurance company settles a claim, it owns a right to salvage the

property that has only been partially damaged or been destroyed, but still has a

salvage value.

� The insurance company can reduce its losses in the matter by selling

the salvage to a salvage dealer.

� It may determine whether or not property will be repaired, replaced

or cash will be provided.

� In situations where an insured property is not completely destroyed,

the insurance company may take possession of it and receive its

salvage value when it has replaced or has made a cash settlement

to the insured party.

Abandonment

An insured cannot be allowed to abandon the insured property and then demand from the insurance company to be paid in full. The insurance company, by

contract, has the right to settle the loss by payment, repair or outright

replacement of the property involved.

Liability

Liability insurance is meant to protect people against financial loss arising out of

liability claims by transferring the burden of financial loss from the insured to the

insurance company.

Negligence

Negligence is also known as an unintentional Tort (act). Failure to do what a

reasonable person would do under similar circumstances.

� Was there a legal duty to act or not to act?

� Was there a breach of that duty?

� Was there injury or damage to another person?

� Was the act the proximate cause of the damages?

If all the questions can be answered with a yes, then a case for negligence can

be made and typically, insurance companies will pay for the covered losses.

(Compared to intentional acts, which would probably NOT be covered)

Lesson 1 Review Questions 1. The purpose of insurance is to: A. Pay for all losses. B. Spread risk amongst others. C. Guarantee against any possible losses. D. Share risks with all the other insureds. 2. Which of the following is NOT a part to a legal contract? A. Declarations B. Insuring agreement C. Exclusions

D. Ex part fixio 3. Which part of a legal contract states the losses for which the insured will be indemnified? A. Declarations B. Insuring agreement C. Exclusions D. Definitions 4. Which of the following must an insured have at the time of loss? A. A car B. An open checking account C. An insurable interest in the property D. A certified page of Declarations 5. Which type of risk is insured against? A. Speculative risk B. Pure risk C. Grand Victoria losses D. Hazard risks 6. Which of the following is NOT a hazard? A. Physical B. Moral C. Mental D. Morale 7. If a home is destroyed by a fire, the peril is: A. The evil match B. The evil gasoline C. The fire D. The charcoal 8. Which of the following lists the perils that a policy will cover? A. Direct B. Named C. All risk D. Open 9. An action, through an unbroken series of events, that can be determined to be the immediate or actual cause of the loss is the: A. Proximate cause B. Negligent cause C. Indemnity cause D. Peril cause

10. Property and casualty insurance contracts are contracts of: A. Proximate cause B. Negligent cause C. Indemnity D. Total reimbursement 11. How much is the ACV, if the replacement cost of the property insured is $100,000 and depreciation is $5,000? A. $100,000 B. $105,000 C. $ 95,000 D. $110,000 12. Which of the following is NOT true regarding a coinsurance feature of a policy? A. The insurer agrees to charge an increased premium rate for coverage. B. The insured agrees to carry a specified percentage of the replacement cost of a building. C. A typical coinsurance clause usually requires an 80% coinsurance. D. The insurer agrees to charge a decreased premium rate for coverage. 13. What refers to a building which is unfurnished and not being used as a dwelling or a business? A. Vacancy B. Unoccupancy C. Salvage D. Renewal 14. Which of the following is defined as a sudden, unexpected, unforeseen event resulting in financial loss? A. Occurrence B. Accident C. Coverage D. Negligence 15. Which of the following is true regarding the cancellation of a property policy? A. The insured alone cannot cancel the policy. B. The insurer alone cannot cancel the policy. C. Both the insurer and insured must cancel the policy at the same time. D. Either the insurer or insured can cancel the policy. 16. If an insurance company cancels the policy, any unearned premium will be returned on a: A. Full basis B. Pro rata basis

C. Short rate basis D. Retroactive basis 17. If the insured cancels the policy, any unearned premium will be returned on a: A. Full basis B. Pro rata basis C. Short rate basis D. Retroactive basis 18. What is the term given to the act of terminating an insurance policy after the specified policy period? A. Nonrenewal B. Vacancy C. Salvage D. Renewal 19. What refers to a building which is furnished, but not being used as a dwelling or for business? A. Salvage B. Vacancy C. Unoccupancy D. Abandonment 20. Which of the following is known as an unintentional tort? A. Proximate cause B. Liability C. Negligence D. Abandonment

Lesson 1 Review Answers

1. (B) The purpose of insurance is to spread risk amongst others and is intended to provide a practical solution to economic uncertainties and unexpected losses. It can also be defined as a social device for handling risk by transferring it. 2. (D) A legal insurance contract includes Declarations (name of the insured, address, amount of coverage, description of the property, cost of the policy); Insuring agreement (what is to be covered); Conditions (responsibilities and obligations of both the insurance company and the insured); Exclusions (losses for which the insured is not covered); and Definitions (clarifies the meaning of certain terms). 3. (B) The Insuring Agreement is the portion of the insurance contract that identifies what losses the insured will be covered for; in other words, the losses for which the insured will be indemnified.

4. (C) At the time of loss, the insured must have an insurable interest in the property. It is important to note that it is at the time of a loss when the insured must have an insurable interest as it relates to property and casualty insurance, whereas in Life and Health policies, an insurable interest must be present at the time of the application. 5. (B) Only pure risks can be insured against. Insurance contracts are contracts of indemnity, not profit makers. The goal of insurance is to place the insured back into his/her financial position just prior to the loss. 6. (C) Moral, morale and physical hazards are all types of hazards dealing with property and casualty insurance. Mental hazards are not considered in P&C coverage. 7. (C) Since a peril is the immediate, specific cause of loss, in the circumstance that a house is destroyed by fire, the fire is the peril. Regardless if a match or gasoline started the fire, they are not ultimately was destroyed it. 8. (B) Perils that are covered in a policy are called Named perils. These are the specific perils that, in order for the insured to collect, must be covered or the insured will not recover. 9. (A) A proximate cause of a loss is an action that, in a natural and continuous sequence, produces the loss. This sequence is unbroken by any other factors or events. For example, everyone eating catfish in a restaurant gets ill. Even though these patrons did something else after leaving the restaurant, the fact is, they were served food that was the proximate cause of the injury (sickness). 10. (C) P&C contracts are indemnity contracts, meaning their purpose is to make the insured �whole again�, or pay he/she back. The purpose is to put the insured back into the same financial positions as he/she was, prior to the insured loss. 11. (C) Actual Cash Value (ACV) is determined by the replacement cost less depreciation. In this case, the replacement cost ($100,000) minus the depreciation ($5,000) equals an ACV of $95,000. 12. (A) A coinsurance clause is an agreement between the insurer and insured in which the insurer agrees to charge a reduced premium rate for coverage. This means that the insured must carry insurance equal to at least 80% of the value of the insured property. If the coinsurance clause is satisfied, partial losses will be paid in full. If the coinsurance clause is not satisfied, partial losses will be subject to a penalty payment. 13. (A) Vacancy refers to a building which is unfurnished and not being used as a

dwelling or for a business. 14. (B) An accident is a sudden, unexpected, unforeseen event resulting in financial loss. This is opposed to an occurrence, which is similar in definition except it includes repeated and continuous exposure to conditions. Accident: A truck hits a car. Occurrence: waste gradually pollutes a river 15. (D) Either the insured or insurer may cancel provided coverage. Each property and casualty policy details the reasons for which the insurer can cancel the policy. Of course, these reasons must be in compliance with individual state laws. While the insurance company must give some specified written notice required by the state, the insured, on the other hand, can request immediate cancellation, without any notice. 16. (B) If the insurance company cancels the policy, any unearned premium will be returned on a pro rata basis. There is no allowance for deductions, such as service fees. This allows the insured to get back all of the money which has not been used or applied to premium cost. 17. (C) If the insured cancels the policy any unearned premium will be returned on a short rate basis (with deductions made for servicing the policy, etc.) With the short rate basis, the insurance company can recoup some of the costs of underwriting and policy processing. 18. (A) Nonrenewal is the act of terminating an insurance policy after the specified policy period. Nonrenewal is a notice given by the insurance company to the insured, indicating the intention not to renew the policy upon the normal termination date. There may be, however, some limitations on the insurance company for nonrenewal. 19. (C) Unoccupancy refers to a building which is furnished, but not being used as a dwelling or for business. Vacancy, on the other hand, refers to a building which is unfurnished and not being used as a dwelling or for a business. 20. (C) An unintentional tort is known as negligence. This is failure to do what a reasonable person would do under similar circumstances. If a case for negligence can be made, typically insurance companies will pay for the covered losses.

Lesson 2: Types of Policies

Personal Lines

Personal lines are types of insurance written for individuals, rather than

businesses, for which the term commercial lines apply.

Dwelling and Contents

The Dwelling policy provides protection for individuals and families against loss

to their dwelling and personal property.

� The Dwelling policy provides more limited Property coverage than the

Homeowners� policy, which will be reviewed in another Chapter.

� The unendorsed (not part of a basic policy) Dwelling policy provides

Property coverage only, while the Homeowners policy provides a package

of Property and Liability coverage.

Dwelling property forms are used to provide coverage for the following types of

personal residences:

� One, two, three and four family homes and apartment houses.

� Dwellings up to five roomers or boarders.

� Permanently installed mobile homes or trailers.

� Insure homes that do not qualify for Homeowners insurance such as

rentals.

� The Dwelling policy covers the named insured and his or her spouse, as

long as the spouse lives in the same household as the insured.

Basic Form (DP-1)

This Basic Form provides the following coverages:

� Coverage A � Dwelling

•Dwelling.

•Structures attached to the dwelling.

•Materials and supplies used to repair the dwelling or other

structures.

� Coverage B � Other structures

• Insures buildings on the premises, but not in contact with the

dwelling.

•Cannot be used for commercial, manufacturing or farming.

� Coverage C � Personal Property

• Insured�s personal property.

•Personal property belonging to the insured�s guests or

servants.

•The following items are NOT covered:

� Money, coins and securities.

� Paper and computerized accounting records.

� Software media.

� Credit cards.

� Animals including birds and fish.

� Aircraft.

� Motor vehicles other than motorized equipment used to

maintain the property.

� Boats, other than rowboats and canoes.

� Coverage D � Fair Rental Value

• If the loss to the dwelling makes it uninhabitable, and the

insured cannot collect the rent he or she would have been

able to receive if the loss had not occurred.

•10% of the insurance on the dwelling is available for this

coverage.

Perils Insured Against

A peril is the cause of the loss such as fire, wind or vandalism.

� Perils that are automatically covered under the Basic form are fire,

lightning and internal explosion.

� Internal explosion is an explosion that occurs in an insured covered

building or in a building containing covered personal property.

� Typical losses covered would include the explosion of a furnace,

stove or hot water heater.

� Steam explosions are excluded if the equipment is owned, leased or

operated by the insured.

Extended Coverage Perils

The insured may choose to be covered against a list of additional perils

that are sometimes called the Extended Coverage perils. While these perils

are already printed in the DP-1 form, no coverage applies until the insured

pays the additional premium.

The following Extended Coverages (EC) can be added on:

� Windstorm: Direct action of the wind, including objects hurled

by the air that cause damage.

� Civil Disorder: An uprising or disturbance by a large number of

persons.

� Smoke: Only smoke from a hostile fire would be covered. This EC

broadens the smoke peril to any sudden, accidental damage from smoke.

� Hail: Direct action of hail to the insured�s property.

� Aircraft: Damage caused by aircraft, including self-propelled

missiles, spacecraft, helicopter, etc. This includes the falling of

an aircraft or parts of an airplane.

� Vehicles: Provides protection for any damage caused by a vehicle,

unless it is owned by the insured. Also, does not include

damage to fences or driveways.

� Explosion: Covered, whether they originate inside or outside

the building including:

•Bursting water pipes

•Electrical arching

•Rupture, bursting or pressure reduction devices

•Steam boilers or pipes

� Riot: Direct loss caused by striking employees. Riot and civil

commotion are very close in definition.

Volcanic Eruption

Losses caused other than by earthquake, land

shock waves or tremors.

This peril covers damage caused by the eruption of

a volcano, including

the ensuing lava flow and airborne particles.

Vandalism and Malicious Mischief (V&MM)

Includes any willful and malicious damage or destruction, except theft and

glass breakage. These acts must be intentional to be covered. This coverage

is included automatically with the DP� 2 Broad Form.

Test Clue: Try using the Acronym � W C S H A V E R to help remember the above Extended Coverage Perils.

Other Coverages

In addition to insuring against the listed perils, the Dwelling Basic form

provides the additional following coverages:

� Other Structures: This provides up to 10% of Coverage A to

cover losses of other structures. (Basic policy coverage)

� Debris Removal: Pays for the expense of removing debris resulting

from a loss that is covered by the policy.

� Property Removed: Covers loss to property that occurs while

the property is being removed to protect it from a covered peril.

� Reasonable Repairs: This pays for the reasonable costs to

make necessary repairs to protect property from further damage

following a covered loss.

� Improvements, Alterations and Additions: Provides coverage

for insureds who are tenants for improvements or alterations to

the dwelling made at the tenant�s expense. Up to 10% of the

coverage C limit is available.

� Fire Department Service Charge: Pays up to $500 for fire

department charges incurred when the fire department is called.

NO deductible applies.

� Worldwide Coverage: Provides 10% of the Coverage C limit

for personal property while it is located anywhere in the world

such as clothes taken on a vacation.

� Rental Value: Provides 10% of Coverage A limit for loss of fair

rental value, payable at 1/12th of the 10% limit for each month

the described location is unfit for its normal use. (Basic policy

coverage)

Exclusions under DP-1 (What�s not covered)

� Water damage in general, including flooding, water backups into

a building or seeping from below the ground.

� Losses resulting from earth movement, except for direct loss by

fire or explosion resulting from earth movement.

� Losses due to power disruption occurring away from the insured�s

location.

� War.

� Nuclear hazard.

� Losses caused by the insured or by someone else at the insured�s

direction.

� Replacing regular glass with safety glass.

� Losses resulting from ordinances or laws that require more expensive

reconstruction or demolition.

How Will Losses Be Paid, Settled or Treated? (Terms to

know)

Loss Settlement

Covered property losses are valued at actual cash value, but not to exceed

the amount necessary to repair or replace.

Our Option

Gives the insurer the right to repair or replace damaged property with the

equivalent property within 30 days of receiving the insured�s statement

of loss.

Pair or Set

This clause in a policy will explain how a claim should be handled when

one item of a pair or set is damaged. Loss of an article which completes

a pair or set is handled as a unique claims settlement problem.

The following options may be used when these circumstances arise:

� Repair or replace any part to restore the pair or set to its value before

the loss.

� Settle by paying the difference between the actual cash value of the

set before and after the loss.

Deductibles

This clause is located in the Declarations and states

that only the amount

of loss over the deductible will be paid, up to the

limit of liability.

Other Insurance

If a loss is also covered by other insurance, the insurance company will

pay only its proportion of the loss.

Loss Payment

The loss will be paid within 30 days after reaching an agreement with the

insured.

Recovered Property

If the insured or insurer recovers property on which the insurer has made

loss payment, the other party must be notified. The insured may have the

property returned, in which case, the loss payment will be adjusted, or allow

the company to have it.

For Those Who Want Additional Dwelling Coverage

Example: Let�s assume that Diane owns a pair of earrings designed especially for her. Each earring is worth $1,000, but the pair is worth $5,000. Assume that one earring was destroyed by fire. Her loss is

What if the coverage under the Basic Form (DP-1) isn�t enough? What if insured

wants additional protection? Well, for those who want broader Dwelling

coverage, there are two other Dwelling forms available. They are:

� Broad form (DP-2)

� Special form (DP-3)

Coverage E (Additional Living

Expenses Found in DP-2 and DP-3)

� Pays for additional living expenses after a covered

loss

� Includes reasonable motel, dining, laundry and transportation expenses

� Covered for the time needed to repair or replace the damaged property or

become settled elsewhere in permanent quarters

� Coverage E can be added to the DP-1 by endorsement (extra premium)

Broad Form (DP-2)

While the Basic form named specific perils, so does the Broad form (DP-2). It

includes all those in DP-1, as well as some additional perils. Some of the

additional perils included in the DP-2 are as follows:

Important Note: All three Dwelling forms, DP-1, DP-2 and DP-3 provide the basic policy coverages with Coverage A, B, C and D. However, DP-2 and DP-3 also provide an additional coverage known as Coverage E.

� Burglar damage

� Ice and snow weight

� Glass breakage

� Accidental discharge

� Falling objects

� Freezing of pipes

� Electrical damage

� Collapse

� Tearing apart

Note the acronym to help you remember: BIGAFFECT

Additional Coverage Definitions

Burglar Damage

This covers damage done to the property, but not to any property stolen.

Ice

Protection is provided from falling objects such as ice, snow and sleet. Damage

to the insured building and/or contents due to their weight is covered.

Coverage does not extend to the following:

� Awnings

� Fences

� Patios

� Pavements

� Swimming pools

� Foundations

� Retaining walls

� Bulkheads

� Wharves

� Docks

� Piers

Glass Breakage

All building glass, as long as the insured premises has not been vacant for 30

consecutive days or more immediately before the loss.

Accidental Discharge

Accidental discharge of water and steam from plumbing, heating, air-conditioning

or fire protective sprinkler systems, or of a household appliance.

This does not include losses due to continuous leakage or seepage. No

coverage for a building unoccupied for more than 30 consecutive days

immediately before the loss or to the system or appliance causing the water or

steam escaping.

Falling Objects

Covers damages to the exterior of the insured premises and its contents, if the

falling object first damages the roof or exterior wall. Damage to the falling object

itself is not covered. Outdoor antennas, wiring, equipment, awnings and

fences are not covered.

Freezing of Pipes

Losses are not covered if the dwelling is vacant, unoccupied or being

constructed, unless the insured has taken reasonable care to:

� Maintain heat in the building

� Shut off the water supply and drain the system

Electrical Damage

Coverage from sudden and accidental electrical current.

Collapse

The collapse peril covers risk of direct physical loss to covered property involving

collapse of a building or any part of it caused by:

� Perils insured against in the policy

� Hidden decay

� Insect damage

� Weight of contents

� Weight of rain or snow collected on the roof

� Use of defective materials

Collapse coverage does not cover damage due to:

•Settling

•Cracking

•Shrinking

•Bulging

•Expansion

The following structures and �things� are excluded from coverage:

•Awnings

•Fences

•Patios

•Swimming pools

•Underground pipes, drains and septic tanks

•Foundations

Tearing Apart

Sudden and accidental tearing apart, cracking, burning or bulging of

steam or hot water heating systems, air-conditioning, or automatic fire protective

sprinkler systems, or hot water heaters. This peril does not include

loss caused by freezing, except as provided in the peril of freezing.

Additional Available Coverage with DP-2 and DP-3 (Not

available with DP-1)

� Trees, shrubs and other plants: Pays up to 5% of the Coverage A limit

for damage to trees, shrubs, plants or lawns caused by a specified list of

perils. There is a $500 maximum for damage to any one tree, shrub or

plant.

� Collapse: Pays for the collapse of the dwelling caused by a specified list

of perils.

� Glass or Safety Glazing Material: Pays for the breakage of glass or

safety glazing material and damage to covered property caused by glass

breakage.

Special Form (DP-3)

This is an all risk or open perils policy, unlike DP-1 and DP-2, which are written

on specific perils. DP-3 is defined by its exclusions. If a peril is not specifically

excluded, then it is included for coverage. If contents (Personal Property) are

covered under DP-3, they are insured against the same perils as provided under

the DP-2. In other words, DP-3 provides All Risk or Open Perils coverage on

the dwelling and other structures, and Broad Form coverage on personal

property or contents.

REVIEW CHART ON DWELLING PROPERTY FORMS

(Perils covered for Dwelling Owner)

DP-1 Basic Form

DP-2 Broad Form

DP-3

Special Form

FIRE

LIGHTNING

INTERNAL

EXPLOSION

plus

EXTENDED COVERAGE

• Windstorm • Civil commotion • Smoke • Hail • Aircraft • Vehicles • Volcanic eruption • Explosion • Riot • Vandalism • Malicious

i hi f

FIRE

LIGHTNING

INTERNAL

EXPLOSION

plus

EXTENDED COVERAGE

plus

BROAD FORM

ADDITIONAL PERILS • Burglar damage • Ice & snow

weight • Glass breakage • Accidental

discharge

ALL RISK ON

DWELLING

with

BROAD FORM (DP-2)

PERILS ON

PERSONAL

PROPERTY

mischief

• Falling objects • Freezing of pipes • Electrical

damage • Collapse • Tearing apart

plus

THEFT

Replacement Cost Coverage

� Both the DP-2 and DP-3 settle losses to personal property at actual

cash value.

� Losses to the dwelling and other structures, however, are paid on a

replacement cost basis with no deduction for depreciation. However, the

insured must carry insurance equal to 80% or more of the full replacement

cost of the building.

Dwelling Policy Endorsements

These endorsements can be added to the Dwelling policy:

� Automatic Increase In Insurance: Annual increase in the Coverage A

amount of 4%, 6% or 8%

� Broad Theft Coverage: Covers theft, attempted theft, vandalism and malicious

mischief resulting from theft. It can be written for an owner-occupied

dwelling or an apartment by a tenant who is the named insured.

Example: Billy Bob�s home has a replacement value of $200,000. To have the home restored or replaced at replacement cost, Billy Bob must have insurance equal to or greater than 80% of $200,000 or $160,000. However, Billy Bob forgot the rule and does not carry enough insurance to qualify for replacement cost coverage. Therefore, he will be paid: � The actual cash value of the loss � A proportion of the replacement cost, whichever is larger. Well, how do you compute the amount of reimbursement using the Proportional replacement method? Using the above facts, let�s assume that Billy Bob has a loss of $40,000. While needing $160,000 of insurance, he only has $130,000. Here is how it looks as a formula: Insurance carried -------------------------- X Amount of loss = Amount of reimbursement Insurance Required Using the proportional method, reimbursement would be: $130,000 -------------- = .8125 x $40,000 = $32,500 (minus any deductible) $160,000

Property is covered while it is on or off the premises.

� Dwelling under Construction: When the intended occupant of a dwelling

under construction is the named insured, this endorsement is attached

to the Dwelling policy to provide coverage.

•The limit of liability that applies at any given time is a percentage of

the policy limit based on the value of the partially completed dwelling.

•The available policy limit increases as construction of the dwelling

progresses.

Personal Liability

The insured may purchase Personal Liability and Medical Payments to

Others Coverage as an endorsement to the Dwelling policy. These coverages

can also be purchased as a separate policy. You also need to know that these

coverages are very similar to those provided in the Liability section of the

Homeowners policy, which will be covered in the next Section.

Personal Liability � Coverage L

� Coverage for damages that the insured becomes legally obligated

to pay because of bodily injury or property damage caused by an

occurrence for which there is coverage.

� The insurer will also defend the insured against such claims at its

own expense, even if the suit is groundless or fraudulent.

� The policy limit is $100,000.

Medical Payments to Others � Coverage M

� The insurance company will pay all necessary medical expenses

incurred within three years of an accident that causes bodily injury.

� Coverage applies to injuries:

•While the injured party is on the insured location with the

insured�s permission.

•Sustained while the injured party is off the insured location, if

the injury arises out of a condition:

! On the insured location.

! Caused by an animal in the insured�s care.

! Caused by the activities of the insured.

� There is a policy limit of $1,000 per person.

� The insured does not have to be legally liable for coverage to apply.

� Coverage does not apply to any injury sustained by the insured or

the insured�s family members.

