Property Risk Management & Insurer Operations
Property Risk Management & Insurer Operations RMIN 4310
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Date Created: 10/25/15
CPCU Review Chapter 1 0 Commercial Pronertv Risk quot39 0 Definitions of Commercial Property Insurance I BroadAggregate definition 0 All types of commercial property insurance covering property loss and related net income loss 0 Broad definition encompasses all types of commercial property insurance such as commercial property crime and inland marine insurance I Narrow Singular Definition 0 One particular type of commercial property insurance that covers loss of or damage to buildings and business personal property 0 Narrow definition denotes one of the specific types of commercial property insurance such as commercial property crime insurance or inland marine insurance 0 Risk Management Overview 0 4 Loss exposures 1 Property loss exposure 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 2 Liability loss exposure 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 by someone else seeking money damages 3 Personnel loss exposure 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 4 Net Income loss exposure A condition that presents the possibility of loss caused by a reduction in income 0 Risk Management Process 0 6 steps I 1 Identifying loss exposures I 2 Analyzing loss exposures I 3 Examining feasibility of risk management techniques I 4 Selecting the appropriate risk management techniques I 5 Implementing the selected risk management techniques I 6 Monitoring the results and revising the risk management program 0 Risk Management Techniques 0 O O O O O Avoidance Loss prevention involves reducing the frequency ofa particular loss Loss reduction involves reducing the severity ofa particular loss Separation Duplication Diversification 0 Risk Financing techniques 0 O Retention involves generating funds from within the organization to pay for losses Transfer involves generating funds from outside the organization to pay for losses and includes insurance and noninsurance transfer 0 Risk Control and Commercial Property Loss Exposures O O Peril cause ofloss Hazard a condition that increases the frequency and or severity of loss Engineering approach Attacks hazards by reviewing and improving design and location ofproperties and equipment to reduce the number of hazards Human behavior approach Attacks hazards by modifying people s behavior to reduce the frequency of unsafe acts Fire I 3 elements 0 Initial source of heat 0 Oxygen I 4 element causes the re to are up and spread rather than just smolder greater damage 0 An uninterrupted chain reaction I Fire prevention 0 Focuses on removing one or more of the four elements 0 Heats sources could be electrical chemical mechanical or nuclear 0 Source of oxygen for most fires is ordinary air I Construction types that in uence fire control ISO defines 0 Fire grade 16 Wood frame worst Ioisted masonry brick Noncombustible construction Iron clad Semifire resistant 0 Fire resistant Best I Preloss fire control 0 Control heat sources and keep them separated from fuels OOOOO 0 Separation Fire stop solid piece of material that are between walls to slow the fire Fire wall a wall that prevents a fire from going through that wall 0 0 Fire extinguishing methods Internal Automatic fire detectors and sprinkler systems Portable fire extinguishers Standpipe systems Guard services Fire brigades External 0 Public fire department 0 Fire hydrant s 0 000 O o Burglary robbery and employee theft Thieve s most attracted to money or property with high value and low weight can easily be converted to cash Types 0 I Emplo o Explosion 3 types of theft Burglary theft by someone who forcibly enters the place where the property is kept Robbery involves the use or threat of force against the person from the property is being taken Employee theft Also called employee dishonesty or embezzlement is theft that an employee commits against his or her own employer of protection Deadbolt locks Bars on windows Breakage resistant glass Denied access to safes and vaults Burglar alarm systems Hold up alarms alert local police Guards Security patrols Surveillance cameras yee theft protection Risk control measures Accounting controls Access controls Background checks Separation of duties 0 000 Most explosions have chemistry of extremely rapid combustion o Windstorm 0 Flood Flammable liquids Vapors Gases Excessive dust in grain elevators Action of commercial explosives Explosive materials kept in a lowoxygen or oxygen free area Oxygen is replaced with inert air such as carbon dioxide or nitrogen Venting for explosions that are not prevented or suppressed Uses solid barriers to direct force toward open air and away from other property Pressure exerted exceeds the vessel s capacity to contain pressure due to increase or decrease in vessel s strength Explosion pressure vessels 0 Steam boilers Proper maintenance and inspection are important Most well engineered and maintained structures will not usually incur damage from winds below 50 mph High velocity wind can Break glass Tear away exterior trim Create forces that lift the roof Roof can blow offifnot anchored well Exposed contents can be damaged or destroyed Roof remains surface can suffer considerable stress 0 Damage to shingles tiles or other attached coverings Pre loss actions for windstorms Design structures to withstand anticipated wind loads Provide storm shutters and blinds for windows and openings rated to handle high wind loads Maintain roof and wall systems including roof tie downs Secure materials and equipment located outside the facility Locate trees and utility poles away from structures Can occur with low elevation and rising water level to cause water damage Occurs from High tides Rising water in streams lakes and rivers 0 Earth Inadequate runoff of rain water ash oods Best method is avoidance of areas with prior ood experience Flood control measures quake Dams and other impoundments of water Channels designed to direct the runoff and open areas over which ood waters can spread out Property protections such as dikes and sand bags that divide ood waters Equipment designed to resist the pressure of ood waters and the effects of dampness such as pumps to remove water and allow for runoff Structures constructed