PROPERTY AND CASUALTY
INSURANCE (204)
07/04
PUBLISHER’S NOTE
Important Notice
EVERY CARE HAS BEEN TAKEN TO ENSURE THAT THE INFORMATION IN THIS COURSE MATERIAL IS AS ACCURATE AS POSSIBLE AT THE TIME OF PUBLICATION. PLEASE BE ADVISED THAT APPLICABLE LAWS AND PROCEDURES ARE SUBJECT TO CHANGE AND INTERPRETATION. NEITHER THE AUTHORS NOR THE PUBLISHER ACCEPT ANY RESPONSIBILITY FOR ANY LOSS, INJURY, OR INCONVENIENCE SUSTAINED BY ANYONE USING THIS GUIDE. THIS INFORMATION IS INTENDED TO PROVIDED GENERAL INFORMATION AND BACKGROUND AND IS DISTRIBUTED ON THE BASIS THAT THE AUTHORS ARE NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR ANY OTHER PROFESSIONAL SERVICE OR ADVICE. THIS GUIDE WAS DESIGNED TO PROVIDE YOU WITH AN OVERVIEW OF THE INFORMATION PRESENTED AND IS NOT A SUBSTITUTE FOR PROFESSIONAL CONSULTATION.
Copyright © 2004 AHI Insurance Services 03/04 Copyright © 2004 AHI Insurance Services
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i TABLE OF CONTENTS
PUBLISHER’S NOTE I
CHAPTER 1: FIRE INSURANCE 1 FIRE INSURANCE HISTORY...... 1 DEFINITION OF FIRE ...... 2 BASIC PROVISIONS OF THE STANDARD FIRE POLICY ...... 2 LIMITATIONS ON RECOVERY...... 3 COVERED PERILS ...... 3 ASSIGNMENT OF THE POLICY...... 3 CONDITIONS, EXCLUSIONS, AND OTHER PROVISIONS...... 3 OTHER INSURANCE...... 4 SUSPENSION OF INSURANCE ...... 4 OTHER PERILS AND ADDED PROVISIONS...... 4 PROHIBITION OF WAIVER ...... 4 CANCELLATION...... 4 PROTECTION OF THE MORTGAGEE'S INTEREST ...... 4 PRO RATE LIABILITY CLAUSE ...... 4 REQUIREMENTS IF CASE LOSE OCCURS...... 4 APPRAISAL CLAUSE ...... 5 COMPANY'S OPTION...... 5 NO ABANDONMENT OF PROPERTY...... 5 OTHER PROVISIONS ...... 5 FIRE INSURANCE RATING...... 5 SUMMARY...... 6
CHAPTER 2: DWELLING COVERAGE 9 THE 1984 HOMEOWNERS PROGRAM...... 9 TYPES OF HOMEOWNERS POLICIES...... 9 HO-1 (BASIC FORM)...... 9 HO-2 (BROAD FORM) ...... 10 HO-3 (SPECIAL FORM) ...... 10 HO-4 (CONTENTS BROAD FORM)...... 10 HO-6 (UNIT-OWNERS FORM) ...... 10 HO-8 (MODIFIED COVERAGE FORM)...... 11 POLICY LAYOUT...... 11 DECLARATIONS ...... 11 DEFINITIONS ...... 12 ANALYSIS OF HOMEOWNERS (HO-2) POLICY...... 14 SECTION 1 - PROPERTY COVERAGE...... 14 SECTION 1 - PERILS INSURED AGAINST...... 16 (HO-2)...... 16 FIRE OR LIGHTNING...... 16 WINDSTORM OR HAIL ...... 17
i EXPLOSION...... 17 AIRCRAFT AND VEHICLES...... 17 SUDDEN AND ACCIDENTAL SMOKE DAMAGE ...... 17 VANDALISM OR MALICIOUS MISCHIEF...... 17 THEFT ...... 18 BREAKAGE OF GLASS ...... 18 FAILING OBJECTS ...... 18 WEIGHT OF SNOW, ICE OR SLEET ...... 18 ACCIDENTAL DAMAGE CAUSED BY PLUMBING...... 18 SUDDEN DESTRUCTION OF WATER HEATERS, HEATING SYSTEMS, AIR CONDITIONERS, OR SPRINKLERS...... 18 FREEZING OF PLUMBING ...... 18 SUDDEN DAMAGE FROM ARTIFICIALLY GENERATED ELECTRICAL CURRENT...... 19 DAMAGE DONE BY EXPLOSION, LAVA FLOW, OR VOLCANIC ASH WOULD BE COVERED; EARTHQUAKE DAMAGE IS SPECIFICALLY EXCLUDED...... 19 SECTION 1 - EXCLUSIONS ...... 19 ORDINANCE OR LAW ...... 19 EARTH MOVEMENT...... 19 WATER DAMAGE. MEANING...... 20 POWER FAILURE...... 20 NEGLECT ...... 20 WAR ...... 20 NUCLEAR HAZARD ...... 20 SECTION 1 - CONDITIONS ...... 21 LOSS SETTLEMENT...... 21 REPLACEMENT COST AND INSURANCE TO VALUE REQUIREMENT ...... 21 REASONS FOR THE COINSURANCE REQUIREMENT...... 22 MORTGAGE CLAUSE...... 22 SECTION 2 - LIABILITY COVERAGE...... 23 COVERAGE E - PERSONAL LIABILITY ...... 23 COVERAGE F - MEDICAL PAYMENTS TO OTHERS...... 24 SECTION 2 - EXCLUSIONS ...... 24 SECTIONS 1 AND 2 - CONDITIONS ...... 25
CHAPTER 3: PROPERTY INSURANCE COVERAGES 27 DWELLING 77 PROGRAM...... 27 ELIGIBLE DWELLINGS...... 27 TYPES OF DWELLING FORMS...... 27 DWELLING PROPERTY 1 (BASIC FORM)...... 27 DWELLING PROPERTY 2 (BROAD FORM) ...... 28 DWELLING PROPERTY 3 (SPECIAL FORM)...... 29 MOBILE HOME INSURANCE...... 29 ELIGIBILITY ...... 29 COVERAGE...... 29