Homeowner (HO forms)

Homeowners policies allow property owners to select the contract that most

closely fits their needs and their ability to pay. There are five Homeowners

policies. While each has some unique characteristics, they all share at least one

common attribute. Each package contains property (fire) and casualty

(personal liability and theft). This places the needs of the consumer into one

contract, thus creating a multi-line policy.

In the modern Homeowners contract, Section I contains the property coverages

and Section II provides coverage for legal liability. Section I will vary according to

the HO form, while section II will be identical in all forms.

The five Homeowners forms are:

� HO-2 Broad

� HO-3 Special

� HO-4 Tenant (or contents) Form

� HO-6 Condominium or unit owner

� HO-8 Modified Coverage

HO-2 (Broad form)

� Provides broad coverage for direct physical loss caused by:

•Fire

•Lighting

• Internal Explosion

•Extended Coverage Perils (EC)

•Vandalism & Malicious Mischief (VMM)

•Broad Form Additional Perils ( BIGAFFECT )

HO-3 (Special form)

� Provides open peril coverage for direct physical loss caused by:

•All Risk or Open perils on the dwelling and other structures.

•HO-2 perils on the personal property (contents).

•Theft.

HO-4 (Tenants form)

� Designed for tenants of apartments.

� Provides broad coverage for personal property.

� Similar coverage to the HO-2s and HO-3s broad coverage for personal

property.

� No coverage for the dwelling.

HO-6 (Condominium form)

� Like the HO-4, the HO-6 is designed to insure personal property of

condominium owners.

� Similar coverage to that provided under the HO-2, HO-3 and HO-4.

� Provides very limited dwelling coverage.

HO-8 (Modified Coverage form)

� Designed for older homes.

� Replacement values may far exceed market values.

� Basic coverage on the dwelling and personal property.

� Similar to the DP-1 with EC perils and V&MM coverage.

� Has restrictions on valuation of losses.

� Generally not available today.

REVIEW CHART ON HOMEOWNERS PROPERTY FORMS

(Perils covered for Homeowners)

HO-2 Broad Form

HO-3 Special Form

HO-4 Tenant or Renter

HO-6 Condominium

unit owner

• Fire • Lightning • Internal

explosion

plus

EXTENDED COVERAGE

plus

BROAD FORM

ADDITIONAL PERILS:

Burglar damage Ice & snow

weight Glass breakage

Accidental discharge

Falling objects Freezing of pipes

Electrical damage

Tearing apart

ALL RISK ON DWELLING

with

BROAD FORM

perils on personal property

plus

THEFT

BROAD FORM ON PERSONAL

PROPERTY ONLY

Same as HO-4

with BROAD FORM ON PERSONAL

PROPERTY ONLY

BROADER

ADDITIONS AND ALTERATIONS

Policy Sections of an HO Policy

Section I � Property

Section l (Property) of a Homeowners policy subdivides the property insured into

four distinct coverages:

� Coverage A � Dwelling

� Coverage B � Other Structures

� Coverage C � Personal Property

� Coverage D � Loss of Use

Coverage A � Dwelling

� Covers the dwelling, structures attached to the dwelling as well as materials

and supplies located on or next to the dwelling which is being used for

construction, alteration or repair.

Example: The insured installs built-in cabinets, vanities and wall to wall carpet.

These items are generally not considered contents and would be covered

only as alterations and additions to the dwelling.

Coverage B � Other Structures

� Provides protection for structures on the premises which are detached from

the dwelling. (e.g., tool shed and garage).

� Coverage does not apply to land or structures used for business or rented to

anyone other than a tenant of the dwelling unless it is a garage.

� HO-4 does NOT include Coverage A or Coverage B since renters and

tenants can only insure their personal property.

� HO-6, the Condominium form, includes limited Coverage A for:

o Alterations, appliances, fixtures and improvements that are part

of the building containing the residence premises.

o Property that is the insured�s responsibility under a condo association

agreement.

o Items of real property pertaining solely to the residence premises.

o Structures other than the personal residence owned solely by

the insured at the location of the residence premises.

� The standard Coverage A limit for the HO-6 is $1,000.

Coverage C � Personal Property

� Provides protection for personal property, which is owned or used by the

insured anywhere in the world.

� Coverage is extended to personal property at a secondary residence.

� Coverage for personal property is available for property owned by others as

well as guests or residence employees at the insured�s option if the premises

is occupied by the owner, guests or residence employee.

� Coverage is up to 10% of the Coverage C limit or $1,000, whichever is

greater. This limit does not apply to property being moved from the residence

premises to a new principal residence. Here, full coverage applies for 30

days from the start of the move.

Exclusions

� Animals, birds and fish.

� Aircraft and parts.

� Autos or motorized vehicles unless used to service the premises.

� Property of boarders not related to the insured.

� Property in an apartment held for rental by the insured.

� Paper or electronic records containing business data, except for prerecorded

programs purchased on the retail market.

� Credit cards.

Special Coverage C Limits

A specific dollar amount maximum applies to each of the below named

categories of personal property and these limits can be raised by endorsement,

if needed.

� Money (coins and precious metals) - $200

� Securities, accounts, deeds and other valuable papers - $1,000

� Watercraft, including trailers and equipment - $1,000

� Stolen firearms - $2,000 for loss by theft.

� Stolen jewelry, furs and precious stones - $1,000 total for loss by theft.

� Stolen silverware, goldware or pewterware - $2,500

� Property on the premises used for business purposes - $250

� Loss of portable electronic apparatus in, on or away from autos. This

would include a car phone or portable CD player provided the device can

be operated by both the vehicle�s power and other power sources - $1,000

Coverage D � Loss of Use

This coverage reimburses for additional living expenses and fair rental value

when the insured premises is unfit to live in. The coverage pays the additional

costs related to living elsewhere and the fair rental value of the insured premises.

Coverage D limits are written as a percentage of Coverage A under the HO-2,

HO-3 and HO-8; and a percentage of Coverage C under the HO-4 and HO-6.

Note: Other additional coverages available include:

� Inflation Guard Endorsement, which automatically increases the

coverages under A, B, C and D on a regular periodic basis

� Replacement Cost for Personal Property that will pay for the full cost

of the repair or replacement of the damaged personal property, as a rider

to all HO policies.

Property Not Available for Replacement Cost:

•Antiques and fine art

•Souvenirs and collector items

•Articles outdated or obsolete

•Articles not in good condition

Section l � Additional Coverages:

All Homeowners forms provide additional coverages in addition to the major

Section l � Coverage A through D, but costing no additional premium, unless

otherwise noted.

� Debris removal: If a covered peril causes a loss, pays for removal of debris.

Debris removal is included in the limit of liability applying to the damaged

property. If that limit is exceeded, then an additional 5% of the limit of liability

is paid.

� Cost of reasonable repairs: Pays to protect the property temporarily from

further damage.

� Trees, shrubs and plants: Pays, if on the residence premises for losses

caused by covered perils � up to 5% but no more than $500 per tree, shrub or

plant.

� Fire department service charges: Pays up to $500 when the fire department

is called to fight a covered peril.

� Property removed: Covers property against direct loss from any peril while

being removed from a premise endangered by a covered peril, and for up to

30 days while removed.

� Credit card forgery and counterfeit money: Pays up to $500 due to the

theft or unauthorized use of an insured check or negotiable instrument. Also

covered is protection against forgery of any check as well as losses sustained

because of unknowingly accepting counterfeit currency.

� Loss assessment: Pays up to $1,000 charged by a corporation or association

for a direct insured loss to property owned by all members collectively.

� Landlord�s furnishings: Pays up to $2,500 for the insured�s (as landlord)

appliances, carpeting and other household furnishings in an apartment on the

residence premises.

Section l � Additional Coverages Exclusions:

•Ordinance or law

•Earth movement

•Water damage

•Power failure

•Neglect

•War

•Nuclear hazard

• Intentional loss by, or directed by an insured with the intent to cause

loss

Earthquake Coverage

Earthquake coverage for homes can be added by endorsement, as HO policies

generally exclude coverage for these losses. Costs are based on construction

of the home. Frame houses are less expensive than masonry.

Section l � Additional Conditions of the Policy

� Limits of liability is the maximum amount the insurance company will pay for a

particular loss or for losses sustained during a period of time. This is also

known as the Policy Limit and Limits of Coverage.

� After a loss the insured must notify the company or agent promptly, notify the

police in the event of a theft, notify the credit card company, take reasonable

steps to protect the insured property from further damage, make reasonable

and necessary repairs to protect the property, keep records of repairs, prepare

an inventory of damaged personal property, cooperate with the company

by showing damaged property and records and submit a proof of loss

within 60 days of the insurer�s request.

� Loss settlement rules in which personal property losses are settled on an

actual cash value (ACV) basis while buildings insured under Coverages A

and B are settled on a replacement cost basis subject to an 80% coinsurance

requirement.

� Loss to a pair or set

� Glass replacement with safety glazing materials

� Appraisal

� Pro Rata Liability for other insurance

� Suit against insurer requires that all policy provisions have been complied

with and the suit is stated within one year of the date of loss

� Abandonment of Property not allowed by the insured

� Mortgage clause acknowledges the insurable interest of the mortgagee

(holding the mortgage). The mortgagee�s insurable interest in a dwelling is

the amount of money owed by the insured on the dwelling.

� No Benefit to Bailee (holder of goods)

� Nuclear Hazards excluded

� Recovered Property can be kept or turned over to the insurance company.

Section II � Liability

Now that you�ve become familiar with Section I property coverages, it�s time to

learn about one of the other major areas of risk known as liability.

Just imagine the various exposures to liability a home owner has, such as

damages arising from the home itself or the front yard when a visitor slips and

falls, or a dead tree falls on your neighbor�s new home and the roof collapses.

Homeowners can be held liable for actions of children and pets. How about going

to a football game and it starts to rain? You open your umbrella and one of the

metal tips on the end of the umbrella pokes the person in the next seat, injuring

an eye.

The insured is covered for his/her responsibility as a home owner to the general

public through Coverage E - Personal Liability and Coverage F - Medical

Payments to Others.

Coverage E Covers bodily injury or property damage if someone gets hurt on

your property and the insured is found liable. Minimum limit of liability is

$100,000, but may be increased with additional premiums. Coverage is for non-

business activities.

Conditions include the insured�s location, personal activities of the insured on or

off the insured premises, and actions of an employee who lives at the insured

location in the course of employment. The insured includes the named insured

and all related residents of the same household and residence under 21 in the

care of any member of the named insured�s family.

Coverage E � Personal Liability

� Bodily injury (BI) liability includes bodily harm, disease or sickness

even if it results in death.

� Property damage applies to the physical injury or destruction to tangible

(real) property, including the loss of such property.

� Property Damage (PD) liability.

� Above arising out of insured�s personal, non-business activities that occur

anywhere.

� Provides a legal defense at the insurer�s choice, even if the suit is

groundless, false or fraudulent.

� Coverage E also applies for bodily injury or property damage arising

from insured locations including:

•Premises described in the Declarations.

•Residences newly acquired.

•Vacant land owned or rented by the insured.

• Insured�s land on which a residence is being built.

•Locations where an insured is temporarily residing.

•Locations an insured is renting for non-business use.

•Cemetery plots or burial vaults.

Coverage F - Medical Payments to Others

Coverage F pays for medical expenses incurred within 3 years due to bodily

injury to individuals who do not live at the residence. The expenses are paid,

regardless of whether or not the insured is liable for the injury. The maximum

medical limit of liability is $1,000, but limits may be increased by paying more

premium.

This coverage pays for the necessary medical expenses accrued within a three

year time frame from the date of the accident by a guest or others who may be

injured on the insured�s premises or as a direct result of an insured�s personal

activities.

Coverage F is not limitless but will generally pay for injuries:

� Sustained while the injured party is on an insured location with any insured�s

permission

� Sustained while the injured party is off the insured location if the injury

arises out of a condition:

•On the insured premises.

• Involving an activity of the insured.

•Caused by a residence employee (i.e. live in maid) in the course

of his/her employment.

•Caused by an animal owned by or in the care of any insured.

Coverages E and F Exclusions

� BI and PD arising out of the rental of any part of the premises, except

for the rental of part of an insured location as a residence.

� Liability for injury or damage that is expected or intended by the insured.

� BI or PD arising out of business pursuits or the rendering of or failure

to render professional services.

� BI that is covered under a Workers Compensation policy.

� Liability arising out of ownership, maintenance, use, loading, or

unloading of aircraft, watercraft and motor vehicles.

� Liability arising out of war and war-like acts, such as insurrection and

rebellion.

� Liability arising out of sexual molestation, corporal punishment or

physical or mental abuse.

� Liability arising out of the transmission of a communicable disease by

an insured.

� Liability arising out of the use, sale, manufacture, delivery, transfer, or

possession of a controlled substance (not legitimate RX drugs).

Section II - Comprehensive Personal Liability Additional

Coverage

� Claims expenses for the cost of investigating a claim, premiums for

bonds required in a suit the company decides to defend, reasonable

expenses incurred by the insured, interest on judgment which accrues

after the entry of the judgment. Expenses are paid in addition to the

limit of liability.

� First Aid Expenses incurred by an insured to others, but will not pay

first aid expenses for first aid to the insured.

� Damage to Property of Others - company will pay the replacement

cost of property of others damaged by an insured up to $500 per

occurrence.

� Loan Assessment - $1,000 per occurrence for the insured�s share or

assessment as a member of a group of property owners including liability

for an act of a director, officer or trustee

Section II Conditions

These will apply to both Sections I and II:

� There is coverage only during the policy period.

� No coverage for insureds who intentionally conceal or misrepresent

any material fact relating to insurance coverage.

� Waivers must be in writing to be effective.

� The following cancellation rules apply:

• Insurance company can cancel, for any reason, with 10 days

written notice to the insured during the first 60 days.

• Insured can cancel at any time.

•After 60 days the company may only cancel for the following

reasons:

! Material misrepresentation by the insured (requires a

30 day notice).

! Substantial change in risk insured (requires a 30 day

notice).

! Nonpayment of premium (requires a 10 day notice).

Endorsements

On this subject of endorsements, keep in mind that a homeowners policy is put

together for the average homeowner, whatever that is. However, from time to

time, homeowners develop special needs. To meet these needs, there are a

number of endorsements that can be attached to the Homeowners policy to

modify coverage under Sections I and/or II.

Section I Endorsements

�Scheduled Personal Property: This endorsement provides a separate

schedule of insurance for one or more of nine categories of valuable

property such as:

•Jewelry

•Cameras, projectors, films and equipment

•Golf equipment

•Furs

•Musical instruments

•Silverware

•Coins

•Fine arts

•Postage stamps

� Personal Property Coverage Endorsement (HO-15)

•Attaches to the HO-3 to insure personal property on an open

peril basis.

•This endorsement can only be used with the HO-3.

� Personal Property Replacement Cost: Policy will reimburse losses

to personal property on a replacement cost basis rather than actual

cash value. This is done in the same way that Homeowners forms

reimburse loss to dwellings.

� Permitted Incidental Occupancies: Overrides the exclusions under

the Homeowners forms that apply to the insured�s business activities

conducted on the residence premises.

•This basically eliminates the exclusion for using another

structure for business purposes

• It also eliminates the $2,500 limit for business property on the

residence premises with regard to furniture, supplies and

equipment used in the business listed in the endorsement

•Also, eliminates the Section II exclusion of liability and medical

payments coverage in connection with business pursuits for the

described business.

� As none of the Homeowners forms cover earthquakes, the insured

must purchase an Earthquake endorsement.

� Home Day Care Coverage: Extends Homeowners coverage to this

type of business. The premium for this coverage is based on the number

of children the insured cares for.

Section II Endorsements

� Business Pursuits Endorsement: Provides liability coverage for a

business conducted away from the residence premises.

� Personal Injury Endorsement: Modifies the definition of bodily injury

to include personal injuries such as libel, slander, false arrest, invasion

of privacy and malicious prosecution.

Mobile Homes Coverage

Due to their high exposure to risk and loss, mobile homes are excluded from

homeowner policies, with the exception of the availability of the MH-200

endorsement, which can be added to an HO-2 or HO-3 policy.

If the mobile home is permanently fixed on a foundation, then a dwelling policy

can be used. Because of depreciation, losses are always based on actual cash

value and not replacement value.

The mobile home package policy offers the Broad form of All Risk coverage for

the following:

� Mobile home, all equipment

� Built in accessories

� Additional structures such as awnings, carports and shelters

� Collision (optionally available)

� Additional living expenses

Note: Mobile home coverage is available under Homeowners policies, if

the home is at least 10 x 40 feet and designed for year round living.

Lesson 2 Review Questions 1. Which lines are written for individuals rather than businesses? A. Commercial B. Personal C. BOP D. CPP 2. Which type of policy provides the most Property coverage? A. Dwelling policy B. Unendorsed policy C. Homeowners policy D. Basic form policy 3. Which of the following is NOT covered by Dwelling property forms? A. Four family homes B. Dwellings up to seven roomers or boarders C. Permanently installed mobile homes D. Three family homes 4. Which of the following is NOT one of coverages offered in the DP-1 Basic form? A. Coverage A � Dwelling B. Coverage B � Other structures C. Coverage C � Personal property D. Coverage D � Casualty liability 5. Which of the following would provide coverage for a non-attached garage? A. Coverage A B. Coverage B

C. Coverage C D. Coverage D 6. Which of the following items are NOT covered under Coverage C? A. Money B. Television C. Couch D. Table 7. Coverage D � Fair Rental Value, provides what percent of the insurance on the dwelling for this coverage? A. 5% B. 10% C. 15% D. 20% 8. Which of the following perils are NOT automatically covered under the Dwellings Basic form? A. Fire B. Steam explosions from equipment owned and operated by a third party. C. Steam explosions from equipment leased by the insured. D. Wind 9. All of the following are Extended Coverage Perils (EC) which can be added onto a Dwelling policy EXCEPT: A. Windstorm B. Civil commotion C. Fire D. Smoke 10. Which of the following is NOT an additional coverage on the Dwelling Basic form? A. Other structures B. Debris removal C. Improvements D. Lightening 11. Which of the following are Not exclusions under a DP-1 form? A. War B. Fire C. Nuclear hazard D. Floods 12. Covered property losses are valued at actual cash value, but not to exceed the amount necessary to repair or replace, is known as: A. Loss Settlement

B. Our Option C. Pair or Set D. Repair Option 13. The clause in a policy that explains the rules regarding the loss of one item in a set is known as the: A. Loss Settlement B. Our Option C. Pair or Set D. Repair Option 14. After reaching an agreement with the insurer, a loss will be paid for within how many days? A. 10 B. 15 C. 30 D. 90 15. To increase the coverage of the Basic for DP-1, an insured could purchase additional coverage using which of the following Broad forms? A. DP-1 B. DP-2 C. DP-3 D. DP-4 16. All of the following are included as additional perils found in the DP-2 form EXCEPT: A. Burglar damage B. Electrical damage C. Fire D. Tearing apart 17. Ice coverage extends to which of the following? A. Dwelling B. Awnings C. Patios D. Swimming pool 18. The Collapse Peril covers risk of direct physical loss to covered property involving collapse of a building or any part of it caused by: A. Settling B. Shrinking C. Bulging D. Hidden decay 19. Which of the following additional coverages are available with the DP-2

and DP-3? A. Materials and supplies used to repair the dwelling B. Trees C. Structures attached to the dwelling D. Personal property 20. Broad forms additional perils are found under which form? A. DP-1 B. DP-2 C. DP-3 D. DP-4 21. Both the DP-2 and DP-3 settle losses to personal property at: A. Replacement value B. Actual cash value C. Depreciated value D. Replacement value plus depreciation 22. Bob�s home has a replacement value of $160,000. To have the home restored or replaced at replacement cost, Jo Bob must have insurance equal to or greater than 80% of the replacement value. However, Bob forgot the rule and does not carry enough insurance to qualify for replacement cost coverage. Assuming he only has insurance coverage for $100,000, and has a loss of $20,000, how much will the insurance company reimburse Bob? A. $20,000 B. $16,000 C. $15,625 D. $12,500 23. Personal liability under Dwelling Coverage is covered under which of the following coverages? A. Coverage A B. Coverage B C. Coverage L D. Coverage M 24. Medical Payments to Others under Dwelling Coverage is paid under which of the following coverages? A. Coverage A B. Coverage B C. Coverage L D. Coverage M 25. Homeowners forms are identified by which of the following abbreviations?

