Fundamentals Chapter 5.pptx

 The Muddiest Point Students take two minutes to write down the most confusing concept for you right now. What do you find difficult to understand? Remember the Forgetting Curve!  CHAPTER 5 - PROPERTY INSURANCE POLICIES - COMMON CHARACTERISTICS PROPERTY INSURANCE - A MAJOR SOURCE OF INSURANC...

 The Muddiest Point Students take two minutes to write down the most confusing concept for you right now. What do you find difficult to understand? Remember the Forgetting Curve!  CHAPTER 5 - PROPERTY INSURANCE POLICIES - COMMON CHARACTERISTICS PROPERTY INSURANCE - A MAJOR SOURCE OF INSURANCE PREMIUMS Almost 35% of all premiums from Canadian consumers are for personal and commercial property PERSONAL PROPERTY INSURANCE ○ For property with a personal or non-business use ○ TYPES: Tenant’s insurance, homeowner’s insurance, mobile home insurance, condo unit owner insurance, secondary dwelling insurance, seasonal dwelling insurance COMMERCIAL PROPERTY INSURANCE ○ For property with business use  ATTRIBUTES OF PROPERTY POLICIES 1. No Standard Policy Brokers, adjusters, insurance company personnel refer to an insurance contract as a policy, wording, OR form Insurance companies give many options to select the best policy ○ Perils policies are policies that name the perils they insure ○ Broad coverage policies insure against all risks of direct physical loss OR damage SUBJECT TO policy conditions and exclusions ROLE OF IBC IN FORMS DEVELOPMENT ○ Insurance Bureau of Canada ○ A trade association that represents 125+ insurance companies ○ Insurers are allowed to make any changes or modifications to the forms  ATTRIBUTES OF PROPERTY POLICIES 2. Identify Property Insured and Location Property insurance policies have a definition of property insured UNLESS OTHERWISE NOTED, coverage is restricted to the location on the policy PROPERTY INSURED DEFINED IN POLICY Personal Property ○ The Homeowners Forms automatically cover the dwelling building, detached private structures, AND personal property ○ Definition and location of each is on the policy Commercial Property ○ Insuring the business property: building, stock, AND equipment ○ Location of insured property is on the policy  ATTRIBUTES OF PROPERTY POLICIES 3. Insure Direct Damage Property insurance policies → insure direct damage ONLY DIRECT DAMAGE INSURED ○ Fire damage COVERED ITEMS Water damage to other parts of the building hosed by firefighters Physical damage to roof from firefighters’ axes Smoke and heat damage to adjacent storage shed  ATTRIBUTES OF PROPERTY POLICIES INDIRECT LOSSES - a consequence of direct losses EXAMPLES Loss of food in a freezer if the electrical motor is damaged by lightning Loss of rental income in an apartment due to a major fire Loss of a business’s profits due to a tornado destroying the building ○ UNLESS OTHERWISE STATED, loss of business income from a direct loss IS NOT INSURED Business Interruption OR Extra Expense forms Habitational policies → usually have a separate coverage for indirect losses to freezer contents INDIRECT LOSSES - NOT INSURED BY PROPERTY POLICY Coverage can be added (additional premium)  ATTRIBUTES OF PROPERTY POLICIES 4. Conditions and Warranties 1. Conditions DEFINITION OF CONDITION → A condition requires the insured to do or not do something. Two common conditions: Statutory and Policy Conditions ○ Statutory Conditions - in the following insurance policies All property policies that insure fire Accident and sickness insurance Automobile insurance CONDITIONS ARE ESTABLISHED IN STATUTE → legally binding on all parties of the contract  ATTRIBUTES OF PROPERTY POLICIES Policy Conditions Common to property/other insurance policies Deal with important coverage areas 2. Warranties DEFINITION WARRANTY ○ A promise by insured that specific facts are true and they will remain so Insureds breach the warranty, contract is null; no coverage Requires exact compliance EQUIVALENT TO GUARANTEES Any breach of warranty allows the insurance company to deny coverage even if the breach wasn’t DIRECTLY linked to the cause of loss  ATTRIBUTES OF PROPERTY POLICIES 5. Exclusions 1. Property Excluded - items below contain greater than normal risk ○ Evidences of debt or title, Securities, Automobiles, Watercraft, Aircraft, Money, Other motor vehicles, Books of account, Vacant property (more than 30 consecutive days) 2. Perils Excluded - No policy covers all losses - even policies that insure “against all risks” contain exclusions ○ Earthquake, flood, smoke from agricultural smudging OR industrial operations, wear and tear OR gradual deterioration, rust, corrosion, war, nuclear incident, increased costs of repair OR construction from enforcement by by-law, sewer back-up  ATTRIBUTES OF PROPERTY POLICIES 6. Deductible Clause Almost on every property policy DEFINITION DEDUCTIBLE ○ The amount the insured must pay for each loss before receiving payment from insurer WHAT DEDUCTIBLES ACCOMPLISH ○ Helps keep insurance affordable - higher the deductible, the lower the monthly premium (generally) ○ Curbs moral hazard by making the insured participate in their loss  ATTRIBUTES OF PROPERTY POLICIES 6. Deductible Clause SELECTING A DEDUCTIBLE ○ Most insurers have varied deductible options ○ Commercial property - different deductibles for different property classes ○ Usual minimum deductibles - $500, any more than this and premium is reduced  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment A description of ways used to determine amount to be given to insured if there is a claim INTENT ○ Provide complete indemnity (to give the actual amount of their loss) no more, no less DETERMINING INDEMNITY ○ Personal Property - details on claim settlement are outlined in a provision called Basis of Claim Payment ○ Commercial Property - policies usually have an indemnity agreement  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment THE RULES ○ i) Pair and Set - missing an earring Loss or damage to one item of a pair doesn’t mean loss or damage to the entire pair. Item NOT LOST has value and amount is deducted from amount of claim payment ○ ii) Parts - damage to a portion of carpet Loss to only one PART of property (made of several parts), basis of settlement will be the value of the lost or damaged part INCLUDING INSTALLATION COST  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment FACTORS TO DETERMINE AMOUNT PAID ○ Indemnity Agreement is in the commercial property insurance policies THE ACT: “If any insured property is lost or damaged by perils insured against, insurer will indemnify insured against DIRECT LOSS CAUSED TO an amount not exceeding the LEAST OF: i) ACV of property at time of loss OR damage ii) Interest of insured in the property iii) Amount of insurance on Declarations Page  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment Indemnity Agreement - An Analysis ○ Insurance adjuster will look at the above factors to determine amount of loss ○ When amount is arrived at THEN insured will be offered a settlement based on THE LEAST AMOUNT STEP 1 - ACV (ACTUAL CASH VALUE) AT TIME OF LOSS ACV = Replacement Cost - Depreciation ○ Adjuster first tries to determine REPLACEMENT COST of lost or damaged items ○ Insured must provide adjusters with price quotes.estimates from suppliers/contractors ○ THEN adjuster determines depreciation to be charged: when items are used over time, they will use up some of the value  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment STEP 1 - ACV (ACTUAL CASH VALUE) AT TIME OF LOSS FACTORS INFLUENCE DEPRECIATION ○ Condition of items ○ Obsolescence ○ Resale value ○ Normal life expectancy DIFFERENCE between replacement cost and depreciation charged IS ACV of the items  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment Indemnity Agreement - An Analysis ○ STEP 1 - ACV (ACTUAL CASH VALUE) AT TIME OF LOSS STEP 2 - INTEREST OF INSURED ○ Insurable interest REQUIREMENT OF ALL INSURANCE CONTRACTS ○ Adjuster determines extent of insured’s ownership OR financial interest in property STEP 3 - LIMIT OF INSURANCE ○ Adjuster checks insured’s policy to determine INSURANCE LIMIT purchased for property items claimed  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment Other Basis of Settlement - two methods ○ 1. Replacement Cost Basis Most insurers