CAIB 2 - Chapter 1

Introduction to Determining Insurance Values

• Accurate insurance values are crucial for proper coverage.
• Brokers play a key role in advising insureds on property value determination.
• Various methods exist for establishing property value in insurance, such as market-based and income approaches.

Actual Cash Value (ACV)

• ACV is defined as the cost to repair or replace damaged property minus depreciation.
• Determining ACV involves several methods:
  • Formula/Cost Approach: Evaluates the cost to replace items.
  • Market Value/Direct Sales Approach: Based on prices from similar sales.
  • Income Approach: Considers the income-generating potential of the property.
  • True Value to the Owner: Personal value to the property owner.
  • Broad Evidence Rule: Uses all relevant information for valuation.

Replacement Value

• Replacement value refers to the cost of repairing, replacing, or rebuilding property without depreciation deductions.
• Emphasizes the necessity of appraisals to establish accurate insurance values.

Book Value in Insurance

• Book value indicates the original purchase price of an asset, adjusted for depreciation.
• Represents the value of assets as recorded in the company’s financial statements.

Claims Example: Pete Moss

• Pete Moss experienced a 1,200firelosswithinsurancecoverageof1,200 fire loss with insurance coverage of 1,200firelosswithinsurancecoverageof72,000 and an 80% co-insurance requirement.
• Co-insurance requirement calculated as 80% of 120,000amountsto120,000 amounts to 120,000amountsto96,000.
• Since the loss was less than 2% of the coverage and below 5,000,co−insuranceclausewaswaived,allowingfullrecoveryof5,000, co-insurance clause was waived, allowing full recovery of 5,000,co−insuranceclausewaswaived,allowingfullrecoveryof1,200.

Stated Amount Co-Insurance Clause

• This clause can replace standard co-insurance clauses specified on the Declarations Page.
• Requires the insured to file a Statement of Values for 100% of the property's value.
• Policy reverts to a 100% co-insurance basis if the stated amount is not maintained.

Exclusions in Insurance Policies

• Exclusions can relate to specific types of property or certain perils, such as:
  • Uninsurable risks (e.g., deliberate acts of violence).
  • Catastrophic risks (e.g., earthquakes, floods).
  • Coverage for controlled risks (e.g., wear and tear).
  • Losses related to illegal activities.

Permission Clauses

• Allow for concurrent insurance policies as long as coverage is similar.
• Insureds can make changes to property without prior approval from the insurer.
• Permits usual business practices using typical materials and processes.

Breach of Conditions

• Non-compliance with policy conditions may result in claim denial.
• Exceptions exist if the breach did not impact the loss or if beyond the insured's control.

Reinstatement Clause

• Ensures automatic reinstatement of insurance amounts after a loss.
• Simplifies coverage management and avoids administrative costs compared to previous practices.

Subrogation

• Insurer’s right to recover losses from third parties after compensating the insured.
• Insurer can take legal action in the insured's name, and recovery is shared if not full.

Property Protection Systems

• Include fire extinguishing, fire detection, and intrusion detection systems.
• Designed to proactively prevent and mitigate losses.

Notification of System Issues

• Insureds must notify the insurer of any defects or interruptions in protection systems immediately.

Cancellation of Monitoring or Maintenance Contracts

• Requirement to inform the insurer about canceled or non-renewed monitoring or maintenance contracts.

Suspension of Police Service

• Insureds must notify the insurer about any suspension of police service due to system issues.

Premium Adjustment Clause

• Allows for premium adjustments based on actual reported stock values within six months after policy expiry.

Refunds and Exclusions

• Up to 50% excess premium refunds are available if the actual premium is less than paid.
• Excess values above the insured amount are excluded from refund calculations.

Verification of Values Clause

• Insurers have the right to inspect insured properties and records within a year after the policy ends.

Basis of Valuation: Stock

• Unsold stock is valued at actual cash value or repair/replacement costs.
• Sold stock is valued at selling price minus discounts.

Tenant's Improvements Valuation

• Costs associated with repair or replacement are applicable when improvements are managed properly.
• Pro-rata value considered for improvements not repaired or replaced.

Business Records Valuation

• Manually maintained records are valued by the cost of materials and labor to reproduce.
• Automated records based on reproduction costs from duplicates or originals.

Property of Others

• Insurer may pay either the insured or the actual property owner for losses to property of others.

Locked Vehicle Warranty Overview

• Covers theft from vehicles under specific conditions: unattended vehicle, secure compartments, locked doors/windows, and forcible entry required.

Locked Vehicle Warranty - Terms of the Warranty

• Fully enclosed areas must be used to qualify for theft coverage.
• Covers only when there are visible signs of forced entry.

Statutory Conditions and Commercial Property Policy Conditions

• Statutory conditions are mandated rules for fire insurance contracts.
• Updated commercial property conditions may vary slightly but generally align with statutory terms.

Duration of the Duty

• Ongoing duty of disclosure requires informing the insurer of significant changes that increase risk.
• Options for the insurer include canceling the policy, adjusting the premium, or voiding coverage.

Additional Conditions

• Theft, malicious acts, or suspected crimes must be reported immediately to authorities.
• Obligation to retrieve lost property and share recovery costs, alongside ensuring bailees are responsible for property.

Additional Conditions in Commercial Property Policies

• Loss or damage to items in a set is compensated proportionally.
• Coverage for individual parts is limited to their value, including installation costs.

This quiz delves into the key aspects of determining insurance values, emphasizing the broker's role and various valuation methods. It also covers the concept of Actual Cash Value (ACV) and its significance in property insurance. Enhance your understanding of valuation approaches and their application in the insurance industry.