ii OCEAN AND INLAND MARINE INSURANCE ...... 30 INLAND MARINE INSURANCE...... 31 INLAND MARINE FLOATERS ...... 32 PERSONAL ARTICLES FLOATER ...... 33 PERSONAL PROPERTY FLOATER ...... 35 INSURANCE ON PLEASURE BOATS...... 36 AIRCRAFT PROPERTY INSURANCE ...... 39 FEDERAL PROPERTY INSURANCE PROGRAMS ...... 40 FEDERAL FLOOD INSURANCE ...... 40 ELIGIBILITY REQUIREMENTS ...... 41 AMOUNTS OF INSURANCE ...... 41 DEFINITION OF FLOOD ...... 42 FAIR PLANS...... 42 FEDERAL CRIME INSURANCE...... 42 FEDERAL CROP INSURANCE ...... 43 TITLE INSURANCE ...... 43
CHAPTER 4: MOTOR VEHICLE INSURANCE 47 THE TORT LIABILITY SYSTEM AND AUTOMOBILE INSURANCE...... 47 INTENTIONAL TORTS ...... 47 ABSOLUTE LIABILITY ...... 47 NEGLIGENCE ...... 48 AN OVERVIEW OF THE PERSONAL AUTO POLICY...... 48 POLICY LAYOUT...... 48 THE DECLARATIONS PAGE ...... 48 LIMIT OF LIABILITY ...... 49 AGREEMENT...... 49 DEFINITIONS ...... 49 ELIGIBLE VEHICLES...... 50 SUMMARY OF PERSONAL AUTO POLICY COVERAGES...... 51 INSURED PERSONS...... 52 SUPPLEMENTARY PAYMENTS ...... 53 EXCLUSIONS...... 54 LIMIT OF LIABILITY ...... 57 OUT OF STATE COVERAGE ...... 57 FINANCIAL RESPONSIBILITY ...... 58 OTHER INSURANCE...... 58
CHAPTER 5: MEDICAL PAYMENTS COVERAGE 60 INSURING AGREEMENT...... 60 EXCLUSIONS...... 61 LIMIT OF LIABILITY ...... 62 OTHER INSURANCE...... 63 UNINSURED MOTORISTS COVERAGE ...... 63 INSURING AGREEMENT...... 63 EXCLUSIONS...... 65 LIMIT OF LIABILITY ...... 66
iii OTHER INSURANCE...... 66 UNDERINSURED MOTORIST COVERAGE ...... 67 ARBITRATION...... 67 PART D – COVERAGE FOR DAMAGE TO YOUR AUTO ...... 68 TRANSPORTATION EXPENSES...... 70 EXCLUSIONS...... 70 LIMIT OF LIABILITY ...... 72 PAYMENT OF LOSS ...... 73 NO BENEFIT TO BALLEE...... 73 OTHER INSURANCE...... 73 APPRAISAL...... 74 DUTIES AFTER AN ACCIDENT OR LOSS ...... 74 GENERAL PROVISIONS...... 75 BANKRUPTCY ...... 75 CHANGES...... 75 FRAUD...... 75 LEGAL ACTION AGAINST US ...... 75 OUR RIGHT TO RECOVER PAYMENT...... 76 POLICY PERIOD AND TERRITORY ...... 76 TERMINATION...... 77 TRANSFER OF YOUR INTEREST IN THIS POLICY ...... 78 TWO OR MORE AUTO POLICIES...... 79 INSURING MOTORCYCLES AND OTHER VEHICLES ...... 79 APPROACHES FOR COMPENSATING AUTOMOBILE ACCIDENT ...... 80 VICTIMS ...... 80 AUTOMOBILE INSURANCE FOR HIGH-RISK DRIVERS...... 83 COST OF AUTOMOBILE INSURANCE ...... 85 TERRITORY ...... 85 AGE, SEX, AND MARITAL STATUS...... 85 USE OF THE AUTOMOBILE ...... 85 DRIVER EDUCATION...... 86 GOOD STUDENT DISCOUNT ...... 86 NUMBER AND TYPE OF AUTOMOBILES...... 86 INDIVIDUAL DRIVING RECORD...... 86 PURCHASE HIGHER DEDUCTIBLES ...... 86 IMPROVE YOUR DRIVING RECORD...... 86 SUMMARY...... 87
CHAPTER 6: UMBRELLA POLICY QUESTIONS 88 WHY WOULD I NEED AN UMBRELLA POLICY?...... 88 WHAT IS A PERSONAL UMBRELLA POLICY?...... 88 WHAT SPECIAL PROTECTION IS AFFORDED BY AN UMBRELLA POLICY? ...... 88 IS THERE DIFFERENCES IN PERSONAL UMBRELLA POLICIES? ...... 88 HOW THE POLICY WORKS ...... 89 IS THERE A DEDUCTIBLE?...... 89 OTHER EXCLUSIONS IN AN UMBRELLA POLICY...... 89
iv CHAPTER 7: RISK MANAGEMENT 91 THE PROCESS OF RISK MANAGEMENT...... 91 IDENTIFYING LOSS EXPOSURES ...... 91 PROPERTY LOSS EXPOSURES ...... 92 LIABILITY LOSS EXPOSURES ...... 92 EVALUATING LOSS EXPOSURES...... 94 SELECTING THE BEST WAY TO HANDLE RISK...... 95 IMPLEMENTING A RISK MANAGEMENT PLAN...... 96 MONITORING THE PLAN ...... 97 PRIMARY INSURANCE POLICIES ...... 97 HANDLING LIABILITY LOSS EXPOSURES ...... 98 HANDLING PERSONAL INJURY LIABILITY ...... 99 THE STRUCTURE OF PRIMARY POLICIES...... 100
CHAPTER 8: THE NEED AND PURPOSE OF UMBRELLAS 103 WHAT IS THE NEED? ...... 103 IDENTIFYING GAPS IN LIABILITY COVERAGE ...... 104 PURPOSE OF UMBRELLA POLICIES...... 106 SPECIAL CHARACTERISTICS OF UMBRELLA POLICIES...... 107
CHAPTER 9: THE BASIC POLICY AND COMPONENTS 109 PERSONAL UMBRELLA LIABILITY POLICIES ...... 109 BASIC POLICY COMPONENT PARTS...... 110 DECLARATIONS ...... 111 DEFINITIONS ...... 111 INSURING AGREEMENTS ...... 111 CONDITIONS...... 111 EXCLUSIONS...... 111 MISCELLANEOUS PROVISIONS...... 111 DECLARATIONS PAGE ...... 112 INSURING AGREEMENTS ...... 112 DEFINITIONS ...... 112 CONDITIONS...... 113 EXCLUSIONS...... 113 MISCELLANEOUS PROVISIONS...... 114 REQUIREMENTS OF A LEGAL CONTRACT ...... 115 OFFER AND ACCEPTANCE...... 115 CONSIDERATION...... 115 COMPETENT PARTIES...... 116 LEGAL PURPOSE ...... 117 LEGAL FORM...... 117