in oodprone areas with the lowest oor above the 100 year ood level Plans to move property to higher ground when needed Most of the attention is diverted to the earthquake loss exposure ifin the geographic area Effects can be reduced by careful attention to building design construction and close consideration of conditions of the soil Earthquake resistant structures are designed to withstand forces of the earths movement Most common design the rigid structure with walls columns pillars all tied securely to oors and roofs by horizontal and vertical cross members Collapse types Violent sidetoside Lateral shaking associated with earthquakes Common Policy Formats 0 Multiline policy A policy that cover two or more lines of business Monoline policy A policy that covers only one line of business Standard form Forms developed by the ISO or AAIS Serve as benchmarks for analysis of differences Admitted paper financial guarantee Nonstandard form Manuscript or broker forms Insurers develop their own For very high risk or lots of risks No standard form available Want to differentiate their product Larger accounts Commercial Package Policy CPP O A multiline policy composed of two or more coverage parts each coverage part providing a separate line of insurance Parts that must be covered in a CPP Building and or Business personal property Commercial general liability Other optional coverage parts Commercial crime Commercial inland marine Equipment breakdown Each coverage part components One or more declarations form containing information about the insured and the particular loss exposure insured One or more coverage forms containing most of the essential terms of coverage For some lines ofinsurance a general conditions form Any applicable endorsements modifying the terms of coverage from or general conditions form Common declaration form for the entire policy and the Common policy conditions form Some insurers combine the common and separate declarations forms 0 Business owners policy BOP A multiline policy that includes most of the property and liability coverage s needed by small and midsize businesses Typical options provided Business and business property coverage Business Income Extra expense Equivalent of commercial general liability Other options can either be included automatically or available as options Resemble homeowners policies in the way they package standard coverage s in their simplified rating system Broad based public appeal economic packaging of types of coverage s most needed Provide insurers and producers with highly competitive product that is highly automated with streamlined underwriting Individual insurers independently wrote first BOP policies ISO introduced standardized business owners program in 1976 has been revised several times AAIS had business owners program and Artisan Program 0 Output Policy I A policy that combines in one form and associated endorsements all or most of the commercial property coverage s that the insured organization needs and uses a exible rating plan I Might include 0 Buildings and business personal property Business income Extra expense Crime Inland Marine Equipment breakdown I In CPP each would have its own coverage form I Provide property coverage enhancements not in standard forms 0 Broad coverage for property while away form the insured s premises whether in course of transit have at a location not described in the policy Eligibility 0 Most types of commercial organizations 0 Certain market segments 0 Agribusiness o Developers o Midsize to larger businesses I Policy provisions 0 Declarations Definitions Insuring agreements Exclusions Miscellaneous Provisions 0 Conditions least likely to vary among types of CPP s I Policy conditions 0 Any insurance policy provision that qualifies an otherwise enforceable promise of the insurer 0 Common Policy conditions 0 Insurance services office ISO Commercial lines manual CLM requires a common policy conditions page with all Commercial ro er olicies CPP or monoline oli This contains 6 arts I Cancellation o Insured may cancel policy at any time by notice to the insurer 0 Only the first listed can cancel o The insurer can cancel the policy by giving advance notice to the first listed at least 10 days before the date of cancellation Return ofpremium is sent to the first insured State law supersedes cancellation condition sometimes 0 It says permissible reasons to cancel 0 Also a longer advance notice if for reason other than nonpayment I Changes 0 The entire contract between the insurer and 1St named insured can be changed by a written endorsement I Examination of Books and Records Insurer has the right to examine and audit the insured s books and records related to the policy at any time during the policy and up to 3 years after 0 Sometime make onsite inspections I Inspections and Surveys Insurer has the right but not obligation to inspect insured s premises and operations at any time during the policy 0 Inspections may be the insurer or someone on their behalf from an outside company 0 Insurer may inform insured of the results of the inspection But doesn t have to o No guarantees by the insurer 0 Disclaimer clause to protect insurer I Premiums 1St named is responsible for paying 0 1St named gets returned premium I Transfer of Rights and Duties Under this policy 0 The insurer cannon transfer any rights or duties under the policy to any other person without the insurer s written consent Assignment ofpolicy or a transfer of insurance Automatic transfer if the individual named insured dies Are transferred to insured s legal reps or any person having temp proper custody of the insured property 0 Commercial property conditions form 0 Conditions can limit or expand coverage determine how a loss payment is calculated and place requirements on all parties on all parties to the insurance contract 0 Attached to every commercial property coverage part in a CPP or monoline policy written CLM rules I Commercial property conditions Concealment Misrepresentation or Fraud Policy or coverage can be eliminated Control ofproperty If the insured doesn t have control of building renting negligence by others does not affect the insured s policy Insurance under 2 or more coverage s The insurer will pay no more than the actual loss amount Legal Action against us The insured has