A. MO B. HO C. HP D. HF 26. Which Homeowners form provides broad form coverages? A. HO-2 B. HO-3 C. HO-4 D. HO-6 27. Which Homeowners form provides Special form coverages? A. HO-2 B. HO-3 C. HO-4 D. HO-6 28. Which of the Homeowners forms is designed for tenants? A. HO-2 B. HO-3 C. HO-4 D. HO-6 29. Which of the Homeowners forms is designed for condominiums? A. HO-2 B. HO-3 C. HO-4 D. HO-6 30. Which HO form is designed for older homes? A. HO-2 B. HO-3 C. HO-4 D. HO-8 31. With HO forms, which Section provides coverage for Property? A. 1 B. 2 C. 3 D. 4 32. Which coverages in Section 1 of a Homeowners policy provides coverage for Other Structures? A. A B. B C. C

D. D 33. Coverage C in Section 1 provides coverage for personal property: A. Only in the United States B. Only in the State of residence C. Anywhere in the world D. Only outside the United States 34. Personal property coverage is up to what percent of the Coverage C limit? A. 10% B. 15% C. 25% D. 50% 35. Money can be covered under Special Coverage C to a limit of: A. $100 B. $200 C. $500 D. $1,000 36. A proof of loss must be submitted to the insurance company within how many days of the insurer�s request? A. 10 B. 25 C. 30 D. 60 37. Under Section II of a Homeowners policy, Personal liability is covered by which Coverage? A. A B. F C. E D. M 38. Under Section II of a Homeowners Policy, Medical payments to others are covered under which Coverage? A. A B. F C. E D. M 39. Endorsements are meant to: A. Decrease coverage B. Increase coverage C. Keep coverage the same

D. Decrease then increase every 30 days 40. Which of the following HO forms attach to HO-3 for additional personal property coverage? A. HO � 2 B. HO � 6 C. HO � 15 D. HO � 18

Lesson 2 Review Answers 1. (B) Personal lines are written for individuals. Commercial lines are written for businesses. 2. (C) While both a Homeowners and Dwelling policy provide property coverage, the Dwelling is a more limited policy. The Dwelling policy provides protection for individuals and families against loss to their dwelling and personal property. Homeowners policies extend protection to include property (fire) and casualty (personal liability and theft). This places the needs of the consumer into one contract, thus creating a multi-line policy. 3. (B) Dwelling property forms cover dwellings up to five roomers, not seven. This form also covers three- and four-family homes, permanently-installed mobile homes and rentals not coverable by homeowners. 4. (D) DP-1 offers the following coverage: Coverage A - Dwelling; Coverage B � Other Structures; Coverage C � Personal Property; Coverage D � Fair Rental Value. There is no coverage for casualty liability in DP-1. 5. (B) Since a non-attached garage is considered another structure, it would be covered under Coverage B � Other Structures. 6. (A) Under Coverage C, money, coins and securities are not covered. Also excluded are: paper and computerized accounting records; software media; credit cards; animals including birds and fish; aircraft; motor vehicles other than motorized equipment used to maintain the property; boats, other than rowboats and canoes. 7. (B) If the loss to the dwelling makes it uninhabitable, and the insured cannot collect the rent he or she would have been able to receive if the loss had not occurred, 10% of the insurance on the dwelling is available for this coverage. 8. (B) Damage due to steam explosions are excluded in the Dwellings Basic policy, if the equipment is owned, leased or operated by the insured. 9. (C) Extended Coverage Perils (EC) that can be added to a Dwelling policy

include windstorm, civil disorder, smoke, hail, aircraft, vehicle, explosion and riot. Fire is a named peril under the Basic form, and would not need to be added as an EC. Use the acronym WCSHAVER to remember EC perils. 10. (D) Lightening is covered under the Basic form, not the Additional coverages form. Additional coverages include: other structures; debris removal; property removed; reasonable repairs; improvements, alterations and additions; fire department service charge; worldwide coverage; and rental value. 11. (B) Fire is covered under Dwellings Basic. War, nuclear hazard and floods are all excluded under DP-1. 12. (A) Covered property losses are valued at actual cash value, but not to exceed the amount necessary to repair or replace. This is known as loss settlement. 13. (C) The Set or Pair clause will explain how a claim should be handled when one item of a pair or set is damaged. Loss of an article which completes a pair or set is handled as a unique claims settlement problem. Options include repair or replace any part to restore the pair or set to its value before the loss, or settle by paying the difference between the actual cash value of the set before and after the loss. 14. (C) The loss will be paid within 30 days after reaching an agreement with the insured. 15. (B) While the Basic form named specific perils, so does the Broad form (DP-2). It includes all those in DP-1, as well as some additional perils. Some of the additional perils included in the DP-2 are burglar damage, ice and snow weight, glass breakage, accidental discharge, falling objects, freezing of pipes, electrical damage, collapse, and tearing apart. 16. (C) Fire is covered under the Basic form, while burglar damage, electrical damage and tearing apart are included in the DP-2 Broad form. 17. (A) Protection is provided from falling objects such as ice, snow and sleet. Damage to the insured building and/or contents due to their weight is covered. Coverage does not extend to awnings, fences, patios, pavements, swimming, pools, foundations, retaining walls, bulkheads, wharves, docks and piers. 18. (D) The collapse peril covers risk of direct physical loss to covered property involving collapse of a building or any part of it caused by perils insured against in the policy, hidden decay, insect damage, weight of contents, weight of rain or snow collected on the roof, or use of defective materials. 19. (B) Additional coverage available with DP-2 and DP-3 include trees, collapse

and glass or safety glazing material. 20. (B) Broad forms Additional Perils are found in DP-2. They include burglar damage, ice and snow weight, glass breakage, accidental discharge, falling objects, freezing of pipes, electrical damage, collapse, and tearing apart. 21. (B) Both DP-2 and DP-3 forms settle losses to personal property at Actual Cash Value (ACV). This is found by subtracting depreciation from the replacement cost. 22. (C) If Bob carried $100,000 of insurance, but the coinsurance value required $128,000 (or 80% of the $160,000 replacement value), this would amount to $100,000 divided by the insurance required of $128,000, or .78125. That amount, times the loss of $20,000, equals the reimbursement of $15,625. 23. (C) Personal liability is covered under Coverage L. It is for damages that the insured becomes legally obligated to pay because of bodily injury or property damage caused by an occurrence for which there is coverage. The insurer will also defend the insured against such claims at its own expense, even if the suit is groundless or fraudulent. The policy limit is $100,000. 24. (D) Medical Payments to Others is under Coverage M (think Medical = M). The insurance company will pay all necessary medical expenses incurred within three years of an accident that causes bodily injury. Coverage does not apply to any injury sustained by the insured or the insured�s family members. 25. (B) Homeowners forms can be identified by the abbreviation HO. 26. (A) Broad form HO coverages are found in HO-2. Provides broad coverage for direct physical loss caused by fire, lighting, internal explosion, extended coverage perils (EC), vandalism & malicious mischief (VMM), and broad form additional perils ( BIGAFFECT ) 27. (B) Special forms coverage is provided under HO-3. It provides open peril coverage for direct physical loss caused by: all risk or open perils on the dwelling and other structures, HO-2 perils on the personal property (contents), and theft. 28. (C) HO-4 is designed for tenets of apartments. It provides broad coverage for personal property. Similar coverage to the HO-2s and HO-3s broad coverage for personal property. The dwelling itself is not covered. 29. (D) Like the HO-4, the HO-6 is designed to insure personal property of condominium owners. Similar coverage to that provided under the HO-2, HO-3 and HO-4. Provides very limited dwelling coverage.

30. (D) HO-8, or the Modified Coverage form, is generally not available today. It is designed for older homes, and replacement values may far exceed market values. Basic coverage on the dwelling and personal property. Similar to the DP-1 with EC perils and V&MM coverage, but has restrictions on valuation of losses. 31. (A) In an HO policy, Section 1 provides coverage for property. It�s divided into 4 distinct coverages, Coverages A � D. 32. (B) Coverage B provides coverage for Other Structures. Provides protection for structures on the premises which are detached from the dwelling. (e.g., tool shed and garage), but does not apply to land or structures used for business or rented to anyone other than a tenant of the dwelling unless it is a garage. 33. (C) Coverage C in Section 1 provides coverage for personal property anywhere in the world. Coverage is extended to personal property at a secondary residence. It provides coverage for personal property is available for property owned by others as well as guests or residence employees at the insured�s option if the premises is occupied by the owner, guests or residence employee. 34. (A) Coverage is up to 10% of the Coverage C limit or $1,000, whichever is greater. This limit does not apply to property being moved from the residence premises to a new principal residence. Here, full coverage applies for 30 days from the start of the move. 35. (B) Under Special Coverage C, money�coins and precious metals�can be covered to a limit of $200. 36. (D) A proof of loss must be submitted by the insured within 60 days of the insurer�s request. 37. (C) Under Section II, personal liability is covered under Coverage E, and it covers both bodily injury (BI) and property damage (PD). Bodily injury liability includes bodily harm, disease or sickness even if it results in death. Property damage applies to the physical injury or destruction to tangible (real) property, including the loss of such property. 38. (B) Under Section II, Medical Payment to Others is covered under Coverage F. Coverage F pays for medical expenses incurred within 3 years due to bodily injury to individuals who do not live at the residence. The expenses are paid, regardless of whether or not the insured is liable for the injury. The maximum medical limit of liability is $1,000, but limits may be increased by paying more premium. 39. (B) Endorsements add or increase coverage, not decrease. Keep in mind

that a homeowners policy is put together for the average homeowner, whatever that is. However, from time to time, homeowners develop special needs. To meet these needs, there are a number of endorsements that can be attached to the Homeowners policy to modify coverage under Sections I and/or II. 40. (C) Personal property coverage endorsement HO-15 attaches to the HO-3 to insure personal property on an open peril basis. This endorsement can only be used with the HO-3.

Lesson 3: Commercial Lines

Commercial Property

This policy provides coverage on real property, which includes office buildings,

factories and warehouses. It also provides coverage for the business personal

property located in those buildings, such as furniture, fixtures, machinery and

inventory.

Commercial Building and Personal Property Form

Coverage forms explain what property is covered and what coverages are

provided.

Property Covered

Building Coverage

� All buildings.

� Additions under construction.

� Extensions to the buildings.

� Permanent fixtures.

� Machinery and equipment

� Personal property used to maintain or service the premises,

such as fire extinguishers.

� Outdoor furniture, floor coverings and certain appliances.

� Alterations or repairs to the building, including materials, equipment,

supplies, and temporary structures within 100 feet of the described

premises.

Business Personal Property: Covered while in the building, in the

open or in a vehicle within 100 feet of the premises. This protection

includes:

� Furniture.

� Fixtures.

� Machinery.

� Equipment.

� Inventory.

� All other property used in the business.

� Value of labor, materials or services on personal property of

others, including property in the insured�s care and custody and

property located in or on the building described in the declarations

or within 100 feet of the premises.

� Leased personal property.

Property Not Covered

As the Commercial Building and Personal Property coverage form contains

relatively broad definitions of the types of property covered, it is necessary to

review what it will not cover:

� Valuables such as money and related items.

� Animals, unless boarded or for sale.

� Automobiles held for sale.

� Bridges and roadways.

� Contraband being illegally transported.

� Cost of excavations and grading.

� Foundations of buildings.

� Land, crops and lawns.

� Pilings and docks.

� Property covered under other coverage.

� Underground pipes, flues and drains.

� Vehicles, including watercraft and aircraft that are licensed for use on

public roads or operated away from the premises.

Additional Coverages (In addition to basic coverages)

� Debris removal.

� Expenses as a result of preservation of the property.

� Fire department service charge ($1,000 maximum).

� Pollutant clean up and removal ($10,000 per policy period).

Coverage Extensions

Coverage extensions are available, but only if the insured agrees to an 80% or

higher coinsurance feature.

Newly acquired or constructed property

Property is covered up to 25% or a maximum of $250,000 per building.

This applies to new buildings being constructed on the insured premises

and buildings acquired at a location other than the insured�s premises to

be used for the same purpose as the insured�s building or warehouse.

There is a 10% or $100,000 maximum of personal property applied up to

30 days to cover business personal property at a newly acquired location.

Personal Effects and Property of Others

A maximum of $2,500 will be paid for loss of personal effects of the

insured�s officers, partners and employees. This coverage applies to all

personal property which could include a calculator, coat, briefcase, etc.

Valuable Papers and Records

Up to $2,500 at each described premises can be applied to the cost of

researching, replacing or restoring lost information. This can include the

existence of magnetic media.

Property Off-Premises

Insured property other than stock damaged or destroyed by a covered

peril. Will not apply to property in a vehicle, in the care or control of the

insured�s salesperson or at any fair or exhibition. Maximum coverage is

$10,000.

Outdoor Property

A $1,000 maximum can be applied for outdoor property extensions such

as outdoor fences, antennas, signs, trees, shrubs and plants destroyed by

fire, lightning, explosion, riot or aircraft. There is a maximum of $250 per

plant or shrub.

Optional Coverages

The Building and Personal Property coverage form also provides the following

optional coverages that must be listed in the Declarations to be activated. An

additional premium is charged for each optional coverage selected.

Agreed Value Coverage

This coverage suspends the coinsurance requirement for the covered

property designated and substitutes an agreement to cover any loss in the

same proportion that the limit of insurance carried bears to the stated

value. The insured is required to submit a form stipulating the value of the

property.

Inflation Guard Coverage

Insured and the insurance company agree on

one of several percentages

that will apply annually to the limits of

insurance. If 7%, as an example, is

selected, the total limits of insurance would gradually increase on a pro

rata basis until, at the end of the year, the available limit is 7% higher than

the limits shown initially.

Replacement Cost Coverage

This coverage overrides actual cash value in the Valuation condition

(conditions to be discussed in an upcoming chapter) by agreeing to pay

for loss or damage to covered property on a replacement cost basis, with

the exception of certain property listed in the provisions as the standard

actual cash value valuation.

Causes of Loss Forms

Causes of Loss form states what perils are insured against. It also lists specific

Example 1: If thestated loss of the property is $60,000, and the limit is

$60,000, the entire loss would be covered.

Example 2: Using the facts in

exclusions. There are four Causes of Loss forms: Basic, Broad, Special and

Earthquake.

The Causes of Loss - Basic form provides coverage against the

following perils:

� Fire

� Lightning

� Explosion

� Vehicles

� Windstorm or hail

� Smoke (must cause sudden and accidental loss or damage)

� Aircraft or vehicles

� Riot or civil commotion

� Vandalism

� Sprinkler leakage (automatic sprinkler system)

� Sinkhole collapse (collapse into underground empty spaces)

� Volcanic action

The Causes of Loss - Broad Form covers all of the perils listed in the

Basic Form plus the following:

� Falling objects (does not cover interior damages, unless damages first

occur to the outside)

� Weight of snow, ice or sleet

� Water damage (accidental discharge or leakage from a system or

appliance)

� Building collapse caused by:

o Hidden decay

o Any of the perils listed in the policy

o Weight of people or property

o Weight of rain or snow on the roof

o Defective materials or methods used in construction or

remodeling

Basic Form Exclusions

� Earth movement

� Ordinance or law

� Government action

� Nuclear hazard

� War

� Failure of power or other utility services occurring away from the

insured�s premises

� Water, including flood, sewer backup, mudslides, or seepage or

ground water

� Rupture or bursting of water pipes other than sprinklers

� Leakage or discharge of water or steam resulting from breaking

of water or steam system or appliances

� Explosions of steam boilers, pipes, engines or turbines

� Mechanical breakdown

� Ordinance or law

The Causes of Loss - Special Form

Special form covers any direct physical loss that is not specifically excluded or

limited in the form. Therefore, it provides open perils coverage. Because of

the open perils, the list of exclusions is rather extensive as shown below:

Do not try to memorize the following exclusions. Just try and understand

why they are exclusions. Remember, all property will have some wear and tear

and as it is foreseeable, it is not insurable.

� Wear and tear

� Rust, corrosion, fungus, decay and deterioration

� Smog

� Pollutants

� Settling, cracking, shrinking or expansion

� Damage caused by insects, birds, rodents or other animals, unless a

building collapse

� Mechanical breakdown

� Explosion of steam boilers, pipes and engines

� Dishonest or criminal acts of insured or insured�s employees

� Ordinance or law

� Voluntary parting with property, if induced to do so by fraud or a trick

� Rain, snow, ice or sleet damage to personal property that is not in a

building

� Loss resulting from acts or decisions, or the failure to act or decide

� Collapse

� Faulty planning, development, design or workmanship

Business Income Coverage Forms

This is also known as time element coverage, which pays for the loss of

income that the insured sustains over a period of time, resulting from a peril

insured against, that forces the insured to suspend operations during the period

of restoration.

The loss of income refers to the net income or pretax profit (before income taxes)

that a business would have earned, plus normal continuing operating expenses,

including payroll.

In order for Business Income Coverage to apply, the interruption of business

must be caused by direct physical damage to property at the described premises

caused by a peril insured against in the Causes of Loss form.

The period of restoration begins on the date of the actual physical damage to the

insured property and ends on the date when the property should be repaired with

reasonable speed and similar quality.

There are two Business Income forms:

� Business Income With Extra Expense

� Business Income Without Extra Expense

Business Income With Extra Expenses Coverage Form

These expenses are necessary to continue a business in operation. It

covers only expenses the insured would not have incurred if the property

had not been damaged. An example can include renting temporary offices

to continue the business so as to reduce further losses.

Variation of the above known as the Extra Expense Coverage

form. The purpose of this form is to concentrate on reimbursing

the insured for extra expenses incurred to remain in operation

versus replacing expenses incurred because the business had to

shut down.

� Limits are applied to recovery depending upon the period of restoration.

� Limits must be stated in the Declarations form.

o e.g. 30%/75%/100% means that if the period of restoration was:

- 30 days or less � 30% of the full amount of insurance

would be paid.

- 31-60 days � 75% of the full amount of insurance would be

paid.

- Over 60 days � 100% of the full amount of insurance

would be paid.

Business Income Without Extra Expenses Coverage Form

This replaces the Business Income With Extra Expenses Coverage form

with an Expenses to Reduce Loss coverage that covers expenses the

insured incurs to reduce loss, up to the amount the loss is reduced.

Rental Value

With either of the above two expense forms the insured can select and of

the following:

� Business Income coverage, including Rental Value coverage.

� Business Income coverage, without Rental Value coverage.

� Rental Value coverage only.

Rental value coverage includes the total anticipated rental income from a

tenant occupancy. This would include all amounts that are legal obligations

of the tenant, as well as the fair rental value of any part of the premises

occupied by the insured.

Additional Business Income Coverages

Civil Authority

Under this coverage the policy is extended to cover loss of business income

and extra expense for a period up to two weeks caused by an action

of civil authority.

Alterations and New Buildings

This coverage provides for the actual loss of business income due to direct

physical loss by a covered peril to new buildings, alterations, machinery,

equipment, supplies used in construction, alterations or incidental to

the occupancy of new buildings.

Extended Business Income

This automatically extends the period of restoration up to another 30 consecutive

days to cover additional loss of earnings as long as the insurance

policy limits have not been exhausted.

Optional Coverages

Maximum Period of Indemnity

Limits reimbursement for loss of business income to no more than the

amount of loss incurred during the fist 120 days following the direct loss.

Extended Period of Indemnity

This gives the insured extended business income coverage for the number

of days stated in the Declarations, rather than the 30 days allowed by

the Extended Business Income Additional coverage.

Monthly Limit of Indemnity

Allows the insured to establish the amount of reimbursement for loss of

business income during each 30-day period.

Commercial Package Policy (CPP)

Policies containing a single coverage part is a monoline policy, while a policy

containing two or more coverage parts, qualifies as a package. The package

approach is intended to simplify and standardize the process of assembling

policies.

The CPP package can be used to provide almost any commercial insurance the

insured might need. Almost all commercial risks are eligible for coverage under

the CPP.

To qualify as a Commercial Package Policy, a policy must contain the Common

Policy Declarations Form, the Common Policy Conditions Form and two more of

the following coverage parts:

� Boiler and Machinery

� Commercial Auto

� Commercial Property

� Commercial Crime

� Farm Coverages

� Commercial Inland Marine

� Commercial General Liability

� Pollutant Liability

� Products Liability

� Professional Liability

� Employment Practices Liability

Policy Conditions

Cancellation

This sets forth the circumstances under which the policy may be

cancelled.

� The first named insured may cancel at any time by giving

advanced written notice to the insurer.

� If the insurer cancels, it must give at least 10 days advance

notice if the reason is nonpayment of premium and at least

30 days for any other reason.

� If the insurer cancels, a pro rata share of the remaining premium

must be returned. A penalty can be charged against the

remaining unearned premium if the insured cancels.

Changes and Premiums

� Changes in the policy can only be made with the consent of the

insurer

� Insurer and rating organizations have the right to inspect the

property

� First named insured is responsible for paying the premiums

Transfer of Rights and Duties

� Transfer of rights under the policy without the insurer�s permission

is NOT permitted.

� This is also known as the Assignment clause.

� Common feature of both personal and commercial policies.

� If the named insured dies, rights are transferred to the deceased�s

legal representative.

Common Policy Declarations

The Declarations contain information about who is insured, when

the insurance is effective and for what lines are insured. It includes:

� Name and address of the named insured.

� Policy period, including the time and date coverage begins.

� Description of the business covered.

� Coverage parts purchased as well as their premiums.

� List of forms applicable to all coverage parts.

Boiler and Machinery Coverage Forms

Boiler and Machinery Coverage is provided for protection for steam pressure

equipment. Unfortunately, when accidents occur they can result in substantial

loss in lives and money. To help reduce this risk, engineers developed a boiler

inspection service and guaranteed their inspection service by offering insurance

against loss that occurred, in spite of their careful inspection. This service

developed into Boiler and Machinery insurance.

The Boiler and Machinery policy can be written by itself or in conjunction with a

broader commercial lines property coverage.

If written on a specific basis, each boiler or machine to be insured is listed and

described in a schedule, which is then attached to a policy. If written on a blanket

basis, all boilers and machines of a certain class are insured.

Emphasis of this type of policy is prevention. Prevention of losses is a result

of frequent boiler inspections which are carried out by trained engineers.

Coverage

� Covered property means any steam boiler or other insured equipment

(objects) that the insured owns, is in the care, custody or control

of the insured and for which the insured is legally liable.

� There is automatic coverage at new locations up to 90 days for objects

of the same type.

� The policy promises to pay for direct damage to covered property by

a covered loss.

� Covered causes of loss are accidents to machines shown in the

Declarations.

� An accident is defined as a sudden and accidental breakdown of the

insured boiler or machine, necessitating repair or replacement of the

boiler or machine.

� An accident does not include any of the following:

o Wear and tear

o Depletion

o Deterioration

o Depletion

o Corrosion

o Erosion

o Leakage of a valve

o Breakdown of tubes

o Breakdown of electronic computers

o Breakdown of structures or foundations supporting the

boiler or machine

o The functioning of any safety device

o Explosion of gas or unconsumed fuel within the furnace or

any of its passageways

Expediting Expenses

This coverage reimburses the insured for any reasonable extra expenses

involved in making temporary repairs and of expediting the repair

of the damaged property. Examples can include employee overtime

and the extra cost of express shipments. Policy limit is $5,000.

Defense, Settlement and Supplementary Payments

This policy will pay all cost of legal fees, interest on judgments and

premiums for appeal bonds as is customary for liability insurance

coverages. The amount paid by the company under this coverage is in

addition to the face amount of the policy.

Inspection Service

Loss prevention is the key as the company provides periodic inspections

of the insured boilers and machines as a free service. These inspections

often detect dangerous conditions that can prevent accidents

from happening. If an inspection detects an unsafe condition

the unit can be shut down and the insurance company may suspend

coverage for damage caused by that faulty piece of equipment until

the equipment is repaired.

Small Business Boiler and Machinery Policies

The Basic Form may be written for the following small businesses

having insurable boilers and/or machines valued at no more than $5

million.

� Apartment buildings

� Churches

� Motels

� Hotels

� Office buildings

� Garages

� Retail stores

� Schools

� Banks

� Restaurants

� Nursing homes

� Theaters

� Funeral homes

Expanded Benefits

The Broad Form expands the eligibility requirements for insurable

risks to include much smaller boilers, refrigerator units, air conditioning

systems and other mechanical or electrical equipment used for the

maintenance or service of the premises.

Business Owners Policy (BOP)

This is a commercial policy designed for small and medium sized businesses as

an alternative to the Commercial Building and Personal Property Coverage Form.

The eligibility rules for a BOP are more stringent than those for the CPP.

Tenants of offices and stores can insure business personal property. As a BOP

is a complete package policy by itself, it is not attached to some other coverage

or package. The ideal BOP prospect is the small, well-managed, one-location

business with easily predicted coverage needs.

The following processing and service type businesses are eligible

for coverage:

� Appliance dealers

� Apartment buildings

� Office buildings

� Auto parts and supplies distributors

� Bakeries

� Barber shops

� Certain fast food (open broiling and solid fuel cooking are not allowed)

and limited-cooking restaurants (prepared using appliances that do not

emit smoke or grease-laden vapors that require an exhaust system)

� Clothing or wearing apparel distributors

� Convenience food/gasoline stores where gas sales account for no

more than 50% of total sales. May not include a restaurant, auto service

or repair operations, a car wash, or tank filling operations for propane

or kerosene.

� Drug distributors

� Funeral homes

� Grocery distributors

� Hardware and tool distributors

� Heating and air conditioning distributors

� Jewelry distributors

� Optical goods distributors

� Stationery or paper products

� Printers

� Photographers

� Tobacco products distributors

� Toy distributors

On the other hand the following businesses would not be eligible:

� Service stations

� Auto repair centers

� Contractors

� Bars

� Household personal property

� Places of amusement

� Wholesalers

� Banks and other financial institutions

The BOP is a multi-peril policy, including basic property and liability coverages.

If needed, there are optional coverages that can be used to custom design a

policy for the small business.

The basic difference between a Business Owners Policy and the Business

Personal Property Form is that the BOP is a package policy that

will provide a more complete package of coverage at a less expensive

cost when compared to the BPPF, which provides a set amount of coverage

that must be built upon to meet the insured�s needs.

Property coverage can be written on either a standard or special form.

Most coverages of the two forms are identical except for �covered causes

of loss�.

The standard form is like the basic coverages found in other commercial

forms, while the special form is all risk coverage. Optional coverage is

available to include burglary, robbery, money, securities, outdoor signs,

exterior grade floor glass, mechanical breakdown and employee dishonesty.

The Businessowners Declarations contains the same type of information

found in the commercial Package policy Declarations.

Business Owners Property Forms

There is a choice of two Property forms, the Business owners Standard

Property form and the Businessowners Special Property form. These

forms are very similar to the Commercial Property forms already discussed.