CHAPTER 10: COMMON UMBRELLA CONDITIONS 119 KNOWING POLICY CONDITIONS ...... 119 UNDERSTANDING POLICY CONDITIONS ...... 119
v COMMON PERSONAL UMBRELLA CONDITIONS ...... 120 UNDERSTANDING INSURING AGREEMENTS...... 121 COVERAGE RESTRICTIONS...... 122 INSURED...... 123 ULTIMATE NET LOSS AND RETAINED LIMIT ...... 123 PERSONAL LIABILITY ...... 124 EXCESS VERSUS PERSONAL UMBRELLA LIABILITY INSURANCE ...... 125 REQUIRED UNDERLYING LIMITS...... 125 FAILURE TO PROVIDE UNDERLYING LIMITS ...... 126 SUMMARY...... 127
CHAPTER 11: RESTRICTIONS AND EXCLUSIONS 129 UNDERSTANDING POLICY RESTRICTIONS ...... 129 REASONS FOR EXCLUSIONS ...... 130 COMMON PERSONAL UMBRELLA EXCLUSIONS ...... 132 WORKERS' COMPENSATION ...... 133 CARE, CUSTODY OR CONTROL...... 133 NUCLEAR ENERGY...... 134 WAR RISKS ...... 134 INTENTIONAL ACTS...... 135 AIRCRAFT ...... 135 WATERCRAFT ...... 136 RECREATIONAL VEHICLES ...... 136 BUSINESS PURSUITS...... 137 PROFESSIONAL LIABILITY INSURANCE ...... 137 DIRECTORS AND OFFICERS LIABILITY ...... 137
CHAPER 12: THE UNDERWRITING PROCESS 140 IDENTIFYING AND SELECTING A RISK ...... 140 GATHERING, ORGANIZING AND ANALYZING ...... 141 UNDERWRITING INFORMATION ...... 141 PERSONAL INFORMATION...... 141 PROPERTY LOSS EXPOSURES ...... 142 GENERAL INSURANCE INFORMATION ...... 143 ACCEPTING OR REJECTING THE RISK ...... 144 PRICING THE RISK ...... 145 ISSUING THE POLICY ...... 145 MONITORING THE RISK ...... 146 O UNDERWRITERS USE APPLICANTS’ PERSONAL INFORMATION TO DETERMINE THE RISK HAZARDS TO THE COMPANY...... 146
CHAPTER 13: THE LAUNAGE OF P&C 148 ABANDONMENT ...... 148 BODILY INJURY ...... 149 DEBRIS REMOVAL COVERAGE ...... 152
vi HAZARD ...... 154 LAND CONTRACT...... 155 PERILS...... 157
CHAPTER 14: LLOYDS OF LONDON 162 AN INTRODUCTION TO LLOYD’S...... 162 BIRTH OF A SOCIETY OF UNDERWRITERS...... 164 LLOYD’S ACT 1982...... 165 THE HOMES OF LLOYD’S...... 166 THE GOVERNANCE OF LLOYD’S...... 166 LLOYD’S TODAY...... 167 LLOYD’S GLOBAL INSURANCE INDUSTRY ...... 167 LLOYD’S IN THE U. S...... 168 LLOYD’S FINANCIAL PERFORMANCE...... 168 AN INTERNATIONAL INSTITUTION ...... 169 LLOYD’S CAPITAL ...... 169 LLOYD’S OF CHAIN SECURITY ...... 171 MEMBERS’ FUNDS AT LLOYD’S ...... 172 MEMBERS’ OTHER ASSETS ...... 172 LLOYD’S CENTRAL ASSETS ...... 173 THE ROAD TO GLOBALIZATION – THE INTERDEPENDENCY OF THE US AND EUROPEAN INSURANCE INDUSTRIES...... 174 THE EXTENT OF INTER-DEPENDENCE...... 175 DRIVERS AND SIGNIFICANCE OF THE RELATIONSHIP...... 177 THE CHALLENGES ...... 179 THE FUTURE ...... 182 LLOYD’S MEMBERS ...... 185 UNDERWRITING SYNDICATES ...... 185 MANAGING AGENTS ...... 186 LLOYD’S BROKERS ...... 186 LOCAL BROKERS ...... 187 REGULATION OF LLOYD'S...... 187 PLACING RISK ...... 187 OVERSEAS CLIENTS...... 188 WHO INSURES WITH LLOYD'S?...... 188 RISK MANAGEMENT ...... 188 ADMISSIONS...... 189 COVER HOLDERS ...... 189 BROKER SERVICES ...... 189 OPERATIONAL RISK ...... 189 RISK REVIEW ...... 190 RISK ANALYSIS AND LOSS MODELING ...... 190 CORE PRINCIPLES FOR UNDERWRITING AGENTS ...... 190 INTEGRITY ...... 190 SKILL, CARE AND DILIGENCE ...... 190 MARKET CONDUCT ...... 190 CONDUCT TOWARDS MEMBERS ...... 190
vii INFORMATION ...... 191 CONFLICTS OF INTEREST ...... 191 ASSETS...... 191 FINANCIAL RESOURCES...... 191 INTERNAL ORGANIZATION ...... 191 RELATIONS WITH LLOYD'S ...... 192
viii CHAPTER 1: FIRE INSURANCE
Fires are an alarming cause of financial insecurity. The destruction of property values and the loss of human life can be a traumatic experience to families and businesses alike.
FIRE INSURANCE HISTORY