to comply with all policy terms to bring legal action against insurer also they have to start within 2 years of the date of loss Liberalization if during the policy the insurer can broaden coverage with no additional payment the insured automatically gets this additional thing No Benefit to Bailee The insurer will pay the insured for any covered loss while the property is in temporary custody of a Bailee but will not treat the bailee as an insured Insurer can take legal action against bailee to recover amount paid to insurer Coverage is provided to insured when the insured is the bailee if there is coverage Other Insurance when another policy has the same terms Insurer agrees to pay its share on a pro rata basis Calculated by dividing the applicable policy limit of the coverage part by the total of all policy limits covering on the same basis and multiplying the result by amount of the loss If polices have different terms the insurer pays the amount of loss in excess of the amount due from other insurers Policy period and Coverage Territory policy period determined by declarations statement beginning at 1201 am Coverage in US Puerto Rico and Canada Other locations not insured unless the coverage territory is modified Transfer of Rights of recovery against others to us subrogation After the insured has collected from the insurer they are not allowed to go after the third party Unless the insured waived its right to recovery in writing before a loss occurs I Other common conditions 0 Valuation o 3 valuation approaches I Actual Cash Value ACV Cost to replace property with new property oflike kind and quality minus depreciation I Replacement cost basis The cost to repair of replace property using new materials oflike kind and quality with no deduction for depreciation Selling Price valuation method used in commercial property coverage forms to value stock that has not been sold but not delivered at its selling price minus any discounts or unincurred expenses Coinsurance o Addresses the problem of underinsurance quotinsurance to value 80 to 100 percent 0 prolicy is written for ACV property value is AVC same for replacement cost 0 80 percent is the most common coinsurance 90 and 100 are available for a reduced premium rate 0 Coinsurance formula I Amount Payable Limit ofinsurance Value of covered property at time of loss X Coinsurance X Total amount of covered loss I Did over should times loss Insured s duties in the event a a loss 0 Conditions I Notice of Loss Prompt notice Police Report if a law was broken the police must be called Protection of Property against further loss reasonable steps to prevent further damage I Inventory and Inspection complete inventory of damage and undamaged goods Insurer has to be able to inspect I Proof ofloss insured may be required to sign a sworn proof of loss containing information requested by the insurer I Examination under oath insured has to complete questioning under oath concerning the claim If they refuse they void coverage Appraisal 0 Two appraisers represent the two parties with an umpire I An agreement of any two of these 3 is binding Loss Payment 0 Depending on the insured s financial interest the insurer pays accordingly 0 They can pay the value of the loss or to pay for replacement or repair 0 Party walls walls separating adjoining properties owned by different people Recovered Property 0 The other party must be notified if either recovers o Insured would demand return of covered property I They must refund the amount paid by the insurer for the loss insurer could pay for recovery and repair 0 Vacancy o Ifa loss occurs to a building that has been vacant for 60 consecutive days before the loss the insurer doesn t pay for the following I Vandalism I Sprinkler Leakage I Building glass breakage I Water Damage I Theft I Attempted theft 0 For all other covered perils loss recovery is reduced by 15 0 Buildings under construction or renovation are not considered vacant o The vacancy condition can be eliminated for a specified time for and additional premium called Vacancy Permit endorsement 0 Mortgage holders 0 This condition only applies to covered losses to buildings or structures 0 Insurer pays mortgage holder to their financial interest And in their order ofprecedence as interests appear 0 Insurer must pay covered claims to mortgage holder even though the insurer has denied the claim because ofinsured s acts 0 The requirements for this coverage I Mortgage holder must pay any premiums due to insurer I Mortgage holder must submit proof ofloss within 60 days of request I Insurer must be notified of any change in ownership occupancy or substantial change in risk known I Ifinsurer cancels policy for nonpayment it has to give a written notice at least 10 days prior to cancellation I If the insurer cancels for other reasons it has to give the mortgage holder 30 days notice I If the insurer won t renew the policy it must give 10 days notice to the mortgage holder 0 Loss Payees o Other than mortgage holders these people can be named on the policy declarations page But they don t automatically get added protection 0 Loss payable provisions endorsement describes the rights the loss payee has 0 The endorsement includes space to describe the property in which the loss payee has and interest and indicates which of four sets of provisions applies I Loss Payable Clause does not provide any right to the loss payee other than the right to payment of any loss made jointly to the loss payee and the insured Lender s payable clause provides that loss payee who has interest in the insured property is established in writing such as bills oflading or financing statements receives protection similar to the mortgages condition Contract of sale clause provides that a purchaser or seller has the right to have payment of any loss made jointly to the loss payee and the named insured as interests go Building owner loss payable clause the owner of thebuilding in which the insured is a tenant can be covered as a loss payee Insurer further agrees to adjust losses to the described building with the building owner who is shown as loss payee Any loss payment made to loss payee will satisfy insured s claim Insurer agrees to adjust losses to tenants improvements and betterments directly with the insured unless the lease provides otherwise