Businessowners Standard Property form insures against a list of the

following named perils:

� Fire

� Lightning

� Explosion

� Windstorm or hail

� Smoke

� Aircraft or vehicles

� Riot or civil commotion

� Vandalism and malicious mischief

� Sprinkler leakage

� Sinkhole collapse

� Volcanic action

� Transportation damage to property in transit.

Businessowners Special Property form provides open peril coverage.

Building Coverage

Both Businessowners Property forms provide coverage for buildings and

business personal property. Coverage for buildings includes:

� Completed additions

� Permanently installed machinery and equipment

� Fixtures

� Personal property owned by the insured used to maintain or service

the building, including the following:

o Fire extinguishing equipment

o Outdoor furniture

o Appliances used for refrigerating, ventilating, cooking or

laundering

o Floor coverings

� Personal property furnished by the insured in apartments or rooms

rented to others

� If no other insurance applies, then the following are also usually covered:

o Alterations and repairs to the buildings or structures

o Additions under construction

o Materials, equipment, supplies and temporary structures that

are on or within 100 feet of the premises and being used for

additions, alterations or repairs

Business Personal Property Coverage

To be eligible, business personal property must be located at the described

premises and either in or on the building or in the open or in a vehicle within

100 feet of the premises.

There are typically four different classes of business personal property

that are covered:

1. Property owned and used by the insured in the business, such as

inventory

2. Property of others in the insured�s care, custody or control such as

business equipment rented by the insured for business use

3. Tenant�s improvements made at the tenant�s expense to a building the

tenant occupies but does not own, and which cannot legally be removed

such as alterations tenants make to buildings they rent

4. Leased personal property that the insured has a contractual

responsibility to insure, such as computers and copy machines

Property Not Covered

� Motor vehicles

� Aircraft

� Land, water, crops and lawns

� Outdoor fences, trees, shrubs and plants, except as covered under

a coverage extension

� Contraband and property illegally traded or transported

� Outdoor radio or television antennas

� Satellite dishes and lead in wiring

� Money and securities

� Watercraft while afloat

� Outdoor signs not attached to buildings

Additional Coverages (Standard and Special forms)

The following additional coverages are included in both the Standard

and Special Property forms:

� Debris removal: pays up to 25% of the amount paid for the direct

physical loss.

� Preservation of property: Covers loss from any cause of loss

to property that was removed from the insured location to protect

it from damage by a covered peril. Also applies while the

property is being moved or while it is temporarily stored at another

location, but only for 30 days after the property is first

moved.

� Business income: Loss of income that the insured sustains

due to a direct physical loss from a covered peril that forces the

insured to suspend business operations.

� Extended business income: Loss of business income, even

after operations have been resumed, until the business has

been fully restored to its previous earnings level, but for no more

than 30 days from the date the business is resumed.

� Pollutant cleanup and removal: Provides up to $10,000 coverage

for the costs to extract pollutants from land or water at the

insured�s premises as a result of a covered loss.

� Extra expense: For additional costs incurred to avoid or minimize

suspending business operations after a covered loss.

� Money orders and counterfeit paper currency: Loss incurred

when an insured accepts money orders and counterfeit paper

currency in good faith in exchange for merchandise, money or

services.

� Forgery and alteration: Covers loss from forgery of checks,

drafts and similar items made or drawn by or on the insured or

the insured�s agent.

� Increased cost of construction: Pays up to $5,000 for additional

costs required to comply with ordinances or laws related

to repair or replacement of damaged buildings. Covers only

those buildings insured on a replacement cost basis.

� Exterior glass: Covers damage to exterior building glass.

Special Property form Additional Coverages

These additional coverages are only included in the Special Property

Form:

� Collapse: Covers damage to covered property caused by the

collapse of an insured building, if the collapse is caused by a

specified peril.

� Water or other liquid: Covers loss to a building that indirectly

results from the escape of water or other liquid or power, including

costs to tear out and replace any part of the building to repair

damage to the system from which the material escaped.

Coverage Extensions

Coverage extensions allow the insured to extend the insurance for other

specified purposes. This generally includes a separate limit of liability that

is available in addition to the policy�s limit of liability. These coverages

are included in both Property forms:

� Business Personal Property at Newly Acquired Premises:

This covers personal property that is moved to a premises that

the insured acquires during the policy term. Maximum limit is

$100,000.

� Business Personal Property Off Premises: Covers business

personal property while it is in transit or temporarily located at

premises not owned, leased or operated by the insured. A

$5,000 limit applies.

� Outdoor Property: Extends up to an average of $1,000 for

outdoor property such as fences, signs, trees, shrubs, plants,

and radio and television antennas. Limit of $500 maximum per

tree.

� Personal Effects: Up to $2,500 in Business Personal Property

coverage for personal affects owned by the insured and the insured�s

employees.

� Accounts Receivable: Reimburses insured for money that

cannot be collected from customers due to damage to the insured�s

accounts receivable records. Coverage is limited to

$5,000 for records on the described premises and $2,500 for

records that are not on the premises.

� Valuable Papers and Records: Pays costs to research, replace

or restore information on lost or damaged valuable papers. Coverage is

limited to $5,000 for papers and records on the premises and $2,500 for

papers and records not on the premises.

Optional Coverages

Options coverages selected by the insured usually require an additional

premium. They include:

� Outdoor signs: Covers damage to all outdoor signs owned by or in

the custody or control of the insured.

� Employee dishonesty: Covers loss to business personal property,

money or securities that results from dishonest acts of employees.

� Interior glass: Covers loss to glass items that are permanently attached.

� Mechanical breakdown: Covers damage to covered property

caused by sudden and accidental breakdown of boiler and pressure

vessels.

� Burglary and Robbery (Standard form only): Covers burglary and

robbery to business personal property, money and securities. The

limit for business personal property is 25% of the business personal

property limit shown in the Declarations.

� Money and Securities (Special form only): Covers loss of money

and securities from theft, disappearance and destruction.

Businessowner liability coverage form protects against loss from bodily injury,

property damage and for personal and advertising injury. It also provides medical

expense coverage.

There is a standard Liability and Medical Expense limit of $300,000, which is

the most the insurer will pay for all damages as a result of bodily injury (BI),

Property damage (PD) and medical expenses, arising out of any one occurrence,

and personal and advertising injury sustained by any one person or organization.

Supplementary Payments

These payments are also included in the Businessowners Liability form. Most of these are paid in addition to the policy limit. They are:

� Insurance company expenses in defending a claim or suit against the

insured

� Up to $250 for the cost of bail bonds related to violations that arise

from vehicles

� Cost of bonds to release attachments

� Reasonable expenses insured incurs at the insurance company�s

request to assist in investigating or defending a claim or suit

� Interest that accrues after a judgment is made and before it is paid

� Costs insured is required to pay because of a suit

Businessowners Exclusions

These exclusions apply to Businessowners Liability coverage and they

arise out of:

� Intentional injury

� Contract or agreement

� Alcoholic beverages distribution, selling and serving

� Work related (Workers Compensation applies)

� Transportation of mobile equipment by auto or by mobile equipment

� War

� Rendering or failing to render professional services

� Damage to property owned, rented or occupied by the insured or in the

insured�s care, custody or control

� Damage to insured�s own work

� Recall of insured�s products

Businessowners Endorsements

� Utility Services � Direct Damage Coverage Endorsement: Covers loss

or damage to property caused by an interruption in water, communication

or power supply.

� Utility Services � Time Element Coverage Endorsement: Similar to

above, except it covers loss of business income and extra expense that

occurs, due to an interruption in utility service.

� Protective Safeguards Endorsement: Requires insured to maintain

protective devices listed on the endorsement on specified property as

a condition of the policy.

o P-1 � Automatic Sprinkler System

o P-2 � Automatic Fire Alarm System

o P-3 � Security Service

o P-4 � Service Contract

Lesson 3 Review Questions 1. Coverage forms explain: A. What is not covered B. What is covered C. What coverage is not provided D. What would be nice to be covered 2. Which of the following is insured under Business Personal Property coverage? A. All buildings B. Floor coverings C. Inventory D. Outdoor furniture 3. Which of the following is NOT covered under Business Personal Property? A. Foundations of buildings B. Fixtures C. Equipment D. Value of labor 4. Coverage extensions are available, but only if the insured agrees to what percent or higher coinsurance feature in a Commercial Business policy? A. 25% B. 50% C. 75% D. 80% 5. What is the name of the coverage that can protect the insured against inflation? A. Inflation sky rocketing coverage B. Inflation guard coverage C. Inflation downward coverage D. Insurance degradation coverage

6. Commercial Causes of Loss � Basic form provides coverage for all the following EXCEPT: A. Explosion B. Fire C. Falling objects D. Hail 7. All of the following are excluded from the Causes of Loss forms Except: A. Ordinance or Law B. Rupture or bursting of water pipes C. Mechanical breakdown D. Riot 8. Business income coverage forms pays for the loss of: A. A spousal allowance. B. Gross income that a business would have earned. C. Net income that a business would have earned. D. After tax income that a business would have earned. 9. Which of the following is NOT a Business Income form? A. Business Income with Extra Expense B. Business Income with No Expense C. Business Income without Extra Expense D. Expenses to Reduce Loss Coverage 10. Which insurance policy package can be used to provide almost any commercial insurance the insured might need? A. CPP B. CFP C. BCP D. BOP 11. To qualify as a Commercial Package Policy, a policy must contain the Common Policy Declarations Form, Commercial Inland Marine and Commercial Auto, and: A. The monthly limit of indemnity B. Extended business income C. Common Policy Conditions D. Civil Authority 12. A CPP can be cancelled by the insurer with at least how many days for nonpayment of premium? A. 10 B. 15 C. 25 D. 30

13. What type of coverage is available for protection of steam pressure equipment? A. Steam pressure coverage form B. Boiler and Machinery coverage form C. Property coverage form D. Casualty coverage form 14. One of the keys of making Boiler coverage efficient and cost effective is: A. Shutting down all boilers B. Minimizing coverage to only one boiler per policy C. Emphasizing prevention and inspection programs D. Shutting down all safety devices 15. What is the name of the commercial policy designed for small and medium-sized businesses? A. CPP B. CFP C. BOP D. COP 16. All of the following businesses would be eligible for the Business Owners Policy, EXCEPT: A. Appliance dealers B. Contractors C. Office buildings D. Jewelry distributor 17. The BOP is a: A. Single peril policy B. Closed peril policy C. Multi-peril policy D. Open-end peril policy 18. All of the following are covered by a Business Personal Property Coverage policy EXCEPT: A. Motor vehicles B. Inventory C. Business equipment D. Computers 19. Under a BOP, Preservation of Property coverage applies while the property is being moved or is temporarily stored at another location for a maximum of how many days after the property is first moved? A. 15

B. 30 C. 60 D. 90 20. With a BOP, which of the following are considered Optional Coverages? A. Business personal property at a newly acquired premises B. Business personal property off premises C. Accounts receivable records D. Outdoor signs

Lesson 3 Review Answers

1. (B) In Commercial Lines, coverage forms explain what property is covered and what coverages are provided. 2. (C) Under the Business Personal Property form, the following are insured: furniture, fixtures, machinery, equipment, inventory, all other property used in the business, value of labor, materials or services on personal property of others, including property in the insured�s care and custody and property located in or on the building described in the declarations or within 100 feet of the premises, and leased personal property. 3. (A) Foundations of buildings are not covered under Business Personal Property forms. 4. (D) Coverage extensions are available, but only if the insured agrees to a 80% or higher coinsurance feature in a Commercial Business policy. 5. (B) Inflation Guard Coverage provides inflation protection. The insured and the insurance company agree on one of several percentages that will apply annually to the limits of insurance. If 7%, as an example, is selected, the total limits of insurance would gradually increase on a pro rata basis until, at the end of the year, the available limit is 7% higher than the limits shown initially. 6. (C) Commercial Causes of Loss � Basic form provides coverage against fire, lightning, explosion, vehicles, windstorm or hail, smoke (must cause sudden and accidental loss or damage), aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage (automatic sprinkler system), sinkhole collapse (collapse into underground empty spaces), and volcanic action. Falling objects can be found in the Broad form while Choices A, B and D are in the Basic form. 7. (D) Riot is included in the Broad form. Ordinance or Law, rupture or bursting of water pipes, and mechanical breakdown are all exclusions from the Basic form. 8. (C) Business income coverage forms, also known as time element coverage, pays for the loss of income that the insured sustains over a period of time,

resulting from a peril insured against, that forces the insured to suspend operations during the period of restoration. The loss of income refers to the net income or pretax profit that a business would have earned, plus normal continuing operating expenses, including payroll. 9. (B) Business Income forms exist in the variations of Business Income with Extra Expense, Business Income without Extra Expense, and Expenses to Reduce Loss coverage. 10. (A) The Commercial Package Policy (CPP) package can be used to provide almost any commercial insurance the insured might need. Almost all commercial risks are eligible for coverage under the CPP. 11. (C) To qualify as a Commercial Package Policy, a policy must contain the Common Policy Declarations Form, the Common Policy Conditions Form and two more coverage parts. While Commercial Inland Marine and Commercial Auto are listed in this example, they can be replaced with any two other choices from the CPP offerings. 12. (A) If the insurer cancels a CPP, it must give at least 10 days advance notice if the reason is nonpayment of premium and at least 30 days for any other reason. 13. (B) Boiler and Machinery Coverage is provided for protection for steam pressure equipment. To help reduce this risk of accident involving this equipment, engineers developed a boiler inspection service and guaranteed their inspection service by offering insurance against loss that occurred, in spite of their careful inspection. This service developed into Boiler and Machinery insurance. 14. (C) The emphasis of this type of policy is prevention. Prevention of losses is a result of frequent boiler inspections which are carried out by trained engineers. 15. (C) BOP, or Business Owners Policy, a commercial policy designed for small and medium sized businesses as an alternative to the Commercial Building and Personal Property Coverage Form. The eligibility rules for a BOP are more stringent than those for the CPP. 16. (B) The following businesses are not eligible for BOP: service stations, auto repair centers, contractors, bars, household personal property, places of amusement, wholesalers, banks and other financial institutions 17. (C) The BOP is a multi-peril policy, meaning , it includes basic property and liability coverages. If needed, there are optional coverages that can be used to custom design a policy for the small business.

18. (A) Business Personal Property coverage excludes motor vehicles, aircraft, land, water, crops and lawns, outdoor fences, trees, shrubs and plants, except as covered under a coverage extension, contraband and property illegally traded or transported, outdoor radio or television antennas, satellite dishes and lead in wiring, money and securities, watercraft while afloat, and outdoor signs not attached to buildings. 19. (B) Preservation of property: Covers loss from any cause of loss to property that was removed from the insured location to protect it from damage by a covered peril. Also applies while the property is being moved or while it is temporarily stored at another location, but only for 30 days after the property is first moved. 20. (D) Outdoor signs are considered under optional coverage. Covers damage to all outdoor signs owned by or in the custody or control of the insured. The other options are coverage extensions.

Lesson 4: Other Types of Policies

Inland Marine Insurance

This is an outgrowth of Ocean Marine Insurance, where coverage was extended

to loss from movable property that is transported on land. The Nationwide

Definition was developed by the insurance industry and lists the following six

categories of eligible Marine risks.

� Imports.

� Exports.

� Domestic shipments.

� Instrumentalities of transportation and communications such as

bridges, tunnels, docks, pipelines, power transmission lines.

� Personal property floater risks for movable personal property.

� Commercial property floater risks for movable business property.

The first two categories, Imports and Exports are covered by Ocean Marine

insurance. Personal property floater risks are covered by Personal Inland Marine

insurance. The remaining three, Domestic shipments, Instrumentalities of

transportation and Commercial property floater risks are eligible for Commercial

Inland Marine insurance.

Personal Floaters

Written on an all risk or open perils basis and meant to cover scheduled and

unscheduled personal property. A floater is coverage on property that moves

from one location to another. Most personal floaters limit the insured�s

settlement to actual cash value at the time of loss or the cost to repair or replace

the property in question. The following perils are excluded from coverage:

� Wear and tear from ordinary use

� War

� Loss of market due to delay in delivery

� Flood

� Earthquake

� Dishonesty of employees

In order to form a policy, the following floaters must be attached to

the personal inland marine floater:

1. Personal Property Floater: (PPF) This policy covers all of the

insured�s unscheduled personal property, worldwide on an all

risk basis. Specific or scheduled items of personal property can

be covered on an endorsement basis.

2. Personal Articles Floater: (PAF) This covers all risk protection

from physical loss or damage on certain specified classes of

property.

o This is a separate policy, but it is similar to the scheduled

personal property endorsement that is added to homeowners

policies.

o Typical property which may be insured under Personal Articles

Floater include: fine arts, jewelry, furs, cameras, musical

instruments, silverware, golf equipment, binoculars,

microscopes, stamp collection, coin collection and any

other item valued at $100 or more.

o An appraisal is necessary before the article is insured,

which must contain a detailed description and a value of

the property.

3. Personal Effects Floater: (PEF) This policy is for individuals

who want to have unscheduled, all risk coverage for their

belongings while traveling or on vacation.

o The policy is designed only for property that is normally

carried by travelers.

o There is no coverage when the property is being stored, is

in the home, or when the insured is not traveling.

o A policy can be purchased for each trip, or be a permanent

form of insurance for the insured who travels constantly.

o Excluded from coverage are such things as automobiles,

bicycles, motorcycles, boats, securities, money, tickets,

passports and valuable papers.

Commercial Floaters

These floaters can be written on a scheduled or blanket basis for

named perils or all risk of loss. There are numerous commercial floaters

designed for every conceivable segment of the business market.

This protection is meant to protect business property and equipment

on premises and in transit.

Examples of some commercial floaters would include:

� Transportation policies to protect either the shipper or carrier for

loss to shipments in transit

� Valuable papers pays for the cost of replacing damaged manuscripts,

books, drawings, maps and more

� Bailee coverage: Reimburses the insured for damage to a customer�s

property that is in his or her care, regardless of whether

the insured is liable for the damage as long as the damage resulted

from a covered peril

� Neon and electrical sign policy to protect against loss to neon and

electrical signs

� Physicians and Surgeons Equipment (medical equipment)

� Radium

� Salesperson�s samples

� Installation risk (individual business� interest in the property it

owns and intends to install for purchase)

� Contractor�s equipment (off the road heavy equipment)

� Accounts receivable (inability from collecting debts)

� Electronic data processing (businesses owning, renting or

leasing data processing equipment)

Flood Insurance

National Flood Insurance sponsored by the Federal Government, by way of the

National Flood Insurance Act of 1968, offers flood insurance to homeowners and

businesses.

Flood losses are generally EXCLUDED from most policies. Neither personal

nor commercial lines property contracts protect insureds against flood damage.

The National Flood Insurance Program (NFIP) is a federal program enabling

property owners to purchase flood insurance in return for their community�s

adherence to a flood plan. The program is managed by the Federal Insurance

Administration (FIA) which is a branch of the Federal Emergency Management

Agency (FEMA).

The plan is only available to those persons who live in communities which have

met the plan requirements and have instituted land use and water control

measures. The communities must provide these improvements before their

inhabitants can buy insurance.

A flood is described as a temporary, partial or complete inundation of normally

dry land areas by either an overflow of inland or tidal waters, an unusual and

rapid accumulation or runoff of surface waters, mudslides and mudflows.

Types of Programs

1. Emergency: This program goes into effect when the community applies

to the NFIP and remains in effect until the government finalizes the Flood

Insurance rates for that community.

� Insureds may purchase limited amounts of Flood Insurance for

buildings and contents at subsidized rates.

� Deductible of $1,000.

2. Regular

� Any owner of property in an approved community is eligible for

Flood Insurance. A building and its contents, residential and

commercial and farms may be insured under the Flood Program.

� Deductible of $500.

� With the following exceptions:

o Livestock

o Roads

o Gas and liquid storage tanks

o Wharves, piers and bulkheads

o Growing crops

o Motor vehicles

In the event of loss, the insured must notify his agent who will then notify

the NFIP. If the amount of the losses exceeds the amount of premium

collected, the FIA pays the difference. If the insurer collects

more in premiums than it pays out in losses, the excess must be returned

to the government.

Personal Watercraft Insurance

Since a homeowner policy offers only limited protection against the loss of

watercraft, a separate policy package is necessary. Property coverage is subject

to a special limit of $1,000, and coverage may be totally excluded for certain

perils. Liability coverage is excluded for boats with motors of more than specified

horsepower or boats of more than a specified length.

Limited property and liability coverages are available under the Homeowners

Program, but typically not enough. For coverage, there are three types of policies

available which are based on need:

1. Outboard Motor and Boat Insurance: This covers the physical

damage exposure to boats. This policy is written under the all risk inland

marine floaters. Losses are usually paid on an actual cash value basis.

2. Boatowners/Watercraft Package Policies: This combines property,

liability and medical payment coverage on an open peril basis. They

usually insure boats under 30 feet with a maximum dollar value of

$25,000. Losses are usually paid on an actual cash value basis.

3. Personal Yacht Policy: This is a specialized form of Ocean Marine

Insurance and is usually written for pleasure boats that exceed maximum

size and other requirements for a Boatowners/Watercraft policy.

Commercial Ocean Marine

Oldest form of property insurance which provides property coverage in the event

of a marine loss to the hull (ship itself), cargo (freight), loss of income and

protection and indemnity (liability insurance).

Categories of Ocean Marine

Hull Insurance

� Provides Physical Damage coverage for the ship itself while in

transit on oceans, rivers and lakes.

� Coverage for a single vessel or an entire fleet

� Limited liability insurance may also be included, which provides

protection for the negligent operation of a vessel and damages

to another ship

Cargo Insurance

� Covers goods while they are in transit over water.

� Coverage is extended to include from the property�s point of

origination to its point of destination.

� Also includes incidental travel on land.

� Coverage can also be purchased on a trip or voyage basis.

� Open cargo can be purchased by importers and exporters.

Freight Insurance

� Protects insured against shipping costs losses.

� Can be written separately or included with Hull or Cargo Insurance.

� When shipping is prepaid by the owner of the cargo, the owner

would lose the shipping charges if the cargo is lost. A ship owner

may protect against this loss by adding Freight Insurance to the

Hull coverage.

Protection and Indemnity Insurance (P&I)

� Provides Marine Liability insurance.

� Protects against liability for:

o Job related injuries to sailor.

o Damage to other property or another boat resulting from

collision.

o Damage to cargo through negligence.

o Damage to other property not caused by collision.

o Injuries to stevedores, longshore or harbor workers.

Characteristics of Ocean Marine Insurance

This insurance can be issued on a named peril or open peril basis. Properties

are subject to the normal variety of perils such as fire, explosion,

leakage, damage and more. They are also subject to �perils of the sea�.

�Perils of the Sea� would include:

� Unusual wind

� Unusual wave action

� Lightning

� Collision

� Sinking

� Jettison: Voluntary action to toss the cargo over to prevent further

peril and to save the remaining cargo

� Barratry: Illegal acts committed willfully by the ship�s master or

crew for the purpose of damaging the ship or its cargo

Implied Warranties Given by the Insured

Ocean Marine insurers are dependent on these implied warranties.

They are not written into the contract, but are implied. A breach of

these can void the contract.

They are as follows:

� Seaworthiness: The vessel must be fit for the voyage,

not be overloaded, and have a competent crew.

� Legality: The trip must be for a legal purpose.

� Conditions of Cargo: The cargo must be warranted to

be sound and packed properly.

� No deviation in voyage: Ship must follow an agreed

route, with no changes in destination.

Earthquake

Dwelling and Homeowners policies do NOT cover losses sustained from

earthquakes, as there is no earthquake peril. The reality of this is that most

persons would not need this type of protection.