Fires and fire insurance have more than two hundred years of American history. The early fire marks of Benjamin Franklin's era still can be seen on some Philadelphia buildings. Early subscribers would pay fire-fighting companies in advance; in return they would receive a (a metallic logo) to put outside their building. Payments for fire marks supported the fire-fighting companies. If a protected property had a fire, the appropriate fire-fighting company was notified; once the fire mark was identified, the fire was fought.
During the early years of fire insurance, insurers drafted their own policies, and the contracts lacked uniformity. The contracts were lengthy and restrictive; numerous moral hazard clauses and other restrictive provisions were inserted in the contracts, which permitted insurers to deny claims; the contracts were cumbersome and difficult to understand. In 1873, Massachusetts became the first state to adopt a standard policy for the writing of fire insurance. New York passed a similar law in 1886. The standard fire policy was later revised in 1918 and later in 1943. The 1943 New York Standard Fire Policy is now used in most states, and minor variations of it are used in the other states.
Two major advantages result from a standard policy, such as the Standard Fire Policy. First, loss-adjustment problems are reduced, since the possibility of two contracts with different policy provisions is reduced. Second, there are fewer legal difficulties, since the courts have interpreted the words, phrases, and provisions of the standard contract repeatedly and their meaning is known more precisely.
The SFP (Standard Fire Policy) is an incomplete contract, and an appropriate form must be added to it. A form must be added because property has different characteristics,
1 and the insurance needs of individuals and business firms vary widely. In recent years, the SFP has declined in importance.
Many states have passed laws that require insurance contracts to be more readable. In view of the trend towards readable contracts and package policies, the SFP has been eliminated as a separate contract for certain types of insurance, and basic provisions are now incorporated into the newer contracts. Despite its reduced importance the SFP remains an important document. The basic provisions of the SFP have been incorporated into the newer readable contracts. Many basic property insurance concepts were first legally defined in the SFP, for example, the principles of indemnity, insurable interest, actual cash value, and pro rate sharing of losses. Finally, the SFP is still used to insure commercial buildings and business property that do not qualify for coverage under the newer contracts.
DEFINITION OF FIRE
“Fire” is never defined in insurance policies, perhaps because its meaning is well established by the courts. First, there must be combustion or rapid oxidation that causes a flame or at least a glow. Thus, scorching, heating, and charring that occur without a flame or glow are not covered. Second, the fire must be hostile or unfriendly. It makes no difference if a fire begins as friendly and subsequently becomes hostile, or if a fire begins as hostile, if an insured is to collect for a fire loss, the proximate cause, or an intervening cause must be a hostile fire.
If water damage was sustained when the fire department put out a hostile fire, the proximate cause of the water damage would be the hostile fire, and this damage would be covered by a fire policy.
Fortunately for most property owners, fire insurance usually is purchased in, packages specifying other related perils, so the legal issues confronted historically by insured purchasing only “fire” insurance should not be frequently encountered.
BASIC PROVISIONS OF THE STANDARD FIRE POLICY
Consideration Policy Term Persons Insured
The SFP covers the named insured and his or her legal representative. The named insured can be an individual, business association, or corporation. A party not specified, as a named insured has no legal right to receive a loss payment directly even though that party has an insurable interest in the property at the time of loss.
