2 Hour Webcast FAIA 1 FAIA Copyright 2010. “Risk is the spice of life, but its burdens are...

Property & Liability Concepts

2 Hour WebcastFAIA

“Risk is the spice of life, but its burdens are heavy.”

Anonymous

Property and Liability Concepts

What is Risk?

“Uncertainty concerning the occurrence of a loss.”

Risks are classified according to two factors:

The number of people affected.◦ This would fall under the category of fundamental

or particular risk.

The type of financial loss involved.◦ This would fall under the category of pure or

speculative risk.

Fundamental Risk

A risk of loss to which all members of a society or a large number are exposed in a single occurrence.

Particular Risk

A risk where relatively few members of a society are exposed.

Pure Risk

Where only the possibility of loss or no loss occurs.

Speculative Risk

Either a profit or a loss is possible.

Law of Large

Numbers

The larger the numbers of similar exposures units the more predictable and accurate the estimate of expected losses.

Exposure Unit

Measure of the loss exposure assembled by the insurer.

Losses

The time your client cares most about insurance.

Two types of losses:

Direct Loss

Indirect Loss

Direct Loss

Direct physical loss or damage to, or complete destruction of property.

Indirect Loss

The financial loss that is a result of a direct loss.

Cause of loss.

FAIA INSURANCE THEATRE

Hazard

Anything that increases the chance of loss.

Three different types of hazards

Physical Hazard

Morale Hazard

Moral Hazard

Review Time

1. Which of the following is an example of a pure risk?

A. Bob places a bet on the outcome of a football game. B. Linda’s pet pig is temperamental. She is afraid it will

bite the neighbor one day and she will be held responsible.

C. Gurn transfers all his retirement funds into a stock that he expects to rise in value.

D. Sally along with 40 other co-workers puts $100 into a Daytona 500 office pool. The person holding the name of the winning driver will win the entire $4,000 pot.

2. The law of large numbers:

A. Prohibits insurance with extremely high numbers

B. States that there must be a spread of risk for insurance to be effective.

C. States that more examples used to develop a statistic, the more reliable the statistic will be.

D. Requires all members of society with an exposure to purchase insurance.

3. The tread on Pauls Plymouth is worn down. This is an example of what type of hazard?

A. PhysicalB. Moral C. MoraleD. Dangerous

4. Which of the following is a hazard as opposed to a peril?

A. FireB. LightningC. Wet bathroom floorD. Flood

Insurable Interest

Specifies that the insured must lose financially if a loss occurs or must incur some other kind of harm if the loss takes place.

When must an insurable interest exist in property insurance?

At the time of loss.

Sell your home to Bob but a fire occurs before your homeowners insurance expires. You cannot collect the loss since you no longer have an insurable interest in the home.

Purposes of an insurable interest:

To prevent from gambling. To reduce moral hazard. To measure the loss.

Indemnity

States when a loss occurs, an individual should be restored to the approximate financial condition he/she was before the loss.

Insured involved in car accident.

Had car repaired but could not be restored to pre-loss value and condition.

The insured wanted company to pay for loss of value to vehicle.

Gonzales v. Farmers Insurance Co. of Oregon

“the insured has the right to payment for the loss in money or REPAIR or replacement of the damaged property.”

Repair was not defined.

Insurer argued that the policy did not cover the diminished value and was only obligated to repair the vehicle.

They argued that the plain and ordinary meaning of repair applied.

“to restore to a good or sound condition after decay or damage;”

Insured argued that repair included pre loss restoration.

Court found in favor of the insurance company.

The insured appealed and won.

Supreme Court of Oregon ruled the word repair meant pre loss condition and must compensate insured for diminished value.

Elements of an Insurance Contract.

Elements of an Insurance Contract

1. Agreement (offer and acceptance)

2. Competent Parties

Considered competent if you’re not:

1.Insane 2. Under the Influence 3. Minor

3.Legal Purpose

4.Consideration

Characteristics of an Insurance Contract.

◦Indemnity Principle that states when a loss occurs, an individual

should be restored to the approximate financial condition he or she was before the loss.