will change basis for settlement from ACV to replacement cost BUT that doesn't mean that claims will be settled on that basis ○ RC Coverage is only provided when insureds comply with policy provisions  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment REPLACEMENT COST - BUILDINGS - provisions a) Replacement affected by insured with due diligence and dispatch ○ Provisions help control claims costs ○ Labour and materials increase in cost over time ○ Delay in replacement will increase cost ○ Insured must do everything to replace property ASAP b) Replacement will be on the same site OR adjacent site ○ Reduces moral hazard - removes temptation to cause a loss just to relocate biz c) Settlement on RC basis is made only when replacement has been effected ○ After a claim is made, insured is offered a settlement based on ACV of building ○ Difference between ACV and RC is due when the replacement has been effected  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment Other Basis of Settlement - two methods 1) Replacement Cost Basis ○ REPLACEMENT COST - PROPERTY For personal property and business stock and equipment Settlement on RC basis: insureds MUST SHOW ○ Property was useable for original purpose at time of loss ○ Property was repaired/replaced promptly  ATTRIBUTES OF PROPERTY POLICIES MEANING OF REPLACEMENT COST REPLACING Replacing lost or damaged item with another ○ Insurer CANNOT SETTLE CLAIM with USED materials ○ Insureds are entitled to NEW materials of like kind and quality as before the loss ○ Insurer WILL NOT MAKE ANY deduction for depreciation ○ RC basis - there is no depreciation charged on lost/damaged property REPAIRING, CONSTRUCTING, RECONSTRUCTING If cannot replace, payment is made for labour and material cost to repair damage ○ EXAMPLE ACV VS. RC Settlement Textbook Fundamentals 5-17  ATTRIBUTES OF PROPERTY POLICIES 7. Claims Payment Other Basis of Settlement - two methods 2. Valued Properties ○ If items cannot be replaced (original art), insurer may cover on a valued basis Basis of settlement is the agreed-upon value by both insured and insurer Insurers usually need valuation by qualified appraiser  ATTRIBUTES OF PROPERTY POLICIES 8. Standard Mortgage Clause Mortgagees want their property protected AND a certified copy of policy and all renewals are provided to them DEFINITION MORTGAGEE ○ Anyone with insurable interest in insured property: bank, credit union, individual, group of people CERTIFIED COPY OF INSURANCE POLICY REQUIRED BY MORTGAGEE ○ Betty has a loan from RBC bank for their store and has to do the following: Purchase insurance that names RBC as payee Give RBC a certified copy of the policy  ATTRIBUTES OF PROPERTY POLICIES 8. Standard Mortgage Clause STANDARD MORTGAGE CLAUSE - guarantees 1. Guarantee of payment when insured breaches ANY policy conditions Breach of Policy Conditions Coverage CAN’T BE DENIED to mortgagee for breach of policy conditions by insured INCLUDING: ○ a) Neglect - insureds don’t try to save property from loss when it was reasonable that they could have - COVERAGE IS DENIED ON THE PROPERTY. Mortgagee is entitled to payment ○ b) Omission OR Misrepresentation - insurer may deny insurance to insureds who misrepresent/do not disclose a material fact. Mortgagee is entitled to payment MORTGAGEE IS PAID WHEN ACT OF INSURED BREACHES A POLICY CONDITION  ATTRIBUTES OF PROPERTY POLICIES 8. Standard Mortgage Clause STANDARD MORTGAGE CLAUSE - guarantees 2. Guarantee - insurer won’t reduce coverage to the prejudice of mortgagee NOR terminate policy without providing the same notice required by law for the insured Insurer PROMISES they will not change the policy to the DISADVANTAGE of the mortgagee Mortgagee has to consent to changes Mortgagee gets the same notice as would be given to insured if the insurer decides to terminate the policy  Create a “How” question Students take two minutes to create a “How” question based on the concepts covered so far, in the chat window. No question is too simple! Remember the Forgetting Curve!  ATTRIBUTES OF PROPERTY POLICIES TEXTBOOK REFERENCES ○ Replacement Cost Endorsement 5-21 ○ Standard Mortgage Clause 5-22