2
Limitations on recovery
Face amount of the policy; Actual cash value; Amount to repair or replace the property with similar materials; No allowance for increased cost of repair due to some ordinance or law; No coverage for business income or other indirect loss; Insurable interest of the insured.
Covered perils
Only three perils are covered in the insuring agreement. To have coverage under the SFP, an insured peril must be the proximate cause of the loss. This means there is an unbroken chain of events between the occurrence of an insured peril and damage or destruction of the property.
Assignment of the policy
The SFP cannot be validly assigned to someone else without the insurers written consent.
CONDITIONS, EXCLUSIONS, AND OTHER PROVISIONS
Concealment and fraud
If the insured willfully conceals a material fact or makes a material misrepresentation, either before or after a loss, the insurer can void the policy.
Excluded property
This includes accounts, bills, currency, deeds, evidence of debt, money, and securities.
Excluded perils; Enemy attack; Invasion; Insurrection; Rebellion; Civil war; Usurped power; Order of any civil authority;
3 Neglect of the insured to protect the property; Loss by theft.
OTHER INSURANCE
Suspension of insurance
Material increase in hazard Vacancy or un-occupancy beyond sixty days No coverage for riot or explosion, unless a fire ensues
OTHER PERILS AND ADDED PROVISIONS
Prohibition of waiver
No policy provision can be waived unless it is in writing and attached to the policy.
Cancellation
Either the insured or the insurer can cancel the SFP. In either case, a premium refund based on the short-rate table will be made to the insured rather than a pro rate refund based on the unearned premium.
Protection of the mortgagee's interest
Purchase of separate insurance Assignment of the policy by the insured Loss payable clause Standard Mortgage Clause.
Pro rate liability clause
Applies when more than one policy covers the same insurable interest in the property.
Requirements if case lose occurs
4 The insured must give immediate written notice of the loss to the company. The insured is required to protect the property from further damage. Unless extended in writing by the company, the insured must file a satisfactory proof of loss within sixty days.
Appraisal Clause
Appraisal clause is used when the insured and insurer cannot agree on the actual cash value or amount of the loss. The purpose of the appraisal clause is to reduce litigation and provide an equitable and fair procedure for resolving any disagreement concerning the amount of loss.
Company's Option
The company has the option of paying the claim in dollars, or it can repair, rebuild, or replace the property with materials of like kind and quality.
No abandonment of property
The company has the option to take salvage at its agreed or appraised value, but the company cannot be forced to take salvage, and the insured cannot abandon the property.
Other Provisions
The insurer must pay the loss within sixty days after proof of loss is received.
A lawsuit against the company concerning the loss must be made within twelve months after the loss and only upon compliance with all policy provisions pertaining to the insured's obligations at the time of and after the loss.
The SFP contains a subrogation provision. The insurer may require from the insured an assignment of the right of recovery against any party who may have caused the loss to the extent of the loss payment.
FIRE INSURANCE RATING
5 A fire insurance rate is the cost per hundred dollars of exposure value. The premium is calculated by multiplying the rate times the number of hundreds of dollars of value in the exposure.
Fire insurers to produce rates commonly use two different methods: classes rating and schedule rating operates by combining comparable units into a class and then charging a class rate reflecting the loss experience and expenses of the class analyzes each property individually and is used primarily in rating commercial buildings.
SUMMARY
For more than forty years the 1943 New York Standard Fire Insurance Policy provided the backbone of American fire insurance contracts.
Commercial fire insurance is provided as one part of a seven-part commercial insurance package. Property coverage falls into three categories: buildings, personal business property, and property of others. Fire and ten other perils are specified causes of loss in the basic form. More extensive coverage is available in the broad and special forms.
Indirect loss coverage is available for income lost, and extra expenses, following a direct loss. Income lost because of direct losses at dependent properties can also be insured.
Fire insurance rates are usually determined on a schedule or a class-rating basis. Schedule rating requires comparing property to a standard exposure and increasing or decreasing the premium for desirable or undesirable features. Class rating involves placing property in a class with similarly situated exposures.
Focus Points
o Fire insurance dates back more than two hundred years. o Early forms of “fire insurance” consisted of subscribers paying fire-fighting companies, in advance, to fight fires that might happen in the future.
o During the early years of fire insurance, insurers drafted their own policies.
o Massachusetts was the first state to adopt a standard policy of fire insurance in 1873.
o Most states still use the 1943 New York Standard Fire Policy.
o Two major advantages results of a standard policy are loss-adjustment problems are reduced and fewer legal difficulties.
6 o The SFP is an incomplete contract, appropriate forms must be added to it. o Basic provisions of the SFP have been incorporated in newer readable contracts. o Many basic property insurance concepts were first defined in the SFP. o “Fire” is never defined in insurance policies. o A fire policy covers water damage sustained in the extinguishing of a hostile fire. o Basic provisions of the SFP are consideration, Policy Term, and Persons Insured. o The insured and his/her legal representative are covered under the SFP. o To have coverage under the SFP, an insured peril must be the proximate cause of the loss. o Concealment of facts or misrepresentations can cause the insurer to void the policy. o Policy provisions may be waived if not in writing and attached to the policy. o The SFP may be canceled by the insured or the insurer. o Upon cancellation, a premium refund will be made to the insured based on the short-rate table. o The pro rate liability clause applies when multiple policies cover the same insurable interest.
o Appraisal clause is used when the insured and insurer dis-agree on the value or amount of the loss.
o The company may pay a claim in dollars, or it can repair, rebuild, or replace the property with similar materials.
o The insurer must pay the loss within sixty days after proof of loss is received.
o Any suit against the company must be made within twelve months of the loss.