◦Aletory

◦ One party’s performance depends on an uncertain event, which means the exchange of value might appear to be unequal.

Adhesion

One party has greater power over the other party in drafting the contract. The insured, who takes no part in preparation of the contract simply agrees to the policy terms.

Unilateral

One-sided. ◦ Only the insurance company is legally bound to

perform its part of the agreement.

Utmost Good Faith

The insurer relies on the truthfulness and integrity of the applicant when issuing a policy.

In return, the insured relies on the company’s promise and capability to provide coverage and pay claims.

Utmost Good Faith

Concealment

1. Intentional 2. Material Fact

Misrepresentation

Conditional

The insurance policy includes a number of conditions that both the insured and the insurer must comply with.

Insurer uses two approaches when structuring an insurance policy.

Self-Contained

Modular Policies

“The insurance contract is one of the most important inventions of the human mind in modern times.”

Edwin W. PattersonEssentials of Insurance Law, 2nd Ed.

Basic Parts of the Insurance Contract

Declarations

◦ “statements that provide information about the property to be insured.”

1. Policy or policy number2. Policy expiration dates3. Name of the insurer4. Name of the agent5. Name of the insured6. Name of additional interests (Mortgagee)

7. Mailing address8. Address of covered property9. Attached forms and endorsements10. Policy limits11. Deductibles12. Premiums

Insuring Agreement

This is the promise that the insurer makes to the insured and is essentially what the insured is buying.

AGREEMENTWe will provide the insurance described in this policy in return for the premium and compliance with all applicable provisions of this policy.

Definitions

The way the insurer wants the word defined.

Undefined words and phrases are interpreted according to these rules:

◦ Everyday words are given their ordinary meaning◦ Technical words are given their technical

meanings.◦ Words with established legal meanings are given

their legal meanings. ◦ Many of the definitions that appear in insurance

policies are intended to resolve real or perceived ambiguity regarding the use of those terms in previous policies.

“We”

The Company providing this insurance.

Exclusions

Limits the coverage described in the insuring agreement.

Exclusions serve one of three purposes:

To exclude coverage because a different form of insurance is more appropriate

To exclude coverage because the premium charged does not include the exposure.

To exclude coverage for exposures that are uninsurable.

Conditions and Miscellaneous Provisions

The conditions in which the insured must comply if the insurer is expected to perform appear in this part of the form.

Other provisions or what may be referred to as “the ground rules of the game.”

Endorsements

Always supersedes the policy.

Endorsements

Always supersedes the policy.

Personal Liability Loss Exposures

Assets Exposed to Loss Causes of Loss Financial Consequences of Loss

1. Assets Exposed To Losses

The kind of damages awarded in a liability claim are:

General Special Punitive

2. Causes of Loss

The filing of a lawsuit or a claim of liability against an insured.

Civil Law

The branch of the law that provides a means to settle dispute betweenparties.

Tort Liability

A wrongful act or omission, other than a crime or a breach of contract for which the remedy is usually monetary damages.

Negligence Intentional Torts Absolute Liability

Negligence

1. A duty owed or duty to act.

Negligence

2. A breach of that duty

Negligence

3. An injury or damage occurs

Negligence

4. The breach of duty is the direct cause of the injury or damage in an unbroken chain of events

Intentional Torts

Libel Slander Assault Battery Trespass Nuisance

Absolute Liability

Does not involve proving negligence.

The Court Ruled:

1. The chimpanzee's owner is strictly liable.

2. The possessor of a wild animal is liable for physical harm the animal does to another, even though the possessor has exercised the utmost care to confine the animal, or otherwise prevent it from doing harm, if the harm results from the dangerous propensities that are characteristic of wild animals of that class.

Contractual Liability

When an individual enters into a contract or agreement.

Statutory Liability

Arises out of a passage of a statute or law.

Financial Consequences of Loss

Monetary loss and future monetary loss.

Liability Insurance Policy Provisions:

1. Liability claims involve three parties.

2. Pays claim on behalf of the insured.

3. Indicate the activities and types of injury or damages that are covered.

Parties covered. Activities covered. Type of injuries or damages the policy

covers. Loss exposures Other costs covered. Time period. What determines the amount of the

payment of claims.

