Week 1 of Notes Property and Casualty Insurance
Week 1 of Notes Property and Casualty Insurance INS 3203
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This 5 page Class Notes was uploaded by Whitney Smith on Tuesday February 2, 2016. The Class Notes belongs to INS 3203 at Mississippi State University taught by Priscilla King in Winter 2016. Since its upload, it has received 75 views. For similar materials see Property and Casualty Insurance in Economcs at Mississippi State University.
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Date Created: 02/02/16
Chapter 1 – Property and Casualty Insurance A. Risk Management Overview a. Organizations must effectively manage four categories of loss exposures: property, liability, personnel, and net income loss exposures. B. Loss Exposure a. Property Loss Exposure i. A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest. b. Liability Loss Exposure i. A condition that presents the possibility that a person or an organization will sustain a loss resulting from a claim made against that person or organization b someone seeking money damages or some other legal remedy. c. Personnel Loss Exposure i. A condition that presents the possibility of loss caused by a key person’s death, disability, retirement, or resignation that deprives an organization of that person’s special skill or knowledge that the organization cannot readily replace. d. Net Income Loss Exposure i. A condition that presents the possibility of loss caused by a reduction in net income. C. Risk Management Process a. Step 1: Identifying loss exposure i. The organization must identify its loss exposures within each of the loss exposure categories. 1. Example: Property loss exposures could include the following: a. Losses resulting from damage, such as: b. Costs to rebuild or repair damaged or destroyed office buildings c. Restore computer data; 2. Losses resulting from taking, such as: a. Potential theft losses that could occur from persons inside and outside the organization 3. Loss of use costs to relocate the business during rebuilding and to store equipment and supplies until the damaged building and property have been repaired or replaced. b. Step 2: Analyzing loss exposure i. These exposures should then be analyzed to determine the likelihood of loss and its probable extent. 1. Example: Techniques for managing these property exposures might include the following: a. Loss reduction, such as: i. Installing a sprinkler system to prevent fire damage and establishing a security system with the local fire department. b. Loss prevention, such as: i. Establishing internal security controls to prevent employee theft and installing a security system to avoid robbery. c. Separation, such as: i. Establishing an arrangement with another nearby organization to enable work to continue during any business disruption and establishing offsite storage for computer data backup tapes d. Risk transfer, such as: i. Purchasing property insurance. c. Step 3: Examining feasibility of risk management techniques i. The costs associated with each technique should be considered to determine which are feasible and which are not 1. Example: Installing a sprinkler system might not be feasible because of the cost and potential work interruption. While purchasing insurance in establishing arrangements for temporary relocation of the business and for offsite storage for backup tapes might be feasible. d. Step 4: Selecting the appropriate risk management techniques i. The feasibility study should assist the organization in choosing the best techniques. e. Step 5: Implementing selected risk management techniques i. Implementing the selected techniques could include the following: 1. Arranging meetings with organizations with which the organization could potentially establish a resource sharing arrangement 2. Selecting a partner organization 3. Establishing the plan ii. I could also include meeting with an insurance agent to procure the best policy to meet the organization’s needs f. Step 6: Monitoring results and revising the risk management program i. Monitoring the results might involve the following: 1. Staging trial run with the resource organization to make sure the system's could handle the increased workload that such an arrangement could entail 2. Reviewing organizational policies that could influence the success of such an arrangement 3. Annually reviewing insurance coverages and limits to ensure that the organization’s needs continue to be met. D. Risk Management Techniques a. Avoidance i. Avoidance eliminates any possibility of loss. The probability of loss from an avoided loss exposure is zero because an entity decides not to assume a loss exposure in the first place (proactive avoidance) or to eliminate one that already exists (abandonment). b. Loss Prevention i. Loss prevention involves reducing the frequency of a particular loss. c. Loss Reduction i. Loss reduction involves reducing the severity of a particular loss. d. Separation i. Separation involves dispersing a particular activity or asset over several locations. Separation involves the routine, daily reliance on each of the separated assets or activities, all of which regularly form a portion of the organization’s working resources. E. Risk Control and Commercial Property Loss Exposure a. Most losses result from a chain of events. b. In some cases, a combination of unrelated events converges to cause a los. c. Risk control measures are designed to address the links in the chain of events and the unrelated events that converge. d. Specific risk control measures provide valuable property protection and are applicable to property losses cause by these events: i. Fire ii. Burglary, Robbery, and Employee Theft 1. Theft risk control often focuses on the three most common types of theft: a. Burglary is theft by someone who forcibly enters the place where the property is kept. b. Robbery involves the use (or threat) of force against the person from whom the property is taken. c. Employee theft (also called employee dishonesty or embezzlement) is theft that an employee commits against his or her own employer. iii. Explosion iv. Windstorm 1. Preloss actions for windstorm include these: a. Design structures to withstand anticipated wind loads. b. Provide storm shutters and blinds for windows and openings rated to handle high wind loads. c. Maintain roof and wall systems, including roof tiedowns d. Secure materials and equipment located outside the facility e. Locate trees and utility poles away from structures. v. Flood 1. The flood risk control measures or devices may be implemented: a. Dams and other impoundments of water b. Channels designed to direct the runoff and open areas over which flood waters can spread out c. Property protections, such as dikes and sand bags (or other barriers), that divide flood waters d. Equipment designed to resist the pressure of flood waters and the effects of dampness, such as pumps to remove water and allow for runoff e. Structures constructed in floodprone areas with the lowest floor above the 100 year flood level f. Plans to move property to higher ground when needed vi. Earthquake 1. Earthquake resistant structures are designed to withstand the forces of earth movement. e. Generally, risk control measures take one or both of two approaches: i. The engineering approach ii. The human behavior approach Common Policy Formats A. Multiline Policies and Monoline Policies a. Multiline Policy i. Also known as a package policy ii. Most organizations are insured under this for most of their property and liability loss exposures b. Monoline Policy i. Many organizations purchase specialty coverages, such as flood insurance, in these policies. B. Standard Forms and Nonstandard Forms a. Standard Forms i. Developed by ISO, AAIS, or other insurance advisory organizations. b. Nonstandard Forms i. Insurers’ or brokers’ independently develop forms. C. Commercial Package Policy a. Policy that covers two or more lines of business by combining ISO’s commercial lines coverage parts. b. Under ISO Commercial Lines Manual policy writing rules, one of the coverage parts of a CPP must cover buildings and/or business personal property, and another must cover commercial general liability. c. Examples of additional property coverage parts are commercial crime, commercial inland marine, and equipment breakdown. d. Each coverage part consists of these components: i. One or more declarations forms (containing information about the insured and the particular loss exposures insured) ii. One or more coverage forms (containing most of the essential terms of coverage) iii. For some liens of insurance, a general conditions form iv. Any applicable endorsements (modifying the terms of the coverage form or general conditions form) D. Businessowners Policy a. A package policy hat combines most of the property and liability coverages needed by small and medium size businesses. E. Output Policy a. A policy that combines, in one form and associated endorsements, all or most of the commercial property coverages that the insured organization needs, and uses flexible rating plan. Common Policy Conditions A. Cancellation a. The insured may cancel the policy at any time by mailing or delivering written notice of cancellation to the insurer. b. The insurer can cancel the policy by mailing or delivering written notice of cancellation to the first named insured. B. Changes a. In practice, changes are often first made by verbal communication and confirmed afterwards in writing. C. Examination of Books & Records a. The insurer reserves the right to examine and audit the insured’s books and records related to the policy at any time during the policy period and for up to three years after the policy’s termination. b. However, if the insurer prefers to verify the reports by making an onsite inspection of the insured’s books and records, the condition permits the insurer to do that. D. Inspections and Surveys a. The insurer has the right, but not the obligation, to inspect the insured’s premises and operations at any reasonable time during the policy period. E. Premiums a. The first named insured is responsible for paying the policy premium. If the insurer owes a return premium, it will make payment only to the first name insured. F. Transfer of Rights & Duties Under This Policy a. The insured cannot transfer any rights or duties under the policy to any other person or organization without the insurer’s written consent. Commercial Property Conditions Forms Commercial Property Conditions o A required component of the commercial property coverage part that contains conditions applicable to all commercial property coverage forms. Policy condition o Any provision that qualifies an otherwise enforceable promise made in the policy. A. Other Common Conditions a. Valuation i. For an insurer to determine the amount of a loss, the policy must specify a valuation basis for the type of property insured. ii. Actual Cash Value (ACV) 1. Cost to replace property with new property of like kind and qualify less depreciation. iii. Replacement Cost (RC) 1. The costs to repair or replace property using new materials of like kind and quality with no deduction for depreciation. b. Coinsurance c. Insured’s Duties in the Event of a Loss d. Appraisal i. If the insurer and the insured disagree about the value of covered property or the amount of a covered loss, the appraisal condition allows either party to demand an appraisal. e. Loss Payment i. The insurer usually has the option of either paying the value of the lot or damaged property or paying for repair or replacement. f. Recovered Property i. If either the insured or the insurer recovers any insured property after the loss settlement, the other party must be notified. g. Vacancy i. If the building in which the loss occurs has been vacant for sixty consecutive days before the loss, the insurer is not obligated to pay for loss caused by vandalism, sprinkler leakage, building glass breakage, water damage, theft, or attempted theft. h. Mortgage Holders i. The mortgage holder must pay any premiums due to the insurer. ii. The mortgage holder must submit a proof of loss within sixty days of the insurer’s request iii. The insurer must be notified of any change in ownership, occupancy, or substantial change in risk known to the mortgage holder. i. Loss Payees
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