7 o A fire insurance rate is the cost per hundred dollars of exposure value. o Two common methods to produce fire rates are class rating and schedule rating.
8
CHAPTER 2: DWELLING COVERAGE
Homeowners insurance is a package policy that combines two or more separate contracts into one policy. Prior to the introduction of homeowners insurance in the 1950s, property insurance on a private dwelling and personal property, theft coverage, and personal liability insurance could not be obtained in one policy. The current homeowners (HO) format incorporates the standard fire policy with other coverage's including comprehensive personal liability insurance, additional living expense coverage, replacement-cost coverage on the dwelling, and medical expense coverage for people other than the homeowner and family.
In 1976 the Insurance Services Office (ISO) made a significant revision in the language of the HO insurance policy. The Homeowners 76 Policy referred to the policy owner as “you” and the insurer as “we”. The standard fire policy was eliminated as a separate document, and its basic provisions were incorporated into the homeowner policy itself.
THE 1984 HOMEOWNERS PROGRAM
The Homeowners 76 Program was not adopted in several states and the older forms were used instead. Elimination of the standard fire policy as a separate document caused problems in some states, since law mandated the standard fire policy. The ISO revised the homeowner’s policy in 1982 and it was initially introduced on a trial basis in six states in 1982 and early 1983, the most recent HO forms were introduced in 1984.
A homeowner contract on a private dwelling can be written only on an owner- occupied dwelling that does not contain more than two families (four in some states).
TYPES OF HOMEOWNERS POLICIES
HO-1 (Basic Form)
9 HO-1 insures the dwelling and other structures and also covers the insured's personal property. Homeowner’s 1 is a named-perils policy. Homeowners 1 is not widely used at the present time and has been withdrawn from use in many states.
HO-2 (Broad Form)
HO-2 expands the coverage under the basic form and adds several new perils.
HO-3 (Special Form)
HO-3 insures the dwelling and other structures against the risks of direct physical loss to property except those losses specifically excluded. Personal property is covered by the same broad named perils listed in HO-2, plus the peril of damage by glass or safety glazing material, which is part of a building, storm door, or storm window
HO-4 (Contents Broad Form)
HO-4 is specifically designed for tenants of rented premises. Homeowner 4 covers the tenant's personal property against loss or damage, and it also provides personal liability insurance as well.
HO-6 (Unit-owners Form)
HO-6 is designed for the owners of condominium units and cooperative apartments. Homeowners 6 covers the personal property of the insured for the same named perils listed in Homeowners 2.
There is also a minimum of $1 000 of insurance on the condominium unit that cover the following property:
a. Alterations, appliances, fixtures, and improvements that are part of the residence premises, such as built-in appliances, carpets, additional kitchen cabinets, and wallpaper.
b. Real property that pertains exclusively to the residence premises, such as a patio or balcony, or trees or shrubs on the patio.
10 c. Property that may be the insured's responsibility under the condominium owners’ agreement, such as fixtures or interior partitions.
d. Structures owned solely by the insured, other than the condominium unit, which is at the location of the condominium unit, such as a private garage or fence
HO-8 (Modified Coverage Form)
HO-8 is a modified HO-1 form by which losses to the dwelling and other structures are paid based on the amount required to repair or replace the property using common construction materials and methods. Payment is not based on replacement cost. In addition, theft coverage is limited to losses that occur on the residence premises up to a maximum of $1 000 per occurrence.
The HO-8 form is designed for older homes in urban neighborhoods where the replacement cost of a house may substantially exceed its market value.
POLICY LAYOUT
DECLARATIONS
The HO's front-page displays descriptive materials called the declarations come from the insurance application. The declarations show rating information the insurer used to calculate the premium. The name and address of the named insured appears. The time when the policy begins and ends is shown. And the maximum limits of the insurance company's liability for the different coverage are entered, usually in boxes next to the various coverage’s.
The insurers limit of liability is divided into two sections. Section 1 provides property insurance protection and is divided into four coverage's (or insuring agreements), each with a separate limit of liability. Section 2 provides liability coverage and is divided into two coverage’s.
Homeowner’s coverage is that each coverage (A through F) is treated separately. Dollars may not be transferred among the various coverage. The maximum amount the insured could collect is the sum of all the coverage’s.
Coverage A, covers the insured's home. Coverage B applies to such Items as an unattached garage or shed. Coverage C applies to property usually found in homes such as furniture, clothes, appliances, and other personal property. Coverage D, loss of
11 use, pays for extra expenses if a covered loss prevents the insured from living in the home.
The limits of liability for the various insuring agreements found in Section 1 are determined as a percentage of coverage A. That is, once the insured chooses an amount for coverage A, Coverage B automatically equals 10 percent of this amount. Coverage C equals 50 percent of coverage A. Coverage D equals 20 percent of coverage A. If an insured needs additional protection, coverage's B, C, or D may be increased. Coverage may not be reduced below the specified percentages. The insured must pay an additional charge for increased coverage. Section 2 provides liability protection and is divided into two coverage’s. Coverage E provides protection from adverse legal judgments. Coverage F provides for medical payments to those injured by accident arising at the insured's premises or resulting from the insured's activities. Coverage is available without establishing the homeowner’s legal liability.