If an insured feels it is necessary there are many companies that will issue

earthquake protection as an endorsement to their Dwelling or Homeowners

policy or even as a separate policy.

This type of insurance generally covers damage to a structure, its contents or

both as the result of an earthquake.

Lesson 4 Review Questions

1. Inland Marine Insurance is an outgrowth of: A. Inland water insurance B. Ocean marine insurance C. Fish water insurance D. Outland marine insurance 2. A floater is coverage on property that: A. Stays on a ship B. Stays at one location C. Moves from one location to another D. The insured changes insurance coverage on 3. In order to form an Inland Marine policy, which of the following floaters must NOT be attached to the personal inland marine floater? A. Personal property floater B. Personal articles floater C. Personal effects floater D. Personal stuff floater

4. Commercial floaters can be written on a scheduled or: A. Blanket basis B. Specific basis C. Commercial basis D. Noncommercial basis 5. Flood losses are generally: A. Included in most commercial policies B. Excluded from most policies C. Sold by the various States D. Sponsored by the Insurance Directors Union 6. Flood insurance is sponsored by: A. The State of Illinois B. The Insurance Director C. The Federal Government D. New York State 7. Emergency flood coverage has a deductible of: A. $100 B. $500 C. $1,000 D. $2,500 8. Since a homeowner policy offers only limited protection against the loss of watercraft, there are three different types of policies available which are based on need. Which of the following combines property liability and medical payment coverage on a open peril basis? A. Outboard Motor and Boat Insurance B. Boatowners/Watercraft package policies C. Personal Yacht policies D. Water insurance policies 9. What is the name of the oldest form of property insurance which provides property coverage in the event of a marine loss to the hull and cargo? A. Inland marine B. Outland marine C. Ocean marine D. Fish marine 10. Which of the following is NOT an implied warranty given by the insured regarding Ocean Marine Insurance? A. Seaworthiness B. Collision proof

C. Legality D. No deviation in voyage

Lesson 4 Review Answers 1. (B) Inland marine insurance is an outgrowth of ocean marine insurance, where coverage was extended to loss from movable property that is transported on land. The nationwide definition was developed by the insurance industry and lists the following as eligible Marine risks: imports; exports; domestic shipments; instrumentalities of transportation and communications such as bridges, tunnels, docks, pipelines, power transmission lines; personal property floater risks for movable personal property, and commercial property floater risks for movable business property. 2. (C) A floater is coverage on property that moves from one location to another. Most personal floaters limit the insured�s settlement to actual cash value at the time of loss or the cost to repair or replace the property in question. 3. (D) In order to form a policy, the following floaters must be attached to the personal inland marine floater: the personal property floater, personal articles floater, and personal effects floater. There is no personal stuff floater. 4. (A) Commercial floaters can be written on a scheduled or blanket basis for named perils or all risk of loss. There are numerous commercial floaters designed for every conceivable segment of the business market. This protection is meant to protect business property and equipment on premises and in transit. 5. (B) Most, if not all, commercial policies exclude coverage from floods. They can be purchased through an agent, but the coverage is provided by the Federal Government through the FEMA agency. 6. (C) The National Flood Insurance Program (NFIP) is a federal program enabling property owners to purchase flood insurance in return for their community�s adherence to a flood plan. The program is managed by the Federal Insurance Administration (FIA) which is a branch of the Federal Emergency Management Agency (FEMA). 7. (C) Emergency flood coverage has a $1000 deductible. Regular flood insurance has a $500 deductible. 8. (B) Boatowners/Watercraft Package Policies combines property, liability and medical payment coverage on an open peril basis. They usually insure boats under 30 feet with a maximum dollar value of $25,000. Losses are usually paid on an actual cash value basis.

9. (C) Ocean marine insurance is the oldest form of property insurance which provides property coverage in the event of a marine loss to the hull (ship itself), cargo (freight), loss of income and protection and indemnity (liability insurance). 10. (B) Collision proof is not an implied warranty regarding Ocean Marine insurance. However, seaworthiness, legality and no deviation in voyage are all implied warranties given by the insured when covered with an Ocean Marine policy.

Lesson 5: Policy Provisions and Contract Law

Definition of the Insured

The insured is defined in every property and casualty policy. A party not

specifically named as an insured has no legal right to recover directly under a

policy, even if that party has an insurable interest in the insured property at the

time of loss.

Keep in mind, however, that it is possible for a person, not specifically named in

the contract, to still have recovery rights in the event of loss such as a guest

staying at your house. This guest is covered for specific types of loss under

dwelling and homeowners forms.

Duties of the Insured

� Give notice of claim immediately (written or by telephone).

� Prevent further loss as reasonably possible.

� Separate damaged from undamaged property to determine loss.

� Inventory the loss.

� Prepare a proof of loss which is required by the insurer within a reasonable

time period, usually 60 days.

� Make all books and records pertaining to the loss available to the insurer.

Duties of the Insurer (Obligations of the Insurance

Company)

� Respond to the insured�s claim in a timely fashion.

� Evaluate the claim.

� Treat the insured fairly.

� Provide repair or replacement cost.

Mortgagee Rights

The mortgagee (bank/lender) has an insurable interest in mortgaged property.

The mortgagee must be given an opportunity to file a proof of loss, etc. under the

policy, if the insured fails to do so.

Additionally, the mortgagee is given 10 days written notice of cancellation or

nonrenewable, if the insurer decides to cancel or not renew the policy.

If the insured fails to provide proof of loss, a mortgagee has 60 days from

receiving notice of the failure to file such a proof of loss to file the loss

themselves.

Proof of Loss

Filing a detailed proof of loss, which is an official inventory of the damages, is

part of the duties owed to the insurance company by the insured.

Notice of Claim

Another responsibility of the insured, after a loss, is to give a Notice of Claim,

which must be given to the insurance company promptly.

Appraisal

When and if both the insured and the insurer cannot agree on a settlement

amount, each is required to obtain an independent appraisal and share in the

cost of an umpire to settle the dispute. The decision of the umpire is final and

binding. The issue here is the amount of settlement, not whether coverage exists

or not.

Other Insurance

When more than one insurance company is used to insure a piece of property,

pro rata liability rules will apply. This is done in keeping with the doctrine of

indemnity. The formula to establish settlement contributions is as follows:

Company Coverage Amount x Loss = Amount company will pay

-----------------------------------------

Total Amount of Insurance

Assignment

The Assignment condition specifies that a policy

may not be transferred to anyone else without the

written consent of the insurer, except in the event of

the death of the named insured. In this case, the rights and duties under the

policy are transferred to the insured�s legal representative.

Subrogation

This is a process in which insurance companies usually settle their differences

when one company subrogates against another. During this process, all parties

agree to be bound.

The insured�s insurance company (Company A) pays the losses which were

caused by an insured of another insurance company (Company B). Then

Company A would bring a suit against Company B on behalf of their insured.

This transfer to the insurance company of the insured�s right of recovery against

others is called Subrogation.

Other Insurance Example Paco, a hard working author, purchases a retreat home in upstate Wisconsin. As a writer, Paco needed plenty of seclusion.

Arbitration

This process is used to settle and resolve areas of disagreement between the

insured and the insurance company or between the company and a third party in

the case of liability insurance, or between two insurers.

An arbitrator listens to both parties involved in the dispute and makes a �fair�

decision based on oral evidence provided by both. Typically, the parties have to

abide by this decision.

Elements of a Legal Contract

1. The Offer: The insurance company, through its agents, will attempt

to solicit invitations for offers (THEY DO NOT MAKE THE OFFER)

through advertisements, telephone calls and conversations. The

prospect makes the offer by filling out the application and submitting

it to the insurance company. (Very Important test point)

� A Counter Offer negates the original offer. An example

of a counter offer is when an insurance company comes

back to the proposed insured with a �Rated Policy�.

2. Acceptance: After the insured submits the application and the initial

premium is paid, it is up to the insurance company to accept the

offer by issuing the policy. The total of the Offer and the Acceptance

is known as the Agreement.

3. Consideration: All parties in all contracts must provide some form

of consideration (something of value) to make the contract valid. The

insured pays the premium, while the insurance company makes a

promise to pay a covered claim in the future. A contract in which one

party, the insured, pays something, and the other party, the insurance

company, promises to do something in the future, is known as a

Unilateral Contract.

4. Contract must be for a legal purpose. As an example, you can�t

buy a policy with the intent to kill the insured to collect the proceeds.

5. Parties must be competent and understand all the terms: If

your prospect only understands a foreign language, you must provide

a means to interpret the terms of the contract or there won�t be a valid

contract. Minors can buy life insurance, but cannot buy property and

casualty insurance.

Representations and Warranties

Most of the statements contained in the insured�s application for insurance

are Representations. They are statements that the applicant believes are true.

Under the law, a representation is not considered a matter to which the parties

contract, so a policy cannot be voided on the basis of a representation.

Sometimes specific agreements are made between the insured and the insurer

that certain conditions will be met. As an example an agreement might require a

small convenience store to hire a security guard during the nighttime hours

because of local crime problems.

This agreement is called a warranty and becomes part of the policy and can

void the policy if the agreement is breached.

Concealment

Failure to disclose a MATERIAL FACT that the underwriter, if he/she had known,

would not have issued the policy.

Binder

A temporary contract of insurance, oral or written, offered by an insurer or an

agent (if he/she has the authority) pending issuance of the policy. It is usually

written for a period of 30 or 60 days and remains in force for that period unless

canceled, or until a permanent policy is issued or refused by the insurer.

A binder does NOT guarantee that a policy will be issued. It only guarantees

temporary coverage.

� If no formal action is taken by the insurer the binder remains in effect

until it expires.

� Coverage under a binder may be cancelled by a formal cancellation or

rejection notice.

Sources of Insurability Information

and Underwriting

The proposed insured�s application will be reviewed

by the insurance company

underwriters to determine whether there is an insurable risk, whether there is an

insurable interest and whether the property is insurable.

Factors looked at by underwriters

� Inspection reports

� Motor vehicle reports

� Credit reports

Fair Credit Reporting Act

� This federal act helps insure that applicants for insurance are treated in

a fair, accurate and confidential manner. It is the producer�s responsibility

to explain the terms of this Act.

Example: Neil purchases a new car and calls his insurance agent. The agent tells Neil that he�s covered for a period of 60 days. This is an example of a binder. The insurance company

� The signed forms will give the underwriters authority to investigate the

proposed insured further, if they deem it necessary.

� The Act also provides consumers with an opportunity to find out

information that an investigative agency has issued about them and to

whom such reports have been made.

� If a consumer is denied insurance because of information contained in

a credit report dealing with the prospect�s credit rating, general reputation

or personal character, the consumer must be notified.

� Erroneous information must be corrected within six months.

Lesson 5 Review Questions 1. Which part of the insurance contract states what is to be covered? A. Declarations B. Insuring agreement C. Conditions D. Exclusions 2. All of the following are duties of the insured, EXCEPT: A. Give notice of a claim B. Prevent further loss C. Commingle damaged and undamaged property D. Inventory the loss 3. All of the following are duties of the insurer, EXCEPT: A. Evaluate the claim B. Prepare a proof of loss C. Respond to the insured�s claim in a timely fashion D. Treat the insured fairly

4. A mortgagee is given how many days written notice of cancellation? A. 5 B. 10 C. 15 D. 30 5. What is the name of the document which acts as an official inventory of damages after an insurable event takes place? A. Proof of loss B. Appraisal C. Notice of claim D. Assignment 6. Neil does it again, but it really wasn�t his fault. While pulling out of a parking spot, another car backed out of a parking place and rammed Neil�s car on the passenger side. An investigation ensued and the police gave the wrongdoer, Dan, a ticket. While Dan was insured, his insurance company refused to cooperate and would not honor Neil�s claim. Neil�s insurance company paid the claim minus a deductible. Which of the following can Neil�s insurance company do? A. Nothing, as that�s life in the world of insurance B. Assign the settlement to a collection agency C. Subrogate against Bad News Inc. D. Sue Dan and his insurance company 7. What is the name of the process in which a third party attempts to settle a dispute between an insurer and insured? A. Arbitration B. Subrogation C. Warranty D. Assignment 8. Which of the following is NOT an element of a legal contract? A. Offer B. Acceptance C. Legal purpose D. Declarations 9. Failure to disclose a material fact is known as: A. Hiding the fact B. Not being truthful C. Concealment D. Binder 10. Which of the following are NOT sources of insurability information reviewed by underwriters?

A. Inspection reports B. Motor vehicle reports C. Credit reports D. Psychologist report Lesson 5 Review Answers 1. (B) The insuring agreement in an insurance contract states what is to be covered under the policy. 2. (C) Duties of the insured include giving notice of claim immediately; preventing further loss as reasonably possible; separating�not commingling�damaged from undamaged property to determine loss; inventorying the loss; preparing a proof of loss which is required by the insurer within a reasonable time period, usually 60 days; and making all books and records pertaining to the loss available to the insurer. 3. (B) The proof of loss is a duty of the insured, not the insurer. Evaluating the claim, responding in a timely fashion, and treating the insured fairly are amongst the duties of the insurer. 4. (B) The mortgagee is given 10 days written notice of cancellation or nonrenewable, if the insurer decides to cancel or not renew the policy. 5. (A) When and if both the insured and the insurer cannot agree on a settlement amount, each is required to obtain an independent appraisal and share in the cost of an umpire to settle the dispute. The decision of the umpire is final and binding. The issue here is the amount of settlement, not whether coverage exists or not. 6. (C) Subrogation is the most appropriate way to go. This is a process in which insurance companies usually settle their differences when one company subrogates against another. It is a transfer to the insurance company of the insured�s right of recovery against others. If the subrogation claim is ignored, arbitration would probably be the next step. 7. (A) This process is used to settle and resolve areas of disagreement between the insured and the insurance company or between the company and a third party in the case of liability insurance, or between two insurers. An arbitrator listens to both parties involved in the dispute and makes a �fair� decision based on oral evidence provided by both. Typically, the parties have to abide by this decision. 8. (D) While Declarations are part of an insurance contract, they are not an element of a legal contract. Elements of a legal contract include the offer,

acceptance, consideration, contract for a legal purpose, and competent parties. 9. (C) Concealment is failure to disclose a material fact that the underwriter, if he/she had known, would not have issued the policy. 10. (D) Sources of insurability information reviewed by underwriters include inspection reports, motor vehicle reports and credit reports. Psychological reports are not used in this process.

End of Property Insurance section

Module 2 Casualty Insurance

Lesson 6: Insurance Term and Related Concepts

Purpose of Insurance

The purpose of insurance is to spread risk amongst others and is intended to

provide a practical solution to economic uncertainties and unexpected losses.

For test purposes, insurance is defined as a social device for handling risk

by transferring it.

Parts of the Insurance Contract

Since an insurance policy is a legal contract it must be very specific about the

agreements between the insured and the insurer. To do this, most policies

contain five parts:

� Declarations: These can usually be found on the first page of the

policy.

o They contain information such as the name of the insured,

address, amount of coverage, description of the property

and the cost of the policy.

� Insuring Agreements: This is the �heart� of the policy as it states

what is to be covered or, in other words, the losses for which the insured

will be indemnified.

o The insuring agreement also describes the type of property

covered and the perils against which it is insured.

� Conditions: This part of the contract describes the responsibilities

and obligations of both the insurance company and the insured. In

other words, everyone knows what they have to do.

� Exclusions: Describes the losses for which the insured is not covered. If

an excluded loss occurs, the insured will not be indemnified.

� Definitions: This section clarifies the meaning of certain terms

used in the policy.

Risk

A risk is the uncertainty or chance of a loss.

Types of Risks

1. Speculative Risk: This risk implies that an individual could not only have the

potential of improving his/her financial position but also has the potential of being

placed in a worse financial position by losing something. The best example for

speculative risk is GAMBLING. Therefore, insurance policies will NOT protect

speculative risks.

2. Pure Risk: On the other hand, this risk is what insurance is all about. It covers

losses only and does not imply that the insured can �make money� after a

covered loss. The goal of insurance is to place the insured back to his/her

financial position just prior to the loss. Obviously, life insurance can�t replace the

deceased, but instead, will help provide financial stability to the family or loved

ones of the deceased.

Hazards

A hazard is any factor or situation that increases or contributes to the probability

that a peril will occur so as to increase the chance of a loss.

Types of Hazards

� Physical Hazard: A visible or tangible condition of the premises that

increases the chances of a peril occurring such as faulty wiring, slippery

floors, icy roads, gasoline cans, etc.

� Moral Hazard: Concerns the insured�s attempting to defraud the

insurance company through intentional and deliberate destruction of the

property, such as arson.

� Morale Hazard: Has to do with the insured�s indifference, carelessness,

laziness or lack of concern for the property such as leaving your keys in

the car, smoking in bed, or exceeding the speed limit.

Indemnity

All property and casualty insurance contracts are contracts of indemnity and their

purpose is to make the insured �whole again� or pay he/she back. The purpose

is to put the insured back in the same financial positions as he/she was prior to

the insured loss.

Insurable Interest

Before a person can benefit from insurance, that

Example: Eric bought a Z28 Camaro three years ago for $22,000. Today it has a book value of $7,000. According to the principle of indemnity, the insured should receive no more than $7,000, if the car is

person must have a chance of

financial loss or have a financial interest in the property. The insured must have

an insurable interest in his/her home or any subject of the insurance. It is

important to note that at the time of a loss, the insured must have an insurable

interest when dealing with property and casualty insurance.

Actual Cash Value (ACV)

Many losses are settled with the insurance company on an actual cash value

basis. This is usually calculated by determining what the item would cost to

replace (replacement cost) and subtracting an amount for depreciation (use).

� The formula is ACV = Replacement Cost � (minus) Depreciation.

� If the insured were paid the full replacement cost without deducting

anything for having used the insured item, the principle of indemnity

would be violated.

Negligence

The law imposes a duty on everyone to act in a reasonable and prudent manner.

Negligence can be seen as an unreasonable or imprudent act. However, it is

never an intentional act. Negligence is also known as an unintentional Tort (act).

Failure to do what a reasonable person would do under similar circumstances.

� Was there a legal duty to act or not to act?

� Was there a breach of that duty?

� Was there injury or damage to another person?

� Was the act the proximate cause of the damages?

If all the questions can be answered with a yes, then a case for negligence can

be made and typically insurance will pay for the covered losses.

Liability

Liability insurance is meant to protect people against

financial loss arising out of

liability claims by transferring the burden of financial loss from the insured to the

insurance company.

Accident

An accident is a sudden unexpected, unforeseen event resulting in financial loss.

� Examples

o Man trips on a cracked sidewalk.

o A truck hits a car.

o Lightening strikes a house causing a fire.

Example: You own a restaurant in Oakbrook. On a dark and stormy

Night, ten of your customers develop stomach spasms which appeared

to be a result of your famous �Oakbrook

Occurrence (very close to an accident)

An occurrence is a sudden, unexpected, unforeseen event resulting in financial

loss, including repeated and continuous exposure to conditions.

� Examples

o Industrial waste gradually pollutes a river.

o An insured worker gradually becomes ill due to repeatedly

handling asbestos on the job.

Burglary

Burglary is the forcible entry or exit into or out of an insureds locked premises

and the carrying away of property belonging to the insured. Burglary can also

include forcing a guard to open a locked premises.

Robbery

The forcible removal of an insured�s property due to fear or threat of violence or

means of injuring or murdering a messenger or custodian.

� A messenger is defined as an insured, partner, officer or any other

employee of the insured authorized to have custody of the insured

property outside the insured premises.

� A custodian can be defined in the same way as a messenger inside

the premises.

� A guard or watchperson means any person the insured retains specifically

to have care and custody of property inside the premises and

who has no other duties.

Theft

Theft is a broad term which includes any unlawful taking of property including the

acts of burglary and robbery. The term theft, however, does not include all

forms of stealing. It usually does not include employee dishonesty.

Mysterious Disappearance

Vanishing of property with no known explanation.

Binders

After the agent has completed the application the agent may have the authority

to issue a binder for insurance.

The binder is a temporary contract of insurance, oral or written, offered by an

insurer or an agent (if he/she has the authority) pending issuance of the policy. It

is usually written for a period of 30 or 60 days and remains in force for that

period, unless canceled or until a permanent policy is issued or refused by the

insurer. However, if the binder is oral, it must be backed up in writing as soon as

possible.

A binder does NOT guarantee that a policy will be issued; it only guarantees

temporary coverage.

� If no formal action is taken by the insurer, the binder remains in effect

until it expires.

� Coverage under a binder may be cancelled by a formal cancellation or

rejection notice.

Representations and Warranties

Most of the statements contained in the insured�s application for insurance

are representations. They are statements that the applicant believes are true.

Example: Joe purchases a new car and calls his insurance agent. The agent tells Joe that he�s covered for a period of 60 days. This is an example of a binder. The insurance company then reviews the application and decides not to issue the policy. However, the insurance company doesn�t send a notice to Joe. Well, it gets worse. Thirty days later, Joe is in a car accident and it�s his fault. Is he covered? Yes, he is, because the agent issued a binder, which would have covered this loss.

Under the law, a representation is not considered a matter to which the parties

contract, so a policy cannot be voided on the basis of a representation.

Sometimes, specific agreements are made, between the insured and the

insurer, that certain conditions will be met. As an example, an agreement might

require a small convenience store to hire a security guard during the nighttime

hours because of local crime problems. This agreement is called a warranty

and becomes part of the policy and can void the policy if the agreement is

breached.

Concealment

Failure to disclose a MATERIAL FACT that the underwriter, if he/she had known,

would not have issued the policy.

Bodily Injury (BI)

Bodily injury means injury, sickness, disease and death arising out or injury,

sickness or disease.

Property Damage (PD)

Property damage means damage to or destruction of property, including loss of

use of the property.

Personal Injury (PI)

Liability policies offer coverage for an insured�s liability for personal injury, such

as slander, libel, false arrest, and invasion of privacy.

Limit of Liability

These limits represent the maximum amount the insurance company will pay for

a loss. Within this framework, the principle of indemnity and applicable policy

conditions are used to determine the exact reimbursement, in the event of a loss.

The limits of liability are found on the Declarations page.

Deductibles

In order to avoid minor claims, companies usually write deductibles into their

property contracts. This means that the insured must pay some portion of the

loss. Just like in health insurance, the insured will pay the deductible first and

then the insurance company will pay the remainder of the claim within covered

limitations.

Insured Contracts

Insured contracts are contracts to perform a service or use of property which,

because of the subject matter, requires insurance coverage to pick up any

potential covered risks.

� Insured contracts could include any of the following:

o A lease of premises.

o A sidetrack agreement.

o An elevator maintenance agreement.

Deposit Premium/Audit

Deposit Premium is the premium paid at the beginning of the policy period that

is based on an estimate of what the final premium will be. This premium is

adjusted based on reports submitted by the insured to the insurer. This is also

called an estimated premium.

Premium shown as advance premium is a deposit premium only. A Premium

Audit is computed by the insurer. At the close of each audit period, the insurer

will compute the earned premium for that period.

Audit premiums are due and payable on notice to the first named insured.

Excess premium will be returned by the insurer, if the sum of the advance and

audit premiums is greater than the earned premium.

Certificate of Insurance

This is a document that evidences the existence of insurance coverage. It

outlines a summary of the coverage provided by the policy.

� In property insurance, a certificate of insurance may be used to

demonstrate the existence of a master policy, which provides protection

for more than one person.

Example: A condominium association may have a master property

insurance policy insuring the buildings in a condominium

complex. Certificates may be issued to each member as proof of

their insurable interest.

� In casualty insurance, a certificate of insurance is generally issued to

demonstrate proof of liability coverage for a specific location or project.