Covered Parties

Homeowners 1. Named insured and spouse if residing in the

same house. 2. Relatives of the named insured and spouse if the

relatives reside in the same house. 3. Full time students who were residents before

moving out. 4. Any person or organization legally responsible for

animals or watercraft owned by insured. 5. Employees using covered vehicles.

Covered Parties

Commercial Policy 1. The named insured’s employees and

volunteer workers. 2. Real estate managers for the named

insured. 3. Persons responsible for the property of a

named insured who has died. 4. Any organization that is newly acquired or

formed by the named insured

Covered Activities

PAP Auto policy applies to claims that result from covered auto accident.

CGL covers all activities or sources of liability that are not specifically excluded.

Types of Injuries or Damages

Bodily Injury

bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.

Types of Injuries or Damages

Property Damage

a. Physical injury to tangible property, includingall resulting loss of use of that property. Allsuch loss of use shall be deemed to occur atthe time of the physical injury that caused it; or

b. Loss of use of tangible property that is notphysically injured. All such loss of use shall bedeemed to occur at the time of the "occurrence"that caused it.

Exposures

1. To avoid covering uninsurable losses. 2. To avoid insuring losses that could be

prevented. 3. To eliminate duplicate coverage. 4. To eliminate coverage most insured’s don’t

need. 5. To eliminate coverage for exposures that

require special handling by the insurer. 6. To keep premiums reasonable.

Covered Costs

1. The damages that the insured is legally liable to pay.

2. The cost of defending the insured against the claim.

CGL Insuring Agreement

1. Insuring Agreement a. We will pay those sums that the insured

becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages.

Covered Time Period

“Triggered” by:

1. Events that occur during the policy period (in an occurrence basis policy)

2. Claims made (submitted) during the policy period. (Claims maid policy)

Amount Payable

Determined by:

1. Policy limits 2. Defense costs 3. “Other Insurance” provisions.

Amount Payable

Limits expressed by:

1. An each person limit. 2. An each occurrence limit. 3. An aggregate amount.

Review Time

1. What is meant by a contract of adhesion?

A. Both parties have to provide services for the other.

B. One party writes up the contract and the other party adheres to the terms.

C. The contract can be revoked at any time by any party.

D. There is not an ounce of consideration involved.

2. What part of the policy describes what property and or perils will be covered by the contract?

A. DefinitionsB. ExclusionsC. Insuring AgreementD. Conditions

3. What is the consideration that an insurer gives to the insured under an insurance contract?

A. BenefitsB. PremiumC. Promise to pay for certain losses.D. Promise to be thoughtful.

The state of Florida has taken a very strong position on the issue of unauthorized entities. An unauthorized entity is an insurance company that is not licensed by the Florida department of financial services. Agents and brokers have responsibility for conducting reasonable research to ensure that they are not writing policies or placing business with unauthorized entities. Lack of careful screening can result in significant financial loss to Florida residents due to unpaid claims and/or theft of premiums.

UNAUTHORIZED ENTITIES

Agents may be held liable when representing these unauthorized entities. It is the agents and brokers responsibility to give fair and accurate information regarding the companies they represent. Any question about the authorized status of a company can be checked by calling the Florida department of financial services at 877-693-5236 or for out of state agents, 800-413-3089 .We urge all agents and brokers to adhere to this admonition.

For more information on unauthorized entities go to FAIA’s website at www.faia.com and under the Education section you will find a handout that you can download.

Per DFS requirements, you'll need to sign an affidavit for us to process your CE.

Please fax the affidavit to 850-668-2852 OR mail it to PO Box 12129, Tallahassee, FL, 32317

OR scan it to a .pdf file and email it to classroom@faia.com. Be sure to complete all the required information and sign it below.

The affidavit is located on the FAIA website, www.faia.com, under Education.

We need this form to be sent within three (3) business days.

Thanks for attending!

Jeff Odomjodom@faia.com

2 Hour Webcast FAIA 1 FAIA Copyright 2010. “Risk is the spice of life, but its burdens are...

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