DEFINITIONS
Immediately following the insuring agreement is a short glossary that determines the meaning of eight important terms that are found throughout the policy in boldface type.
Bodily injury means bodily harm, sickness or disease, including required care, loss of services and death that results; Business includes trade, professional or occupation; Insured means you and residents of your household who are: a. Your relatives b. Other persons under the age of 21 and in the care of any person named above
Under Section 11, also means: c. With respect to animals or watercraft to which this policy applies, any person or organization legally responsible for these animals or watercraft which are owned by you or any person included in or above. A person or organization using or having custody of these animals or watercraft in the course of business or without the consent of the owner is not an insured d. With respect to any vehicle to which this policy applies:
1. Persons while engaged in your employ or that of any person included in a or b above; or
2. Other persons using the vehicle on an insured location with your consent means:
Insured Location means:
12 a. The residence premises
b. The part of other premises, other structures and grounds used by you as a residence and: 1. Which is shown in the Declarations; 2. Or which is acquired by your during the policy period for your use as a residence;
c. Any premises used by you in connection with a premises in a or b above;
d. Any part of premises:
d. Vacant land, other than farmland, owned by or rented to an insured;
e. Land owned by or rented to an insured on which a one or two family dwelling is being built as a residence for and insured;
f. Individual or family cemetery plots or burial vaults of an insured or;
g. Any part of premises occasionally rented to an insured for other than business use;
Occurrence means an accident, including exposure to conditions, which results, during the policy period, in:
a. Bodily injury; or, b. Property damage.
Property damage means physical injury to, destruction of, or loss of use of tangible property Residence employee means:
a. An employee of a person whose duties are related to the maintenance or use of the including household or domestic services; or
b. One who performs similar duties elsewhere not related to the business of the insured
Residence premises means:
a. The one family dwelling, other structures, and grounds
13 b. That part of any other building; where you reside and which is showing the 'residence premises' as the in the Declarations
Residence premises also means a two family dwelling where you reside in at least one of the family units and which is shown as the “residence premises" in the Declarations.
ANALYSIS OF HOMEOWNERS (HO-2) POLICY
SECTION 1 - PROPERTY COVERAGE Section 1 of the HO consists of four parts. They are labeled A through D and “Additional Coverages”. Section 1 informs the insured what property and other losses are covered and what losses are not covered.
Coverage A applies to the insured's residence premises shown on the Declarations. A second home or summer cottage, which might be considered a temporary residence, is not covered, since it does not appear in the Declarations.
Coverage B applies to other structures on the residence premises separated from the home by a clear space. An unattached garage or tools shed are examples of property covered in this section.
Coverage C applies to personal property of the insured located anywhere in the world. Special limits on some property are detailed in the policy.
Sometimes the question is raised whether a specific item is real or personal property. If it is real property, it would be covered under Coverage A; if it is personal, it would be covered under Coverage C. The English common law rule is land and anything permanently attached to land is real property
The Special Limits of Liability passage establishes maximum dollar amounts that can be recovered when the specifically identified property is lost. In some cases the limits apply only to loss by the peril or theft; in other cases, any loss is subject to the specified limits.
a. Special limits of liability. These limits do not increase the Coverage C limit of liability. The special limit for each numbered category below is the total limit for each loss for all property in that category.
14 1. $200 on money bank notes, bullion, gold other than gold ware, silver other than silverware, platinum, coins and medals.
2. $1000 on securities, accounts, deeds, evidences of debt, letters of credit, notes, other than bank notes, manuscripts, passports, tickets and stamps.
3. $1 000 on watercraft, including their trailers, furnishings, equipment and outboard motors.
4. $1000 on trailers not used with watercraft.
5. $1000 on grave markers.
6. $1000 for loss by theft of jewelry, watches, furs, precious and semi-precious stones.
7. $2000 for loss by theft of firearms.
8. $2500 for loss by theft of silverware, silver-plated ware, gold ware, gold-plated ware and pewter-ware. This includes flatware, hollowware, tea sets, trays and trophies made of or including silver, gold or pewter.
9. $2500 on property, on the residence premises used at any time or in any manner for any purpose.
10. $250 on property, away from the used at any time or in any manner for any business purpose. b. Some property is specifically excluded from coverage including the following:
1. Personal property insured elsewhere, such as in a Personal Property Floater. 2. Animals, birds, or fish. 3. Motor vehicles and equipment. 4. Property associated with renting of an apartment was previously called "Additional Living Expense." The former term seems more informative, because R emphasizes that the insurance covers only the necessary increase in living expenses ... for the shortest time required to repair or replace the damage. 5. Additional coverage a. Debris removal costs are covered.
15 b. Expenses incurred to protect property from further damage are covered. c. A limited amount of coverage is available for damage to trees and shrubs. d. Fire department service charges will be reimbursed. e. Property removed from the residence because it was endangered and that is subsequently damaged or stolen at the removal site is covered. f. Credit card fraud and similar frauds are covered for a limited amount. g. Certain loss assessments in cooperative-type buildings are paid up to a $1000 limit. h. Collapse. Collapse had been a specifically named peril in prior versions of the HO insurance policy. Now it is given special treatment. Collapse is difficult to define, because it can be the result of many different causes. Moreover, some courts have introduced the doctrine of This rule states, when a loss arises from two separately identifiable perils, one covered (for example, negligence or collapse) and one excluded (for exam pie, underground water pressure), coverage will be provided by the HO. Concurrent causation court decisions have led to deliberate treatment of losses associated with collapse as an additional coverage instead of as a named peril.