Example: A contractor may be required by the property owner to

provide proof of general liability insurance for his/her work.

Lesson 6 Review Questions 1. The purpose of insurance is to: A. Pay for all losses B. Spread risk amongst others C. Guarantee against any possible losses D. Share risks with all the other insureds 2. Which of the following is NOT a part to a legal contract? A. Declarations B. Insuring agreement C. Exclusions D. Ex part fixio

3. Which part of a legal contract states the losses for which the insured will be indemnified? A. Declarations B. Insuring agreement C. Exclusions D. Definitions 4. Which of the following must an insured have at the time of loss? A. A car B. An open checking account C. An insurable interest in the property D. A certified page of Declarations 5. Which type of risk is insured against? A. Speculative risk B. Pure risk C. Grand Victoria losses D. Hazard risks 6. Which of the following is NOT a hazard? A. Physical B. Moral C. Mental D. Morale 7. What is the name of the document that shows a policy has been issued? A. Agent�s word B. Insurer�s word C. Certificate of Insurance D. Letter from the agent 106 8. An employer with a debt problem asks her employee to set her home on fire. She offers to split the insurance money if he does it. What kind of hazard is this? A. Physical B. Moral C. Morale D. Psychological 9. A person is daydreaming and ends up driving on the wrong side of the road, hitting an oncoming car. This is known as: A. Negligence B. Drunk driving C. No-fault D. Absolute liability

10. Property and casualty insurance contracts are contracts of: A. Proximate cause B. Negligent cause C. Indemnity D. Total reimbursement 11. How much is the ACV if the replacement cost of the property insured is $100,000 and depreciation is $5,000? A. $100,000 B. $105,000 C. $ 95,000 D. $110,000 12. The taking of property by a person unlawfully entering a locked residence is known as: A. Robbery B. Trespass C. Burglary D. Larceny 13. All statements made on an application are known as: A. Warranties B. Representations C. Statements D. Guarantees 14. Which of the following is defined as a sudden, unexpected, unforeseen event resulting in financial loss? A. Occurrence B. Accident C. Coverage D. Negligence 107 15. What is the name of the premium first collected from the insured? A. Deposit premium B. Audit premium C. First premium D. Final premium 16. Which of the following is known as an unintentional tort? A. Proximate cause B. Liability C. Negligence D. Abandonment

17. What type of insurance is meant to protect people against financial loss arising out of claims of others for alleged personal acts by the insured? A. Property B. Liability C. Life D. Term 18. What is defined as an insured, partner, officer or any other employee of the insured authorized to have custody of the insured property outside the insured premises? A. Custodian B. Guard C. Watchperson D. Messenger 19. What is the broad term used to include any unlawful taking of property? A. Robbery B. Burglary C. Theft D. Vanishing property 20. The maximum amount the insurance company will pay for a loss is known as the: A. Deposit premium B. Audit premium C. Limit of Liability D. Maximum payment Lesson 6 Review Answers 1. (B) The purpose of insurance is to spread risk amongst others and is intended to provide a practical solution to economic uncertainties and unexpected losses. 2. (D) The parts of a legal contract include declarations, insuring agreement, exclusions, conditions and definitions. 3. (B) The insuring agreement is the �heart� of the policy as it states what is to be covered or, in other words, the losses for which the insured will be indemnified. The insuring agreement also describes the type of property covered and the perils against which it is insured. 4. (C) At the time of loss, the insured must have an insurable interest in the property. It is important to note that it is at the time of a loss when the insured must have an insurable interest as it relates to property and casualty insurance, whereas in Life and Health policies, an insurable interest must be present at the

time of the application. 5. (B) Only pure risks can be insured against. Insurance contracts are contracts of indemnity, not profit makers. The goal of insurance is to place the insured back into his/her financial position just prior to the loss. 6. (C) Moral, morale and physical hazards are all types of hazards dealing with property and casualty insurance. Mental hazards are not considered in P&C coverage. 7. (C) The Certificate of Insurance is a document that evidences the existence of insurance coverage. It outlines a summary of the coverage provided by the policy. In property insurance, a certificate of insurance may be used to demonstrate the existence of a master policy, which provides protection for more than one person. 8. (B) A moral hazard concerns the insured�s attempting to defraud the insurance company through intentional and deliberate destruction of the property, such as arson. Since the employer asked the employee to set his house on fire with the promise of splitting the insurance money, this situation would be a moral hazard. 9. (A) The law imposes a duty on everyone to act in a reasonable and prudent manner. Negligence can be seen as an unreasonable or imprudent act. However, it is never an intentional act. The driver who caused the accident certainly did not intend to do so, and his negligent driving led to the collision. 10. (C) All property and casualty insurance contracts are contracts of indemnity and their purpose is to make the insured �whole again� or pay he/she back. The purpose is to put the insured back in the same financial positions as he/she was prior to the insured loss. 11. (C) The Actual Cash Value is found by subtracting the depreciation from the replacement cost. In this case, $100,000 minus $5000 depreciation equals $95,000. If the insured were paid the full replacement cost without deducting anything for having used the insured item, the principle of indemnity would be violated. 12. (C) Burglary is the forcible entry or exit into or out of an insureds locked premises and the carrying away of property belonging to the insured. Burglary can also include forcing a guard to open a locked premises. 13. (B) Most of the statements contained in the insured�s application for insurance are representations. They are statements that the applicant believes are true. Under the law, a representation is not considered a matter to which the parties contract, so a policy cannot be voided on the basis of a representation.

14. (B) An accident is a sudden unexpected, unforeseen event resulting in financial loss. This is as opposed to an occurrence, which is similar in definition, but includes long, continuous exposure to conditions. 15. (A) Deposit Premium is the premium paid at the beginning of the policy period that is based on an estimate of what the final premium will be. This premium is adjusted based on reports submitted by the insured to the insurer. This is also called an estimated premium. 16. (C) The law imposes a duty on everyone to act in a reasonable and prudent manner. Negligence can be seen as an unreasonable or imprudent act. However, it is never an intentional act. Negligence is also known as an unintentional Tort (act). Failure to do what a reasonable person would do under similar circumstances. 17. (B) Liability insurance is meant to protect people against financial loss arising out of liability claims by transferring the burden of financial loss from the insured to the insurance company. 18. (D) A messenger is defined as an insured, partner, officer or any other employee of the insured authorized to have custody of the insured property outside the insured premises. A custodian is defined the same as messenger but would remain inside the premises. 19. (C) Theft is a broad term which includes any unlawful taking of property including the acts of burglary and robbery. The term theft, however, does not include all forms of stealing. It usually does not include employee dishonesty. 20. (C) These limits represent the maximum amount the insurance company will pay for a loss. Within this framework, the principle of indemnity and applicable policy conditions are used to determine the exact reimbursement, in the event of a loss. The limits of liability are found on the Declarations page.

Lesson 7: Types of Policies, Bonds, and Related

Terms

Commercial General Liability

This is liability insurance for most types of commercial or business exposures.

The Commercial General Liability Policy is part of the Commercial Package

Policy and can be sold in conjunction with other coverages or can be purchased

independently.

There are many different coverages available under the CGL policy, each

designed for a particular type of exposure. Under a CGL policy, the named

insured, spouse, partners, officers, directors and shareholders, and SPOUSES, if

acting within the scope of business, as well as employees, managers or anyone

acting with authority within the business, can be covered.

Basic Hazards

Premises and Operations Exposure (Business Liability)

This is a liability that arises out of the conduct and/or location of a

business. This includes liability for bodily injury, property damage and

personal and advertising injury.

Personal and Advertising injury includes such things as slander, libel,

copyright infringement, invasion of privacy, false arrest, wrongful entry

onto another�s premises, and malicious prosecution.

Products and Completed Operations

A business is exposed to liability by defects in its products of completed

operations.

Independent Contractors

A business, from time to time, can be held liable for

the actions of others.

This is know as Contingent Liability which arises out of the work done

by independent contractors. In general, an individual business cannot be

held responsible for the negligence of an independent contractor other

than the following exceptions:

� The activity is legal.

� A situation is involved which does not permit delegation of authority.

� The work is inherently dangerous.

Example: Mary Jane while visiting her local bank slips on the floor because an employee failed to wipe up some water caused by a rain storm.

Example: You waited all week to purchase your favorite custard donuts at the Delicious Donut Shop. Upon returning home with these donuts, you take your first bite and realize the custard is sour

Contractual

Contractual liability applies to �insured contracts� which would include all of the

following:

� A lease of a premises.

� A sidetrack agreement.

� An elevator maintenance agreement.

� Any easement or license agreement except in connection with

construction or demolition operations on or within 50 feet of a railroad.

� An obligation as required by ordinance to indemnify a municipality

except in connection with work for a municipality.

Commercial General Liability Coverage Forms (CGL)

This is liability insurance for most types of commercial or business exposures.

The Commercial General Liability Policy is part of the Commercial Package

Policy and can be sold in conjunction with other coverages or can be purchased

independently. There are many different coverages available under the CGL

policy, each designed for a particular type of exposure.

A Commercial General Liability coverage policy must include the following:

� Common Policy Declarations

� Common Policy Conditions

� CGL Declarations

� One or more CGL coverage forms

� Any mandatory endorsements

Occurrence

Occurrence means an accident, including continuous or repeated exposure

to substantially the same general harmful conditions. Coverage under

the occurrence form is triggered by damage or injury that occurs during

the policy period.

If a policy has been written on an occurrence basis, it means that the in-

surer will pay a claim that is covered, even if the claim is submitted past

the policy period, as long as the accident occurred while the policy was

in force.

Claims Made

Claims Made means that coverage is triggered by the claim, not the

occurrence. In other words, the insurer will only cover claims made during

the policy period. Stacking of liability claims occur when an occurrence

happens over a 2-3 year period. Each year�s limit could be stacked

up to provide larger liability limits. A Claims Made Policy is designed to

prevent this from happening.

Extended Reporting Periods (ERP)

� This is a feature built into a policy that can fill in a gap when a

claims made policy is replaced by an occurrence form.

� This feature provides an extension of coverage for claims made

after the policy�s expiration date. The policy provides an extended

reporting period if:

o The claims made form is cancelled or not renewed.

o The insurer renews or replaces the form shown in the

Declarations of the current form.

o The insurer renews or replaces the form with an occurrence

form.

o Once an extended reporting period is in effect, it cannot

be cancelled.

Basic Extended Reporting Period

� A period of either 60 days or five years is available automatically

and free of charge.

� It provides automatic coverage for any valid claim made during

the 60 days after the policy expires, as long as the incident occurred

between the expiring policy�s retroactive date and its expiration

date.

� If an event took place before the claims made policy expired,

but suspects that claims may first come in after the 60 day basic

extended reporting period, the insured has up to 60 days, following

policy expiration, to report the occurrence or offense to the

insurer. In this case, the five year basic extended reporting period

automatically applies.

� In the event of the above, claims for damages arising from the

reported occurrence can be brought any time during the five

year period.

Supplemental Extended Reporting Period

� Provides an unlimited extension of the reporting period.

� This extended reporting period takes effect at the end of either

the 60 day or five year ERP, whichever applies.

� The insured must request this endorsement and pay an additional

premium.

Retroactive Date

� This is the date when a claims made policy may not pay.

� However, the retroactive date can provide some measure of

protection against previous losses that may have occurred before

the claims made form was written.

� The retroactive date is listed in the CGL Declarations. The insured

has three options for the retroactive date:

o Use the same date as the policy effective date.

o Use an earlier date than the policy effective date.

o Use no retroactive date.

� Agents need to be careful so as not to sell a new CGL policy

and create a gap where the insured has no coverage.

Commercial General Liability Coverage Form

The Commercial General Liability Policy provides the following coverages on an

occurrence or claims made basis:

COVERAGES

COVERAGE A

Premises

BI and PD Operations

Products

Completed Operations

Independent Contractors

Contractual

Fire Legal

COVERAGE B

Personal Injury

Advertising Injury

COVERAGE C

Medical Payments

SUPPLEMENTARY

PAYMENTS

For Coverages A&B

Supplementary

Payments

COVERAGE A

Bodily Injury (BI) & Property Damage (PD)

Coverage A is for bodily injury and property damage liability. This includes

premises and operations liability, products, completed operations liability,

contractual liability and fire legal liability. To get coverage, the BI or PD

complained of must occur within the policy period and must be caused by an

occurrence.

Property damage means physical injury to tangible property, including resulting

loss of use of that property as well as loss of use of tangible property that is not

physically injured.

The insurer has the right and duty to defend any suit seeking those damages.

Exclusions to Coverage A:

Coverage A does not apply to BI and PD caused by:

� Expected or intentional acts.

� Work related.

� Activities an Insured assumes under a contract or agreement.

� Automobile, aircraft or watercraft activities.

� Work related injuries covered under workers compensation.

� Dram shop (Liquor liability).

� Personal property of others in the insured�s care.

� Discharge of pollutants.

� War.

� Loss, cost or expense incurred by the insured for the recall of a

product because of a known or suspected defect.

� Arising out of the transportation of mobile equipment by auto

� Damage to property owned, rented or occupied by the insured

or in the insured�s care, custody or control.

� Damage to the insured�s own product arising out of the product

itself.

� Damage to the insured�s own work.

COVERAGE B - Personal & Advertising Injury Liability

This coverage will pay those sums which the insured is legally obligated to pay

for damages, due to personal or advertising injury. Coverage applies to personal

injury if it arises out of the conduct of the insured�s business. Personal injuries

are not covered if they result from the insured�s personal life.

Personal Injury includes:

� Malicious prosecution

� Libel

� Slander

� False arrest

� Defamation of character

� Unlawful eviction or entry

� Violation of the right to privacy

Advertising Mistakes can result in exposure to vast sums of liability due

to improper advertising. An injury that can be labeled an advertising injury

is one which is created due to one or more of the following:

� Stealing the advertising ideas or style of another.

� Copyright, title or slogan infringement.

� Written or oral publication material violating a person�s privacy

rights.

� Oral or written publication leading to slander or libel of a person or

of his/her organization�s goods, products or services.

Exclusions to Coverage B:

When the insured:

� Knows the oral or written publication is false.

� Has published material which is the focus of a personal injury claim

before the inception of the policy.

� Willfully violates the law.

� Assumes liability in a contract or agreement.

Not covered if the injuries results from:

� A breach of contract.

� The failure of goods to conform to advertised quality.

� The wrong description of the price of goods, products or services.

� An offense committed by an insured, whose business is advertising,

broadcasting, publishing or telecasting.

� Criminal acts committed or directed by the insured.

Supplementary Payments (Coverages A and B)

The Supplementary Payments section of the Commercial General Liability policy

is one of the most valuable portions of any liability policy. Its benefits include:

� Defense costs.

� All other expenses incurred in investigating or settling the claim.

� Up to $250 for the cost of bail bonds.

� Reasonable expenses the insured incurs at the company�s request in

assisting their defense efforts � including loss of earnings of up to $250

a day.

� The cost of appeal bonds and attachment bonds, but the company is

not responsible for actually providing the bonds.

� Any interest awards made to the other person to offset the time between

the occurrence or the judgment, and the actual payment of damages.

� The most important benefit is the payment of defense costs. One aspect

of our system of justice is that, if the other person sues and wins,

his lawyer is paid by getting a percentage of the award.

� If the other person loses, his lawyer doesn�t get paid. In other words,

the other person has nothing to lose, only to gain.

� The insured�s lawyer, on the other hand, works by the hour and the

insured would have to pay him, whether he/she wins or loses. So having

coverage for any defense costs, especially in a nuisance lawsuit, is an

important benefit and without it, the defendant would be at a decided

disadvantage.

COVERAGE C � Medical Payments

This coverage agrees to pay medical expenses, which are incurred within one

year of an accident during a policy period when bodily injury occurs on the

premises owned or rented by the insured, or for bodily injury that results from the

insured�s operations.

Negligence does not have to be established in order to make a policy pay a

claim. It is no fault coverage with reimbursement for:

� Medical payments for necessary hospital.

� Ambulance.

� Funeral expenses.

� Professional nursing care.

� First aid which is given when an accident occurs.

� Any necessary medical, surgical, prosthetic devices, x-ray and dental

services.

Exclusions to Coverage C:

Medical payments will not cover expenses for bodily injury to:

� Insureds.

� Persons hired to work for the insured.

� Tenants of the insured.

� Persons entitled to workers compensation.

� Persons involved in an athletic event.

� Persons injured resulting from the products-completed operations

hazard (These would be paid under Coverage A).

� Persons excluded under Coverage A.

� Persons injured due to war.

Who is an Insured?

Since the need for liability insurance varies with the type of business structure,

the CGL addresses all types of business structures:

� Individuals � Insured and spouse

� Partnership, Joint Venture � Insured, insured�s members and their

spouses

� Limited Liability Company � Insured, members and managers

� Corporation � Owner, executive officers, directors and stockholders

� Other Organizations � Insured, executive officers, directors and

shareholders

Note: In all these cases, employees are also insured for acts within the scope

of the employment. The insured�s legal representative is considered an insured if

the insured dies, but only with respect to duties as the legal representative.

Limits of Insurance

The Limits of Insurance shown in the Declarations are the most that will be paid,

regardless of the number of insureds, claims made, suits brought or persons

bringing suit.

General Aggregate Limit is the most the insurance company will pay

during the policy period for BI and PD, except those provided for under

Products Completed Operations coverage. This limit can be modified by

endorsement so that it applies separately to each of the insured�s

locations or projects.

Aggregate Limits of liability are established for all coverages to include

two sets:

� The first set is for products-completed operations claims that

represents the most that will be paid under Coverage A because of

injury and damage arising out of the products completed operations

hazard.

� The second set is for all other coverages.

Personal and Advertising Injury Limit represents the most that will be

paid under Coverage B for the sum of all damages due to personal injury

sustained by any one person or organization limit. This limit is also subject

to the overall General Aggregate Limit.

Each Occurrence Limit is the most the insurance company will pay for

the sum of all damages under Coverage A and C because of bodily injury,

property damage and medical payments, arising out of any one

occurrence. This limit is also subject to either the General Aggregate Limit

or the Products Completed Operations Aggregate Limit, whichever is

applicable.

Damage to Premises Rented to the Insured Limit represents the most

that will be paid under Coverage A for liability for fire damage to premises

rented to the insured or occupied by the named insured with the owner�s

permission arising out of any one fire. Also subject to the Per Occurrence

Limit and the General Aggregate Limit.

Medical Expense Limit is the most that will be paid under Coverage C for

all medical expenses because of bodily injury sustained by any one

person. Subject to the Per Occurrence and General Aggregate Limits.

CGL Conditions

These conditions are found in both the Occurrence and Claims Made forms.

� Bankruptcy condition states that if the insured becomes bankrupt or

insolvent, the insurer cannot refuse to pay claims that may be covered

under this policy.

� Duties in the Event of Occurrence, Claim or Suit requires that the

insured promptly notify the insurance company of an occurrence that

may result in a claim or suit and give written notice to the insurer of any

claim that has been made or suit that has been brought against the

insured.

� Legal Action Against Us states that no person or organization has

the right to join the insurance company as a party or bring the insurance

company into a suit.

� Insured must also do the following:

o Authorize the insurer to obtain records.

o Send the insurer copies of any demands, notices or other legal

papers received in connection with a claim or suit on a timely

basis.

o Cooperate with the insurer in the investigation, defense and

settlement of the claim.

o At the company�s request, assist the insurer in the enforcement

of any right against someone who may be liable to the insured.

o Not voluntarily make a payment, assume any obligation or incur

any expense, other than expenses for first aid, without the insurer�s

consent, except at the insured�s own cost.

ISO�s (Insurance Services Office) Common Policy

Conditions

� Nonrenewal: If the insurer decides to not renew the CGL policy, it

must mail or deliver written notice of nonrenewal to the first named insured

at least 30 days before the expiration date of the policy.

� Other Insurance condition states that when the insured�s CGL is

primary and other primary insurance applies to the same loss, the loss

will be divided between the policies by one of two methods:

o Contribution by equal shares: all insurers contribute equally

up to the limit of the policy with the lowest limit. At that point,

the insurer with the lowest limit stops paying since it has already

paid its policy�s limit, and the other insurers share the remainder

of the loss. This continues either until the loss is paid in full or

each company has paid its limit.

o Contribution by limits: Each company pays a proportion of

the loss equal to the proportion its policy limits bear to the total

amount of insurance available.

� Claim Information: The right to make claims is included in the claims

made form, but not the occurrence form.

o It provides that the insurer will give the first named insured certain

information relating to the current CGL claims made form

and any previous claims made forms the insurer has issued to

the insured during the previous three years.

This information includes:

� A list or record of each occurrence not previously reported

to any other insurer of which the insurer has been

notified according to policy provisions.

� A summary, by policy year, of payments made and

amounts reserved under any applicable General Aggregate

Limit and Products Completed Operations Aggregate

Limit.

o If the insurer cancels or nonrenews the policy, it will provide this

information no later than 30 days prior to termination.

o In other circumstances, the insurer will provide the information

only if it receives a written request from the first named insured

within 60 days after the end of the policy period. The information

will be provided within 45 days of the request.

Owners and Contractors Protective (O&CP)

� This policy has been designed to cover an insured�s independent contractor

exposure.

� It provides liability protection in those situations where the law holds the owner

or principal contractor liable for the negligence of an independent contractor,

especially when the work is unlawful, very dangerous and such that the liability

for it cannot be transferred or delegated.

� Bottom line, the O&CP is designed to cover one liability exposure and one

liability exposure only.

� Claims will be paid according to the insuring agreement under O&CP

insurance for bodily injury or property damage due to operations which

are performed for an insured who is named by a contractor (as designated

in the declarations agreement and only at the designated location).

� This policy will also help pay for defending a lawsuit.

Lesson 7 Review Questions 1. All of the following are basic hazards covered under a Commercial General Liability policy EXCEPT: A. Premises exposure B. Operations exposure C. Products operations D. Property damage exposure 2. Contractual liability applies to insured contracts, which would include all of the following EXCEPT: A. Lease of a premises B. A front track agreement C. An elevator maintenance agreement D. Easement 3. A Commercial General Liability coverage part must include which of the following? A. Common policy declarations B. AGL declarations C. Less than one CGL coverage form D. Any optional endorsements 4. An accident, including continuous or repeated exposure to substantially the same general harmful conditions, is known as a(an): A. Repeated action B. Occurrence C. Common event D. Mandatory event 5. Claims made means that coverage is triggered by the claim, not the: A. Occurrence B. Accident C. Event D. Action 6. What is the name of the date when a claims made policy may not pay? A. Future B. Supplemental C. Retroactive D. Sample 7. Which of the following is not covered by Coverage A?

