Insurance
is the transfer of risk of loss
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| Term | Definition |
|---|---|
Insurance | is the transfer of risk of loss |
Risk | is the uncertainty or change of loss occurring |
Two Types of Risk | Pure Risk, Speculative Risk |
***Pure risk is: | a chance of loss or nothing or no chance of gain |
Pure Risk | is loss or nothing, no chance of gain (only pure risks are insurable) |
Speculative | loss or gain (example: gambling) |
***What is speculative risk like? | Gambling |
Handling Risk (STARR) | Sharing, Transfer, Avoidance, Reduction, Retention (Retaining the risk – ex. deductible) |
What is insurance? | The transfer of risk or loss |
Insurance is the transfer of: | Risk or loss (pick risk over loss if both are options) |
All of the following are ways to hand risk except. | Exposure |
Exposure | is the unit of measurement to determine rates for an insured based on how risky they are |
Hazards | increase the chance of the risk occurring |
Physical Hazards | are material and structural things |
Moral Hazards | is lying on purpose, example: lying on the insurance application |
Morale Hazards | is a sense of carelessness (think of teenagers) |
Loss | is the reduction or disappearance of value |
Peril | is the cause of loss like a fire, wind, or hail |
***You go off the road while driving and hit a tree. What is the act of hitting the tree? | Peril |
The Law of Large #’s | says that more stats you have to look at, the more predictable losses will be |
***What does the law of large numbers say? | The more data I have, the more predictable losses will be. |
***What says the more data I have, the more predictable losses will be? | The law of large numbers |
Indemnity | what the insurance company does for us; making us whole again |
Reinsurance | is when a company indemnifies another |
Indemnify | is to make whole again after a loss; what the insurance company does for us |
***What defeats indemnity? | Replacement cost |
Certificates of Authority | allow insurer to sell in that state making them (an insurance company) admitted and authorized (never certified) |
***What does admitted mean? | Authorized |
***What does authorized mean? | Admitted |
***What does an insurance company have to do before they can sell? | Get a certificate of authority |
***What is a certificate of authority similar to? | An insurance license |
Stock Companies | are owned by shareholders, issue non-participating policies and dividends are taxed |
Mutual Companies | are owned by policyholders, issue participating policies, dividends are not taxed. People who buy a policy are an owner of the company |
Domestic | Insurer is a state they are incorporated (headquartered and selling) Hint: 1 state; Example: Headquartered here, started here, based here, and sell here |
***What are the ways that insurance companies can be domiciled? | Domestic, Foreign, Alien |
Foreign | Insurer is a state where they are not head quartered, but they are selling Hint: 2 states; Example: Headquartered/based in Iowa but selling in South Dakota |
Alien | is completely outside of the United States Hint: Country |
Law of Agency | agent represents the insurer and the knowledge of the agent is knowledge of the insurer |
Agent Authority (Agent of Authority) | Express, implied, apparent |
Express | is written/contract |
Implied | is assumed by insurer/agent |
Apparent (perceived) | is assumed by customer (business card/letterhead/stationary); not real authority but it can make an impact |
***What type of agent authority is known as perceived? | Apparent |
***Apparent is why type of agent authority? | Perceived |
***You sent a letterhead to a customer with a handwritten note, what agent authority is this? | Apparent |
Fiduciary Responsibility | agent submits premium collected to the insurance company; fiduciary funds/money; a person of trust |
***If a customer gave me a check for the premium and I forgot to turn it in, but the customer got into an accident. What happens, who is responsible, will it be an approved claim? | Errors and omissions insurance |
***A marketing company is asking for information on a customer, can you give them information? | NO, graham leech Briley protects you from this |
Co-mingling | mixing personal money with premium finds from a client |
Elements of a legal contract (KNOW THESE WELL!!) | Agreement, Consideration, Competent parties, Legal purpose |
Agreement | Known as offer and acceptance |
Offer | customer submits an application |
Acceptance | insurer issues policy |
Consideration | both parties bring something of value |
Consideration on the side of the insured (customer) | application + premium |
Consideration on the side of the insurer | promise to pay a claim |
Competent Parties | Not under the influence of drugs or alcohol, sound mind, legal age (felons are ok) |
Legal Purpose | cannot be against public policy/break the law |
Adhesion | Insurer write the policy, customer either takes it or leaves it (think of glue) |
Aleatory | Unequal exchange (customer pays small monthly premium, insurer pays very large claim); think of a seesaw and how it is uneven |
***John purchased his life insurance policy two months ago and has paid $200 in premium. He dies and $20,000 pays out to his beneficiaries. What does this represent? | Aleatory |
Personal | Between the customer and the insurer |
Unilateral | One-sided promise, only the insurer is legally bound to do anything |
Conditional | both parties have rules/duties they must follow/do; Rules, duties, obligations, ways of behaving – these are all triggers that should signal condition |
Reasonable expectations | a customer can expect the coverage if an agent implied it though during the sale |
Indemnity | restore the insured to their previous financial condition |
Representation | statements that are believed to be true |
Misrepresentation | an untrue statement |
***Carlos was addicted to drug, in and out of rehab, and when asked about his medical history he forgets most of it and doesn’t put it down on his application. What will they cover? | All of it (this is because he does not remember due to being on drugs during that time) |
Material misrepresentation | a piece of information that would have caused a different decision |
Warranty | absolutely true statements, to the best of my knowledge; Used for home and auto (I live at ….., I drive a ’24 VW Atlas) |
Concealment | withholding or hiding on the application by omission; a form of fraud but do not confuse with fraud |
Fraud | deceive or lying to cheat the insurance company; outright lie |
Insurable Interest | you must have interest into the item/person you are insuring, meaning you get insurance on cars you own, house you own, etc. For a person, you need to be related/married. The memory trick is BBS. You need BLOOD, BUSINESS, or MONEY to get insurance. Friends are NOT someone we have insurable interest with. |
Underwriting | is known as the Risk Selection Process. Insurance is the transfer of risk so it’s important to fully assess how much risk a person has to transfer. A person with multiple accidents is more likely to have more claims, so they would be transferring more risks than a person with a clean driving record. |
Perils | perils are the cause of loss; the reason you file a claim. A peril is the fire, lightning, wind, hail. Insurance does not cover all possible perils. These are NOT listed on the declaration page. |
Named Peril | a policy that will only cover perils that are named/listed on the policy. If a peril is not named, it’s not covered. |
Open peril | a policy that will cover any perils except what’s excluded. This is a policy that will list out what is NOT covered. |
Direct loss | the direct physical damage to property, which includes Proximate cause of loss too |
Indirect loss | the losses that because of the/direct loss consequences of the direct loss. A house burning down is the direct loss, and the cost of having to stay at a hotel because of it is the indirect loss. |
Blanket insurance | a single policy that covers multiple classes |
Specific Insurance | a policy that covers a certain thing or it’s own amount of coverage |
Fire restive | a house that is built with material that can resist burning down for up to 2 hours. Fire restive is the best rating |
Frame | a building that is made of wood which is flammable. Frame is the worst rating |
Loss valuation | factor in determining the premium |
Replacement | the brand-new price to replace things at today’s prices. The original price paid is not considered |
Actual cash value (ACV) | the used value to replace things and is calculated by knowing the replacement value and then subtracting wear and tear (depreciation) |
Market value | what a willing buyer would pay a willing seller |
Functional replacement | the modern less expensive price to make repairs like using drywall instead of plaster |
Agreed | a policy that sets the replacement price of an item based on a fair valuation of the item. Agreed is used for an item that doesn’t fluctuate much in value |
Stated | a policy that set a maximum limit that the insurer will pay up to if the item suffers a covered peril |
Property Damage | direct damages to property |
Bodily injury | direct damage to a person’s body |
Special damages | medical bills and loss of wages after an accident |
General damages | pain and suffering, mental anguish – very subjective |
Absolute liability | obviously dangerous – swimming pools and pet tiger |
Strict liability | strictly products |
Vicarious liability | the parent is responsible for the acts of the child, the employer is responsible for the acts of the employee |
Declarations | the first page of the policy and is a policy summary of who and what is covered, by what company and for what amount (NNAAPPP) |
What is on a declarations page? | Name of the insured, Name of the company, Address, Amount, Property description, Period (how long), Premium
|
Definitions | explains certain meanings of words used in the policy |
***Where do we go to find out what the named insured means? | Definitions |
Insured Agreement/Clause | lists the perils insured against as well as contains the promise to pay and the parties of the contract (parties, perils, promise, period) |
Additional/Supplementary Coverage | is build in coverage to all the policies at no additional cost |
Conditions | a part of the policy that lists the rules, duties, obligations, ways of behaving for both the insured and insurer |
Exclusions | a part of the policy that lists what is NOT covered (below are the only two to remember out of the big list); earth movement and water damage/flood |
Endorsements | written changes made to amend the policy, if added coverage via an endorsement, it will raise the premium |
Certificate of insurance | a document that states the insured has coverage |
Insured | an insured is anyone covered by the policy |
First named insured | in a commercial (business) policy, the first named insured is the designated person who manages the policy for the business |
Named insured | the person who bought the policy and is listed on the declarations page |
Additional insured | mortgage/lien holder added via an endorsement in regard to a specific interest (mortgage/car loan) |
Policy period | states how long a policy covers an insured |
Policy territory | states where the coverage is active (US, Canada, US territories) |
Policy limits | the most amount of money the insured can collect under the policy |
Cancellation | terminating and in force policy |
Nonrenewal | termination of a policy at expiration |
Deductibles | the amount of money the insured pays first before the insurer pays |
Coinsurance | a rule that says an insured needs to carry at least 80% of the replacement cost of the home I order to have the full claim covered. If an insured carries less than 80%, the insurer will use the coinsurance equation to reduce the amount they will pay for a claim. |
Other insurance | a provisions in the policy that explains if there is more than one policy covering a loss, they will all need to pay a fair share of the loss to protect indemnity |
Vacancy | a house is vacant when there are NO people and NO stuff. At 61 days of being vacant a house will begin to lose coverage |
Unoccupancy | a house that has stuff, but NO people, however the people do intend to come back like going on a vacation |
Limits of liability | the amount of money the insurer is liable to pay |
Aggregate limit | the max amount of money the insurer is liable to pay |
Per occurrence | the sublimit of liability that sets a maximum for all claims arising from one accident/occurrence |
Per person | the max available limit in an accident for one person |
Split limit | separately stated limits of liability-per person/per accident |
Combined single limit | a single dollar limit available for all claims from one accident without breaking it up by person, bodily or property |
Theft | the act of stealing |
Burglary | breaking and entering, forced entry causing damage |
Robbery | stealing while a person is a witness/victim |