A. Premises B. Products C. Contractual D. Personal injury 8. Personal Injury under Coverage B includes all of the following EXCEPT: A. Malicious prosecution B. Products C. Libel D. Slander 9. Coverage C pays: A. Defense costs B. Medical payments C. Advertising mistakes D. Slander penalties 10. Coverage C has all of the following exclusions EXCEPT: A. Insureds B. Tenants of the insured C. Ambulance fees D. Persons due to war 11. CGL Conditions include all of the following EXCEPT: A. Bankruptcy B. Legal Action against us C. Duties in the event of occurrence D. Medical expense limit 12. Which is an ISO common policy conditions? A. Legal action B. Nonrenewal C. Bankruptcy D. Duties in the event of occurrence Lesson 7 Review Answers 1. (D) Premises exposure, operations exposure, and products operations are all basic hazards covered under a Commercial General Liability policy. 2. (B) Contractual liability applies to �insured contracts� which would include all of the following: a lease of a premises, a sidetrack agreement, an elevator maintenance agreement, any easement or license agreement except in connection with construction or demolition operations on or within 50 feet of a railroad, or an obligation as required by ordinance to indemnify a municipality

except in connection with work for a municipality. 3. (A) A Commercial General Liability coverage policy must include the following: Common Policy Declarations; Common Policy Conditions; CGL Declarations; One or more CGL coverage forms; and any mandatory endorsements 4. (B) Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Coverage under the occurrence form is triggered by damage or injury that occurs during the policy period. 5. (A) Coverage under the occurrence form is triggered by damage or injury that occurs during the policy period. If a policy has been written on an occurrence basis, it means that the insurer will pay a claim that is covered, even if the claim is submitted past the policy period, as long as the accident occurred while the policy was in force. 6. (C) This is the date when a claims made policy may not pay. However, the retroactive date can provide some measure of protection against previous losses that may have occurred before the claims made form was written.The retroactive date is listed in the CGL Declarations. 7. (D) Coverage A is for bodily injury and property damage liability. This includes premises and operations liability, products, completed operations liability, contractual liability and fire legal liability. To get coverage, the BI or PD complained of must occur within the policy period and must be caused by an occurrence. Personal injury is covered by Coverage B. 8. (B) Coverage applies to personal injury if it arises out of the conduct of the insured�s business. Personal injuries are not covered if they result from the insured�s personal life. Products are covered by Coverage A, not B. 9. (B) This coverage agrees to pay medical expenses, which are incurred within one year of an accident during a policy period when bodily injury occurs on the premises owned or rented by the insured, or for bodily injury that results from the insured�s operations. Negligence does not have to be established in order to make a policy pay a claim. 10. (C) Medical payments will not cover expenses for bodily injury to insureds, persons hired to work for the insured, tenants of the insured, persons entitled to workers compensation, persons involved in an athletic event, persons injured resulting from the products-completed operations hazard (these would be paid under Coverage A), persons excluded under Coverage A, and persons injured due to war. Ambulance fees are paid. 11. (D) CGL Conditions include Bankruptcy (the insurer cannot refuse to pay

claims that may be covered); Duties in the Event of Occurrence, Claim or Suit (requires that the insured promptly notify the insurance company of an occurrence that may result in a claim or suit); and Legal Action Against Us (no person or organization has the right to join the insurance company as a party or bring the insurance company into a suit.) 12. (B) ISO (Insurance Services Office) common policy conditions include nonrewal, other insurance, and claim information.

Lesson 8: Automotive: Personal Auto and Business (Commercial) Auto

Liability and Medical

Automobile liability addresses third party claims for bodily injury and property

damage arising out of the insured�s negligent operation of an automobile. In

some states, motorists are required to have some minimum levels of coverage

set forth by state statutes.

The basic coverage provided by automobile policies includes liability, medical

payments, physical damage, and uninsured motorist protection. More than 150

million drivers and roughly 110 million private passenger cars are insured in the

United States.

Personal Auto Policy (PAP)

PAP is designed for personal auto exposure, not commercial. Eligible vehicles

for PAP coverage include any private passenger auto and any pickup or van with

a gross weight less than 10,000 pounds which is not used in a freight or delivery

business. Also included, are vehicles which are leased for a minimum period of

six consecutive months.

� The PAP consists of a Declarations page and a policy form. The policy

form contains four separate coverages, each with its own insuring

agreement, exclusions and conditions. They are:

o Part A � Liability Coverage

o Part B � Medical Payments Coverage

o Part C � Uninsured Motorists Coverage

o Part D � Coverage for Damage to Your Auto (Physical Damage)

Coverages

Part A - Liability Coverage

This coverage provides payment for Bodily Injury and Property Damage

resulting from the insured�s use of an automobile for which the insured

becomes legally liable. The day in which coverage begins under a PAP

policy is at 12:01 a.m. on the date listed in the policy. Under this Part, the

company promises to settle and defend claims brought against the insured

involving the insured�s use of an auto. The company also agrees to pay

for all defense costs.

The definition of insured is quite broad and includes not only family

members, but anyone that drives your vehicle with permission. The liability

coverage under a PAP policy is for any insured who becomes legally

responsible for the bodily injury or property damage to someone else be-

cause of an auto accident. An insurance company will pay sums up to

limits stated in the Declarations portion of the PAP.

The PAP is not available to corporations, partnerships or other

organizations that can be incidentally responsible for the use of insured

vehicles.

Damages paid for bodily injury include not just the payments of actual

medical costs which can be documented, but also for a person�s pain and

suffering due to the injury. Property damage extends to any kind of

property which is damaged due to the negligent operation of an auto

including vehicles, buildings, street lights or any other kind of stationary

object.

The insurer has the option to settle or defend any claim or suit which it

deems appropriate. The insured cannot dictate coverage payment or

refusal.

Liability Limits

The Part A liability is the most the company will pay for all damages

resulting from any one auto accident, regardless of the number of

insureds, claims filed, vehicles or premiums listed in the Declarations, or

vehicles involved in the accident.

Liability coverage is written on a split limit basis such as 20/30/15. The

first two numbers are related to bodily injury. In this case, $20,000 per

person for bodily injury in any one accident; $30,000 per accident for

bodily injury; and $15,000 as a maximum for all property damaged in

any one accident.

Part A-Insureds - Who Are They?

� The insured or any family member.

� Any person using the vehicle with the insured�s permission.

� Any organization with respect to legal responsibility for acts or

omissions of a person for whom coverage is afforded under this

part.

� Bottom line: coverage follows the auto.

PAP Example:

Melvin Doofis, a citizen of a town called Eat n� Plenty, is the head coach of

the town�s football team. On a hot summer night, Melvin decides to have an

outdoor pool party at his house for the entire football team, friends and

relatives. As all of the 250 guests brought automobiles to the dinner, parking

is a problem. In Melvin�s driveway is Melvin�s car, parked at the

top of the driveway, while Billy Bob, his quarterback, parked his car just to

the right side of Melvins. In back of those cars, are two cars belonging to

the Eat n� Plenty cheerleaders, Pattie and Matilda.

In the middle of the party, Melvin runs out of Coors beer. Without more beer,

the team is getting rather hostile and ugly. Melvin, who isn�t drinking,

chooses Herman, another non-drinker, to go with him to purchase more beer.

Melvin borrows Matilda�s car which is located in the driveway nearest to

the street. Matilda carries minimum limits of 10/20/5 liability insurance.

Melvin carries 200/300/200.

Let�s take a look at the following set of facts to help you understand some

of the issues we have presented and discussed:

1. Whose auto insurance liability applies if there is an accident?

Matilda�s liability insurance applies when Melvin drives Matilda�s car.

Melvin becomes an insured, by definition, under Matilda�s liability

coverage.

2. If Melvin negligently runs a stop sign, hits a light pole and sustains

injuries to himself and causes injuries to Herman, whose liability

insurance would cover both Herman�s and Melvin�s injuries?

If Melvin negligently hits a light pole as described, Matilda�s liability

insurance would apply to Herman�s injuries because Melvin is an

insured, by definition, under Matilda�s policy. Neither liability insurance

policy would apply to Melvin�s injuries: Melvin is an insured under

Matilda�s policy and, therefore, Melvin�s personal policy doesn�t apply to

Matilda, the insured.

3. If Herman sustains a serious injury resulting in an $80,000 claim,

Matilda�s auto liability coverage would apply, on a primary basis for

$10,000, to Herman�s injuries. In turn, Melvin�s auto liability coverage

(on his own car) would pay the remaining $70,000 on an excess basis.

Remember, a primary coverage must be exhausted first before an

excess coverage begins.

Supplementary Payments

� Up to $200 a day for lost wages when the insured is required to attend

a legal hearing or trial.

� Bail bonds costs up to $250.

� Cost of bonds to release attachments in any suit the company defends.

� Any expenses incurred by the insurance company.

� Reasonable expenses incurred at the insurer�s request.

� Interest payments (post judgment).

Exclusions

� Insured intentionally causes bodily injury or property damage.

� For damage to property owned or being transported by that person.

� For damage to property rented to, used by or in the care of that

person.

� For bodily injury to an employee of that person during the course of

employment. This exclusion does not apply to bodily injury to a

domestic employee unless workers compensation is required or

available for that domestic employee.

� People engaged in the business of selling, repairing, serving, storing

or parking automobiles.

� Any vehicle which is being used for regular business purposes.

� Any liability arising out of the ownership or operation of a vehicle

while it is being used to carry people or property for money or a fee.

� Motorized vehicles with fewer than four wheels or designed for use

off public roads.

� Vehicles used in prearranged racing or speed contests.

Out of State Coverage

If the insured becomes involved in an auto accident out of state and the

state involved requires higher liability limits than the insured maintains, the

PAP will provide the higher specified limit for this accident.

Part B - Medical Payments

Regardless of fault, the insured, his family and passengers are covered for

necessary medical and funeral expenses sustained, regardless of who

was at fault. The insured and family members are also covered, if they are

struck by an auto when they are a pedestrian.

This coverage is a single limit of anywhere from $1,000 up to $10,000 and

it applies to a single person per accident.

If there is other applicable auto medical payments insurance, the policy

will pay only its share of the loss. The insurer�s share is the proportion

that this policy�s limit of liability bears to the total of all applicable limits.

Exclusions - Does not apply to any persons for bodily injury:

� Sustained while occupying any motorized vehicle having fewer than

four wheels.

� Covered autos used as a livery conveyance.

� Vehicles used for residential living.

� Used during the course of employment, if workers compensation is

available for the bodily injury.

� Any auto other than a covered auto owned by or used regularly by

a named insured or family member.

� Caused by war or nuclear hazard.

� Sustained during prearranged racing or speed contests.

Part C - Uninsured Motorist Coverage

An uninsured motorist is someone that may strike the insured, but who does not

carry insurance, including hit and run drivers. So, Part C agrees to pay damages

which an insured is legally entitled to recover from the owner or operator of an

uninsured vehicle because of bodily injury sustained in an auto accident.

Defining an Uninsured Motor Vehicle

� No liability coverage at the time of the accident.

� Operated by an unidentified hit and run driver who strikes an insured or

family member, the insured�s auto or any auto occupied by the insured or

a family member.

� Has liability coverage, but not enough to meet the state�s financial

responsibility requirement.

� Has invalid liability coverage at the time of the accident because

the insurer is insolvent or denied coverage.

The above definition of an uninsured motor vehicle does NOT apply to:

� Vehicles operated by a self-insurer, unless insolvent.

� Vehicles owned by or made available for the regular use of the insured

or any family member.

� Vehicles operated by a government agency.

� Vehicles operated on rails.

� Vehicles designed for use off of public road.

� Vehicles used as a residence.

Who is the Insured for Uninsured Motorists Coverage?

� The named insured and family members.

� Anyone occupying the named insured�s covered auto.

� Any person entitled to recover damages because of BI caused by

an uninsured motorist to the named insured, family members or

passengers in the covered auto.

Exclusions under Part C � Part C does not cover losses:

� For BI sustained by an insured while occupying or when struck by

an auto that is owned by the insured, but not insured for Uninsured

Motorists Coverage under the policy.

� That are settled without the insurer�s consent.

� For BI sustained by a family member while occupying or when

struck by an auto owned by the named insured that has primary

Uninsured Motorists under another policy.

� That occur when the auto is being used as a public livery.

� That occur while the insured is using an auto without the reasonable

belief that he or she is entitled to do so.

Limit of Liability

Coverage for Part C is similar to the one used for Part A.

Underinsured Motorist Coverage

This is available by endorsement under the PAP. It covers the insured when

involved in an accident with a driver who has auto liability insurance, but the limit

of this insurance is insufficient to pay for the insured�s damage.

Underinsured motorist coverage pays bodily injury coverage caused by the

operation of motor vehicles which are underinsured. The underinsured motorist

coverage allows a covered person to be paid the difference between the actual

damages for bodily injury and the limit of the other drivers insurance when it is

not sufficient to pay the entire claim of the injured party.

Part D - Coverage for Damage to Your Auto

This coverage is divided into two separate coverages:

� Collision

� Comprehensive

Collision means the upset of a covered auto or its impact with another

vehicle or object. When a loss is not considered to be from a collision, it

will fall under something other than collision coverage. Autos will be replaced on

an ACV basis.

Comprehensive coverage is a loss other than from collision and addresses

damage losses to the insured vehicle caused by:

� Missiles or falling objects.

� Fire.

� Theft or larceny.

� Explosion or earthquake.

� Windstorm.

� Hail, water or flood.

� Malicious mischief or vandalism.

� Riot or civil commotion.

� Contact with bird or animal.

� Breakage of glass.

Exclusions:

� Carrying people or property for a fee (livery service).

� Electrical breakdown.

� Mechanical breakdown.

� Normal wear and tear.

� Road damage to tires.

� Damage to radar detection equipment.

� Loss of any CB radio, TV monitors, computers, etc.

� Custom furnishing in any pickup or van.

� War or nuclear perils.

Rental Cars

Car rental companies place the responsibilities for loss or damage to the

rental car itself upon the renter. Collision damage waivers may be purchased

to relieve the renter of all or part of his/her responsibility for loss or

damage to the car. It should be noted that under a PAP, Coverage D will

provide some coverage for the rental car.

Part E � Conditions: Duties of the Insured after an

Accident or Loss

� Notify the police.

� Notify the company.

� Be specific as to all the details of the loss, including when and

where the loss occurred, how it occurred, names and addresses of

witnesses and data about injured persons.

� Provide access to any information needed.

� Submit a completed proof of loss form.

� Protect the auto from further damage.

� Allow the company to inspect and/or appraise any damage.

Personal Auto Policy Endorsements

Some insureds may have additional coverage needs that can be met by

the following endorsements:

� Towing and Labor Costs: Reimburses for the cost of having a

vehicle towed.

� Extended Non-owned Coverage for Name Individual: Extends

the extensive coverage automatically provided under the

PAP for the insured and the family while driving cars other than

the insured�s covered autos.

Assigned Risk Plans

� Due to poor driving records, most companies will not accept them

because their loss experience is much greater than the average driver.

� Assigned Risk Plans are voluntary agreements between licensed

insurance companies. These companies agree to share the poor risks

among themselves. Because these risks are randomly assigned to the

participating companies, they are called assigned risks.

� Drivers are usually issued BI and PD liability in the minimum amount

required.

Commercial Auto Insurance

Commercial Auto Insurance is designed to address commercial automobile risk

exposures. A policy can be written as a mono-line policy (one line of insurance)

or included in the CPP (Commercial Package Policy).

Depending on the nature of the exposure, a Commercial Auto coverage part

must contain:

� Common Policy Declarations

� Common Policy Conditions

� One of the five separate coverage forms:

o Business Auto

o Business Auto Physical Damage

o Garage

o Truckers

o Motor Carrier

! Declarations for coverage form selected

Business Auto Coverage Form

The Business Auto coverage form is used to insure private passenger and

commercial auto exposure of all businesses other than garages, truckers

and motor carriers as they would need separate forms.

The Business Auto coverage form includes:

� The liability coverage will pay all sums an insured legally must

pay as damages because of bodily injury or property damage to

which the insurance applies, caused by an accident and resulting

from the ownership, maintenance or use of a covered auto. This

coverage is similar to the PAP coverage.

� Physical Damage coverage (Comprehensive) which is an all risk

type of physical damage protection for automobiles, including theft but

excluding loss by collision or upset (which may be added).

o Specified Causes of Loss: More limited type of Comprehensive

coverage and would cover only the following:

! Fire

! Lightning

! Explosion

! Theft

! Windstorm

! Hail

! Earthquake

! Flood

! Vandalism or mischief

! Sinking, burning, collision or derailment of a conveyance

transporting the covered auto (e.g. ship)

� Collision: Covers overturn of the covered auto and collision with

another object

Who is an Insured?

� Named insured.

� Those using a covered auto with permission.

� Those who become liable for the actions of the insured.

Exclusions

� Intentional or expected injuries.

� Any liability assumed under a contract or agreement (does not apply

to any liability the insured would have had if there were no contract

or agreement).

� Work related injuries to employees which are covered by Workers

Compensation.

� Damage to property owned by, transported by or in the care, custody

or control of the insured.

� Damage arising out of the movement of property by a mechanical

device.

� Damage arising out of the operation of certain mobile equipment.

� Pollution damage.

� Covered autos while racing.

Types of Autos Covered

� Any vehicle listed in the Declarations that is owned or leased under a

long-term contract of six months or more.

� Any auto acquired during the policy period.

� Any auto not owned by the named insured that is being used as a

temporary substitute for a vehicle shown in the Declarations that is out

of use because of breakdown, repair, servicing, loss or destruction.

Garage Coverage Form

This Form is for automobile type businesses such as gas stations, parking

garages and auto dealers who are excluded by the Business Auto coverage

form.

It is a unique form of coverage because it covers both auto and business liability.

Coverage is provided for autos in the insured�s care, custody and control.

The Garage Coverage form provides:

� Liability coverage.

� Garagekeepers coverage.

� Physical Damage coverage.

Uninsured Motorists, Underinsured Motorists and Medical Payments

coverage may be added by endorsement.

Covered Autos

� Customer autos left with the insured for service, repair, storage or

safekeeping.

� Physical damage coverage only for the dealers� autos and autos

held for sale by dealers, non-dealers or trailer dealers.

Liability Coverage

The Garage coverage form covers both auto and business liability arising

out of:

� Ownership, maintenance or use of covered autos.

� Garage operations.

Garagekeepers Insurance (Coverage)

The Liability section of the Garage coverage form excludes liability for damage to

property of others in the care, custody or control of the insured. For garages, this

excludes a significant business exposure, the garage�s liability for customers�

autos in its care or custody.

The Garagekeepers Insurance provides the following coverage to help:

� Covers the insured�s liability for damage to customer�s property that the

insured has for servicing, repair, parking, or storage.

� Physical damage to customer�s property in the insured�s custody whether

or not the insured is liable.

� Can be provided on either a primary or excess basis.

� Causes of loss that can be covered include Comprehensive or Specified

Causes of Loss and Collision.

Lesson 8 Review Questions 1. Automobile liability addresses third party claims for: A. Liability arising out of slander B. Bodily injury arising out of the insured�s negligent operation of an automobile C. Apartment property coverage D. HO-2 coverage 2. Which of the following is NOT one of the PAP coverages? A. Part A - Liability coverage B. Part B � Property payments coverage C. Part C � Uninsured Motorists coverage D. Part D � Coverage for damage to your vehicle 3. The Part A liability of a PAP is the most the company will pay for all damages resulting from any: A. One accident B. Two accident C. Three accidents D. Any number of accidents

4. Liability coverage is written on a: A. Flat basis B. Multiple basis C. Split limit basis D. Never ending basis 5. Which of the following drivers is probably not a Part A Insured? A. The insured. B. Family member. C. Employer of the driver. D. Cousin Motley without the permission of the insured. 6. Which of the following is NOT a supplementary payment for a PAP? A. Bail bonds costs up to $500 B. Up to $200 a day for lost wages C. Any expenses incurred by the insurance company D. Interest payments 7. Part B of a PAP pays for: A. Property damages B. Liability damages C. Medical payments D. Engine damages 8. Part C of the PAP provides coverage for: A. Insured motorists B. Underinsured motorists C. Overinsured motorists D. Uninsured motorists 9. In many states, uninsured motorists coverage is: A. Not necessary B. Mandatory C. Necessary if the driver is under the age of 25 D. Not necessary if the driver is over the age of 25 10. Underinsured motorists coverage is available by: A. A secondary policy B. Codicil C. Endorsement D. Part H 11. Comprehensive coverage addresses damage losses to the insured from all of the following EXCEPT: A. Fire

B. Collision C. Missiles D. Hail 12. Car rental companies place the responsibilities for loss or damage to the rental car itself upon the: A. Owner of the car B. Credit card company C. Renter D. Other car in the accident 13. All of the following are duties of the insured after a loss, EXCEPT: A. Notify the police B. Submit a completed proof of loss C. Leave the car where the accident took place until the insurance company arrives D. Be specific as to all the details of the loss 14. Towing and labor costs can be added by: A. Part T B. Endorsement C. Buying an additional policy D. Declaration 15. A Commercial Auto coverage part must contain: A. Common policy declarations B. Two of the five separate forms C. Three of the five separate forms D. Medical expense reimbursement 16. Which form is for automobile type businesses such as gas stations and auto dealers? A. Auto dealer form B. Gas station form C. Gasoline transfer engineering form D. Garage Coverage form

Lesson 8 Review Answers 1. (B) Automobile liability addresses third party claims for bodily injury and property damage arising out of the insured�s negligent operation of an automobile. In some states, motorists are required to have some minimum levels of coverage set forth by state statutes. The basic coverage provided by automobile policies includes liability, medical payments, physical damage, and uninsured motorist protection.

2. (B) The PAP consists of a Declarations page and a policy form. The policy form contains four separate coverages, each with its own insuring agreement, exclusions and conditions. They are Part A � Liability Coverage, Part B � Medical Payments Coverage, Part C � Uninsured Motorists Coverage, and Part D � Coverage for Damage to Your Auto (Physical Damage). 3. (A) The Part A liability is the most the company will pay for all damages resulting from any one auto accident, regardless of the number of insureds, claims filed, vehicles or premiums listed in the Declarations, or vehicles involved in the accident. 4. (C) Liability coverage is written on a split limit basis such as 20/30/15. The first two numbers are related to bodily injury. In this case, $20,000 per person for bodily injury in any one accident; $30,000 per accident for bodily injury; and $15,000 as a maximum for all property damaged in any one accident. 5. (D) Part A insureds include the insured or any family member, any person using the vehicle with the insured�s permission, or any organization with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under this part. Basically, the coverage follows the car. Since Cousin Motley did not have permission to drive the car, he would not be insured under Part A. 6. (A) Supplementary PAP payments include up to $200 a day for lost wages when the insured is required to attend a legal hearing or trial, bail bonds costs up to $250, cost of bonds to release attachments in any suit the company defends, any expenses incurred by the insurance company, reasonable expenses incurred at the insurer�s request, and interest payments (post judgment). 7. (C) Under Part B, regardless of fault, the insured, his family and passengers are covered for necessary medical and funeral expenses sustained, regardless of who was at fault. The insured and family members are also covered, if they are struck by an auto when they are a pedestrian. 8. (D) An uninsured motorist is someone that may strike the insured, but who does not carry insurance, including hit and run drivers. So, Part C agree to pay damages which an insured is legally entitled to recover from the owner or operator of an uninsured vehicle because of bodily injury sustained in an auto accident. 9. (B) Uninsured motorists coverage, or Part C, Part C agrees to pay damages which an insured is legally entitled to recover from the owner or operator of an uninsured vehicle because of bodily injury sustained in an auto accident 10. (C) This is available by endorsement under the PAP. It covers the insured when involved in an accident with a driver who has auto liability insurance, but

the limit of this insurance is insufficient to pay for the insured�s damage. . 11. (B) Comprehensive coverage is a loss other than from collision and addresses damage losses to the insured vehicle caused by something other than collision. This includes missiles or falling objects, fire, theft or larceny, explosion or earthquake, windstorm, hail, water or flood, malicious mischief or vandalism, riot or civil commotion, contact with bird or animal, or breakage of glass. 12. (C) Car rental companies place the responsibilities for loss or damage to the rental car itself upon the renter. Collision damage waivers may be purchased to relieve the renter of all or part of his/her responsibility for loss or damage to the car. It should be noted that under a PAP, Coverage D will provide some coverage for the rental car. 13. (C) After a loss, the insured must protect his/her auto from further damage; therefore, it cannot be left at the scene of the accident. Other responsibilities include: notify the police and the insurance company; be specific as to all the details of the loss, including when and where the loss occurred, how it occurred, names and addresses of witnesses and data about injured persons; provide access to any information needed; submit a completed proof of loss form; protect the auto from further damage; and allow the company to inspect and/or appraise any damage. 14. (B) Towing and Labor Costs, which provide reimburses for the cost of having a vehicle towed, can be added as an endorsement. 15. (A) Commercial Auto Insurance is designed to address commercial automobile risk exposures. A policy can be written as a mono-line policy (one line of insurance) or included in the CPP (Commercial Package Policy). Depending on the nature of the exposure, a Commercial Auto coverage part must contain Common Policy Declarations, Common Policy Conditions, and one of the five separate coverage forms: 16. (D) The Garage Coverage Form is for automobile type businesses such as gas stations, parking garages and auto dealers who are excluded by the Business Auto coverage form. It is a unique form of coverage because it covers both auto and business liability. Coverage is provided for autos in the insured�s care, custody and control.

Lesson 9: Other Policies

Workers Compensation Insurance, Employers Liability Insurance and

Related Issues

Workers Compensation Insurance

This insurance covers those people who are injured, become disabled or die

from injuries or illness arising out of and occurring in their course of employment

and have a right to hold employers liable for economic or financial damages

under workers compensation laws.

� Nearly all states that allow private insurance companies to offer

coverage use the standardized Workers Compensation and Employers

Liability policy filed by the National Council on Compensation Insurance

(NCCI)

� An employee does not have to prove fault as an employer cannot defend

against the action, unless he/she can show that the employee was injured

or suffered an injury or died due to willful negligence.

� Willful negligence is defined as a deliberate act or failure to act with

requisite indifference, or if the employee is intoxicated.

� It should be noted that none of the state workers compensation laws

cover every employer and/or type of employment.

� The workers compensation and employee liability policy provides

coverage for payments which are required under state workers

compensation law, as well as the liability risk for injuries and diseases

which are occupationally related.

The following types of employment are not covered under state workers

compensation laws because of their temporary status:

� Farm labor.

� Domestic employment.

� Employees of religious, charitable and nonprofit educational institutions.

� Casual employees.

Ways Employers Can Meet Obligations

� Self insurance

� Private insurance

� State funds

Self insured means a business organization that chooses to retain the

exposure of workers compensation rather than purchase a workers

compensation policy. In most states, an employer can retain the workers

compensation risk, if they show evidence of financial adequacy. Retention

or self insurance is designed only for large employers. They do so by

meeting certain criteria such as:

� Posting a surety bond which will guarantee the security of benefit

payments.

� Showing evidence of the ability to administer the benefit payments

and other workers compensation services that may be mandated

by their state laws.

Part I - Workers Compensation Insurance

� This part applies to bodily injury caused by accident or disease.

� Payments are made to employees, regardless of fault as long as

the injuries are work related.

� There are benefits for medical expenses, mileage, loss of time,

temporary total disability, total disability, partial disability, burial

allowance and rehabilitation.

Part II � Employer�s Liability Insurance

Employer�s liability insurance is needed to cover situations that are not

covered by Workers Compensation laws, such as exempt employments,

illegal employments and non-compensable injuries.

� This applies to work related bodily injury or occupational disease.

� Bodily injury includes resulting death.

� Under this part, the policy pays for damages resulting from bodily

injury claims initiated by employees.

� This coverage protects the insured employer from negligence

suits brought by employees because of work related injuries.

� There is a basic liability limit of $100,000 which can be increased.

Exclusions

� Liability assumed by contract.

� Punitive or exemplary damage payments.

� Bodily injury to an employee while employed in violation of the law

with the insured�s knowledge.

� Intentional bodily injury.

� Damages arising out of discrimination.

Work related vs. Non-work related

To be covered under Workers Compensation, an injury or disease must

arise out of and in the course of employment. The employee must have

been engaged in work related activities. A non-work related injury is one

suffered by the employee while not in the course of employment. As an

example, the insured sponsors an employee picnic. During the festivities,

an employee is injured playing softball. This is a non-work related injury

and would not be covered by workers compensation.

Part III - Other States Insurance

� An optional coverage that automatically provides coverage to the

insured in other states as long as those states are specified and the

insured informs the company about such additional states as soon

as work begins.

� It is not available in those states that have a state fund in which

private insurance is not allowed.

� This protection is important for employers with expanding

interstate operations.

Part IV - Duties If Injury Occurs

� If an injury occurs to a covered employee, the employer must

notify the insurance company immediately and the insured must

cooperate with the insurer and promptly notify the company of an

employee�s injury.

� The insurer reserves the right to inspect the workplace at anytime.

� The insured can cancel at any time, while the insurer must give 10

days notice of cancellation.

Part V � Premium

This part explains how the cost of the policy is determined

Part VI � Conditions

Part VI, Conditions, sets forth the various conditions that apply to the

policy, such as cancellation procedures, subrogation and the insurer�s

right to inspect the insured�s workplace.

Bonding and Crime

Fidelity Bonds

Guarantees an employee�s honest discharge of duty and are written to protect an

insured from dishonest acts by employees.

Most fidelity bonds contain a discovery period, which is a period of time for which

indemnity still exists for loss after the bond itself has expired (usually one year).

Bonds are contracts between three parties:

� Principal: Party who promises to do, or not to do, a specific thing.

This is the person bonded.

� Surety: The party (often the insurance company) who agrees to

be responsible for losses that may result, if the principal does not

keep his or her promise.

� Obligee: Party to whom the principal makes the promise, and for

whose protection the bond is being written.

Types of Fidelity Bonds

Scheduled fidelity bond can be either a name schedule or position

schedule. To schedule something is to list it. Fidelity bonds written on

a name schedule basis would list the names of the individuals to be

bonded. When written on a position schedule basis, fidelity bonds list

the positions to be bonded. The amount of the bond or penalty would

be listed and can be different for each name and position.

Blanket fidelity bonds provide blanket protection for an employer,

covering all employees without exception. As a result, if a covered

loss occurs, there is no need to identify the dishonest employee; the

employer need only prove that the loss occurred.

There are two types of blanket bonds:

1. Commercial blanket bond provides for the bond�s penalty

(limit) to be the maximum amount applicable to any single loss,

regardless of the number of employees involved. This has

an aggregate penalty. Although a loss does not reduce coverage

for any future losses caused by other employees, no more

coverage will be provided for future losses caused by someone

who has already created a loss. There is a one year discovery

period. There is coverage whether dishonest employees act

separately or in collusion.

2. Blanket Position Bond provides for a specific individual

penalty listed in the bond for each of the insured�s employees.

This bond has a multiple penalty which means that the payment

of any one loss does not reduce the coverage offered for

future losses which may occur due to the actions of other

employees. There is a two year discovery period.

Miscellaneous Fidelity Bond Issues

� Fidelity bonds are continuous, without any expiration date.

� Can be terminated by the parties to the bond.

� They provide a discovery or cut-off period for losses that occurred

during the term of the bond, but were not discovered until after its

termination.

Crime and Commercial Crime Insurance

Insurance designed to protect businesses against property loss resulting from

crimes such as burglary, robbery and theft.

Let�s review some of the basic coverages:

� Theft, Disappearance and Destruction (Coverage Form C) Broad

coverage for the company�s money and securities, which is usually

excluded under the Premises Burglary and Robbery and Safe Burglary

forms.

o Inside of the Insured�s Premises coverage provides coverage

for inside the premises or banking premises against theft,

disappearance or destruction. It also pays for damage to locked

containers by theft or unlawful entry and damage to the premises

caused by a theft.

o Outside the Premises coverage pays for loss of money and

securities through theft, disappearance or destruction while outside

the premises and in the care and custody of an insured, business

partner, employee, or armored car company.

� Robbery and Safe Burglary (Coverage D) Provides coverage for

businesses against robbery or attempted robbery � the taking of property

by one who has threatened to commit bodily harm or who has

committed a witnessed, obviously unlawful act.

o Makes provision for coverage inside the premises and outside the

premises of property other than money and securities.

o Inside the premises coverage may be written to cover both

robbery and safe burglary or can be limited to either robbery or safe

burglary. Outside the premises coverage applies to robbery of

property in the care and custody of a messenger.

! A messenger is defined as an insured, partner, officer or

any other employee of the insured authorized to have

custody of the insured property outside the insured

premises.

! A custodian can be defined in the same way as a

messenger, but would be found inside the premises.

! A guard or watchperson means any person the insured

retains specifically to have care and custody of property

inside the premises and who doesn�t have any other duties.

� Premises Burglary (Coverage Form E) covers businesses against

losses from burglary. The policy covers all the insured�s merchandise

other than money and securities. The key to burglary coverage is

evidence of forcible entry or exit.

o If the thief simply walks in, scoops up some merchandise and

leaves, this would not constitute a burglary

Professional Liability

Professional liability arises from a failure to use due care and the degree of skill

required and expected in a particular profession. A profession is a vocation,

calling or occupation involving labor, skill, education and special knowledge of an

intellectual nature.

� As an example, hospitals can be sued for unauthorized release of

information; doctors can be sued by injured patients; attorneys can

be sued for giving bad advice, etc.

� Typical professionals include physicians, attorneys, accountants,

engineers, architects, securities and insurance professionals.

� Errors and Omissions insurance addresses the professional liability

needs of lawyers, engineers, architects, insurance agents, real

estate agents, registered representatives, etc.

� Directors and Officers Liability is a form of E & O which is appropriate

for directors and officers of corporations who may be sued as

individuals by stockholders. Directors and officers have no coverage

under a CGL for personal liability and no coverage under the

Homeowners contract for liability arising out of business pursuits.

Umbrella/Excess Liability

These policies are designed to protect an insured individual or business agent

against catastrophic or disastrous claims. This type of policy provides coverage

over and above primary coverage.

� The umbrella usually provides coverage in some dollar amount,

usually at least a million dollars, over and above the primary

amount carried.

� The purpose of an umbrella liability policy is to provide low cost

coverage due to exposure of businesses because of a greater variety

of liability hazards.

� In recent years, umbrella liability policies have become quite popular

with professionals and members of middle and upper management

for their business and personal liability exposures.

� Remember, primary insurance policies pay first, up to the policy

limits, regardless of other insurance in effect. Excess insurance,

like an umbrella policy, begins to pay after primary insurance has

been exhausted.

Personal Umbrella Coverage

This type of insurance policy provides individuals and families with high

limit/excess protection over basic Comprehensive Personal Liability

(Section II of the Homeowners Policy), automobile liability and other

liability insurance carried with respect to property of a personal/family

nature, as distinguished from business and professional activities and

property. Personal Umbrella Liability insurance is written with a minimum

limit of liability of one million dollars with higher limits available.

Commercial Umbrella Coverage

This policy provides excess general liability, automobile liability, employers

liability limits and also protects the insured firm from exclusions and gaps

in the primary liability policies which serve as underlying insurance.

A Commercial Umbrella policy provides coverage in three types

of situations:

� Policy limits applying to a loss under an underlying policy have

been exhausted.

� Previous losses reimbursed under an underlying policy have reduced

its aggregate limit so that a subsequent loss is not fully covered.

� Loss is excluded under an underlying contract, but not excluded

under the Umbrella.

Lesson 9 Review Questions 1. What type of insurance covers those people who are injured or die from injuries arising out of and occurring in their course of employment? A. Personal Liability B. Workers Compensation C. PAP D. Commercial Liability 2. Which of the following types of employment are covered under state workers compensation? A. Full-time secretary B. Farm labor C. Domestic laborer D. Casual employee

3. All of the following are ways an employer can meet obligations regarding workers compensation, EXCEPT: A. Self insurance B. Public insurance C. State funds D. Private insurance 4. A business that chooses to retain the exposure of workers compensation rather than purchase policy is known as being: A. Self-insured B. Publicly insured C. Privately insured D. State-funded 5. Which part of a workers compensation policy applies to bodily injury? A. Part I B. Part II C. Part III D. Part IV 6. Which part of a workers compensation policy applies to other states insurance? A. Part I B. Part II C. Part III D. Part IV 7. Which type of bond guarantees an employee�s honest discharge of his/her duties? A. Surety B. Correction C. Contact D. Fidelity 8. Which of the following parties promises to do, or not to do, a specific thing in regard to a bond? A. Obligee B. Surety C. Principal D. Partner 9. Which type of bond provides protection for an employer covering all employees without exception? A. Surety bond B. Blanket bond C. Longview bond

D. Safeview bond 10. Which of the following is NOT true regarding a Fidelity Bond? A. They are continuous B. They can be terminated by the parties of the bond C. They provide a cut-off period for losses D. They have specific expiration dates 11. What is defined as an insured, partner, officer of any other employee of the insured authorized to have custody of the insured property outside the insured premises? A. Custodian B. Guard C. Messenger D. Watchperson 12. The key to burglary coverage is evidence of: A. Forcible entry B. Theft without entry to the building C. Holdup with a gun D. Larceny by itself

Lesson 9 Review Answers 1. (B) Workers Compensation insurance covers those people who are injured, become disabled or die from injuries or illness arising out of and occurring in their course of employment and have a right to hold employers liable for economic or financial damages under workers compensation laws. 2. (A) The following types of employment are not covered under state workers compensation laws because of their temporary status: farm labor, domestic employment, employees of religious, charitable and nonprofit educational institutions, and casual employees. A full-time secretary would have workers compensation coverage. 3. (B) Employers can meet Workers Compensation obligations through self insurance, private insurance or state funds. Public insurance is not a method of meeting these obligations. 4. (A) Self insured means a business organization that chooses to retain the exposure of workers compensation rather than purchase a workers compensation policy. In most states, an employer can retain the workers compensation risk, if they show evidence of financial adequacy. Retention or self insurance is designed only for large employers. 5. (A) Part I of Workers Compensation applies to bodily injury caused by accident

or disease. Payments are made to employees, regardless of fault as long as the injuries are work related. There are benefits for medical expenses, mileage, loss of time, temporary total disability, total disability, partial disability, burial allowance and rehabilitation. 6. (C) Part III is an optional coverage that automatically provides coverage to the insured in other states as long as those states are specified and the insured informs the company about such additional states as soon as work begins. It is not available in those states that have a state fund in which private insurance is not allowed. This protection is important for employers with expanding interstate operations. 7. (D) Fidelity bonds guarantee an employee�s honest discharge of duty and are written to protect an insured from dishonest acts by employees. Most fidelity bonds contain a discovery period, which is a period of time for which indemnity still exists for loss after the bond itself has expired (usually one year). 8. (C) The principal is the party who promises to do, or not to do, a specific thing. This is the person bonded. 9. (B) Blanket fidelity bonds provide blanket protection for an employer, covering all employees without exception. As a result, if a covered loss occurs, there is no need to identify the dishonest employee; the employer need only prove that the loss occurred. The two kinds of blanket bonds are commercial and blanket position. 10. (D) Fidelity bonds are continuous, without any expiration date. The can be terminated by the parties to the bond, and provide a discovery or cut-off period for losses that occurred during the term of the bond, but were not discovered until after its termination. 11. (C) A messenger is defined as an insured, partner, officer or any other employee of the insured authorized to have custody of the insured property outside the insured premises. This is similar to a custodian, except that a custodian only has custody inside the premises. 12. (A) Premises Burglary (Coverage Form E) covers businesses against losses from burglary. The policy covers all the insured�s merchandise other than money and securities. The key to burglary coverage is evidence of forcible entry or exit.

Lesson 10: Policy Provisions

Parts of the Insurance Contract

Since an insurance policy is a legal contract it must be very specific about the

agreements between the insured and the insurer. To do this, most policies

contain five parts:

� Declarations: These can usually be found on the first page of the

policy.

o They contain information such as the name of the insured,

address, amount of coverage, description of the property

and the cost of the policy.

� Insuring Agreements: This is the �heart� of the policy as it states

what is to be covered or, in other words, the losses for which the insured

will be indemnified.

o The insuring agreement also describes the type of property

covered and the perils against which it is insured.

� Conditions: This part of the contract describes the responsibilities

and obligations of both the insurance company and the insured. In

other words, everyone knows what they have to do.

� Exclusions: Describes the losses for which the insured is not covered. If

an excluded loss occurs, the insured will not be indemnified.

� Definitions: This section clarifies the meaning of certain terms

used in the policy.

Definition of the Insured

The insured is defined in every property and casualty policy. A party not

specifically named as an insured has no legal right to recover directly under a

policy, even if that party has an insurable interest in the insured property at the

time of loss.

Keep in mind, however, that it is possible for a person, not specifically named in

the contract, to still have recovery rights in the event of loss such as a guest

staying at your house. This guest is covered for specific types of loss under

dwelling and homeowners forms.

Duties of the Insured

� Give notice of claim immediately (written or by telephone).

� Prevent further loss as reasonably possible.

� Separate damaged from undamaged property to determine loss.

� Inventory the loss.

� Prepare a proof of loss which is required by the insurer within a

reasonable time period, usually 60 days.

� Make all books and records pertaining to the loss available to the insurer.

Cancellation

Either the insured or insurer may cancel provided coverage. Each property and

casualty policy details the reasons for which the insurer can cancel the policy. Of

course, these reasons must be in compliance with individual state laws. While

the insurance company must give specified written notice as required by

the state, the insured, on the other hand, can request immediate cancellation,

without any notice.

If the insurance company cancels the policy any unearned premium will be

returned on a pro rata basis. There is no allowance for deductions such as

service fees. This allows the insured to get back all of the money which has not

been used or applied to premium cost.

If the insured cancels the policy any unearned premium will be returned on a

short rate basis (with deductions made for servicing the policy, etc.) With the

short rate basis, the insurance company can recoup some of the costs of

underwriting and policy processing.

If either the insured or the insurance company cancels the policy on its effective

Date, this is known as a flat cancellation with no financial loss to anybody.

Nonrenewal

This is the act of terminating an insurance policy after the specified policy period.

Nonrenewal is a notice given by the insurance company to the insured indicating

the intention not to renew the policy upon the normal termination date. There

may be, however, some limitations on the insurance company for nonrenewal.

Supplementary Payments

Liability policies provide certain Supplementary Payments that are paid in

addition to the policy�s regular limit of liability. These coverages vary from one

type of liability policy to another, but in general they include:

� Premiums for certain types of bonds such as bail and appeal bonds.

� Expenses incurred in the investigation of a claim.

� Loss of earnings.

� First aid to others at the time of an accident.

� Reasonable expenses incurred by the insured at the company�s request

in the investigation or defense of a claim.

� Prejudgment interest (not included as part of damages).

� Post judgment interest (interest accruing on the judgment after an

award has been made but before payment is made by the company).

Proof of Loss

Filing a detailed proof of loss, which is an official inventory of the damages, is

part of the duties owed to the insurance company by the insured.

Notice of Claim

This is a responsibility of the insured after a loss. A Notice of Claim must be

given to the insurance company promptly.

Arbitration

This process is used to settle and resolve areas of disagreement between the

insured and the insurance company or between the company and a third party in

the case of Liability insurance, or between two insurers.

An arbitrator listens to both parties involved in the dispute and makes a �fair�

decision based on oral evidence provided by both. Typically parties have to abide

to this decision.

Subrogation

This is a process in which insurance companies usually settle their differences

when one company subrogates against another. During this process all parties

agree to be bound.

The insured�s insurance company (Company A) pays the losses which were

caused by an insured of another insurance company (Company B). Then

Company A would bring a suit against Company B on behalf of their insured.

This transfer to the insurance company of the insured�s right of recovery against

others is called Subrogation.

Fair Credit Reporting Act

� This federal act helps insure that applicants for insurance are treated in

a fair, accurate and confidential manner. It is the producer�s responsibility

to explain the terms of this Act.

� The signed forms will give the underwriters authority to investigate the

proposed insured further, if they deem it necessary.

� The Act also provides consumers with an opportunity to find out

information that an investigative agency has used about them and to

whom such reports have been made.

� If a consumer is denied insurance because of information contained in

a credit report dealing with the prospect�s credit rating, general reputation

or personal character, the consumer must be notified.

� Erroneous information must be corrected within six months.

Other Insurance

When more than one insurance company is used to insure a piece of property,

pro rata liability rules will apply. This is done in keeping with the doctrine of

indemnity. The formula to establish settlement contributions is as follows:

Separate Company Coverage x Loss = Amount Company Will Pay

------------------------------------------

Total Amount of Insurance (Both Companies)

Right of Salvage

When an insurance company settles a claim it owns

a right to salvage the property that has only been partially damaged or which has

been destroyed, but still has a salvage value.

� The insurance company can reduce its losses in the matter by selling

the salvage to a salvage dealer.

� It may determine whether or not property will be repaired, replaced

or cash will be provided.

� In situations where an insured property is not completely destroyed,

the insurance company may take possession of it and receive its

salvage value when it has replaced or has made a cash settlement

Other Insurance Example Paco, a hard working author, purchases a retreat home in upstate Wisconsin. As a writer, Paco needs plenty of seclusion. Unfortunately, with

to the insured party.

Claims Made Policy Form

Commercial General Liability coverage form that pays for BI and PD losses for

which a claim was first made against the insured during the policy period.

Consent to Settle Losses

In the past, Professional Liability policies contained a provision that the insurer

could not settle a claim without the insured�s consent. Most policies now provide

that such consent is not required.

Statute of Limitations

These are time frames set forth by statutory law, during which an injured party

can bring a lawsuit. Unless legal action is brought within this time period, the right

to sue for injury will disappear. Each state has its own Statutes of Limitations.

Lesson 10 Review Questions 1. All of the following are duties of the insured, EXCEPT: A. Give notice of a claim immediately B. Make all records regarding the loss available to the insurer C. Prepare a proof of loss within 12 months D. Inventory the loss 2. If the insurance company cancels the policy, any unearned premium will be returned on a: A. Pro rata basis B. Flat basis

C. Short rate basis D. Long basis 3. A notice of claim must be filed with the insurance company: A. Within 90 days B. Within 60 days C. Within 30 days D. Promptly 4. The process in which one insurer pays the insured and then goes against another insurance company to recover is known as: A. Arbitration B. Subrogation C. Anticipation D. Nonrenewal 5. The Fair Credit Reporting Act is a: A. State Act B. Dept. of Commerce Act C. Federal Act D. Local Act 6. Under the Fair Credit Reporting Act, erroneous information must be corrected within: A. 3 months B. 5 months C. 6 months D. 12 months Lesson 10 Review Answers 1. (C) Duties of the insured include Give notice of claim immediately (written or by telephone); prevent further loss as reasonably possible; separate damaged from undamaged property to determine loss; inventory the loss; prepare a proof of loss which is required by the insurer within a reasonable time period, usually 60 days�not 12 months; and make all books and records pertaining to the loss available to the insurer. 2. (A) If the insurance company cancels the policy any unearned premium will be returned on a pro rata basis. There is no allowance for deductions such as service fees. This allows the insured to get back all of the money which has not been used or applied to premium cost. 3. (D) This is a responsibility of the insured after a loss. A Notice of Claim must

be given to the insurance company promptly. 4. (B) Subrogation is a process in which insurance companies usually settle their differences when one company subrogates against another. During this process all parties agree to be bound. The insured�s insurance company (Company A) pays the losses which were caused by an insured of another insurance company (Company B). Then Company A would bring a suit against Company B on behalf of their insured. This transfer to the insurance company of the insured�s right of recovery against others is called Subrogation. 5. (C) The Fair Credit Reform Act is a federal act helps insure that applicants for insurance are treated in a fair, accurate and confidential manner. It is the producer�s responsibility to explain the terms of this Act. 6. (C) Under the Fair Credit Reform Act, erroneous information must be corrected within six months.

End of Casualty Insurance section