SECTION 1 - PERILS INSURED AGAINST
(HO-2)
Property insurance policies take one of two basic formats: (1) they may specify the perils that can produce an insured loss, or (2) they may provide comprehensive or open perils coverage and specify the exclusions that apply. Previously insurers are now avoiding used term, ‘all risks’ coverage, because no insurance policy covers all possible losses.
The term "comprehensive coverage" now is also being avoided for the same reason.
Fire or Lightning.
“Fire” means a hostile fire, one not contained in its proper place. “Lightning” is a powerful discharge of natural electricity. Direct losses from lightning are sometimes hard to prove especially when the only damage that occurs is to TV sets and other appliances.
16 Windstorm or Hail
Under this peril, HO-2 provides protection against tornadoes and all other sources of violent wind damage. The coverage excludes damage to the interior of the buildings or contents if the exterior of the building first sustains no damage.
Explosion
Explosion is a difficult term to define, and the term is not defined in the policy. There may be fire or loud noise accompanying an explosion. There may be confinement of gases under pressure. When a combination of some or all of these events causes damage-for instance, when a furnace blows up HO-2 covers the damage caused by the event.
Riot or Civil Commotion
War, civil war, and insurrection are not covered but lesser hostilities are covered. The issue of terrorists' acts will probably have to be addressed by the courts and by insurers.
Aircraft and Vehicles
Aircraft damage includes damage caused by spacecraft failing on a house. HO-2 (but not HO-3) excludes losses to fences, driveways, and walks caused by vehicles operated by an occupant of the house.
Sudden and Accidental Smoke Damage
The smoke damage caused by a smoldering electric blanket may be covered under this provision, as may damage resulting from faulty cooking appliances. If fire fighters cause water damage putting out the smoldering, this -too would be covered, because the proximate cause of the loss would be the smoldering blanket or stove.
Vandalism or Malicious Mischief
If the homeowner’s property is willfully and intentionally damaged by others, there is coverage in the HO-2 contract, the coverage for these two perils is suspended if the house has been vacated for thirty days before the loss. Vacant means the insured and their possessions are absent from the house. When an insured takes a vacation with plans to return home, the house is “unoccupied” rather than vacant, and the coverage remains in effect.
17 Theft
Theft means the crime of removing property without the owner's permission. Theft generally does not include losses by fraud or mysterious disappearance of property. Three exclusions to theft coverage are in the HO, including the theft committed by an insured. Additional restrictions apply if the theft occurs off the residence premises including in a college dorm or apartment.
Breakage of Glass
Breakage of glass is a result and not a cause of loss. This is comprehensive coverage. Any peril causing structural glass (part of the building) to break produces an insured loss.
Failing Objects
The building must sustain exterior damage before interior damage is covered. If a tree limb were to fall and break through the roof, coverage would be provided for the roof and damaged contents.
Weight of Snow, Ice or Sleet
Accidental Damage Caused by Plumbing
Loss to plumbing, appliances, sprinkler systems, or air conditioners is not covered. Only the losses resulting from water leakage by these units are covered. Damage caused by slow and repeated leaks is excluded, however, as is damage sustained if the building is vacant for more than thirty consecutive days before a loss.
Sudden Destruction of Water Heaters, Heating Systems, Air Conditioners, or Sprinklers
The provision covers the explosion of these units, but losses resulting from freezing are covered separately.
Freezing of Plumbing
18 If the building is occupied, or even if the building is unoccupied as long as a serious attempt is made to heat it, and frozen pipes that burst cause damage, HO-2 provides coverage.
Sudden Damage from Artificially Generated Electrical Current
Coverage is provided for electrical appliances excluding damage to tubes, transistors, and similar parts. If a surge of power were sent through the electric lines and burned out a motor, there is coverage. Short-circuit damage may also be covered in some cases.
Damage done by explosion, lava flow, or volcanic ash would be covered; earthquake damage is specifically excluded
The eruption of Mount St. Helen's raised several questions about HO insurance coverage.
SECTION 1 - EXCLUSIONS Eight exclusions apply to the Section 1 coverage in HO-2. Each of the eight exclusions eliminates the insurer's liability for the insured loss. The language of the HO makes this point as follows:
We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.
Ordinance or Law
Meaning enforcement of any ordinance or law regulating the construction, repair, or demolition of a building or other structure, unless specifically provided under this policy.
Earth Movement
Meaning earthquake including land shock waves or tremors before, during or after a volcanic eruption; landslide; mudflow; earth sinking, rising, or shifting; unless direct loss by: Fire; Explosion;
19 Breakage of glass or safety glazing material which is part of a building, storm door or storm window
Water Damage. Meaning
Flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind; Water which backs up through sewers or drains; Water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure; Direct loss by fire, explosion or theft resulting from water damage is covered.
Power Failure
Meaning the failure of power or other utility service if the failure takes place off the But, if a Peril Insured Against ensues on the, we will pay only for that ensuing loss.
Neglect
Meaning neglect of the insured to use all reasonable means to save and preserve property at and after the time of a loss.
War
Including: undeclared war, civil war, insurrection, rebellion, revolution, warlike act by a military force or military personnel, destruction or seizure or use for a military purpose, and including any consequence of any of these. Discharge of a nuclear weapon will be deemed a warlike act even if accidental.
Nuclear Hazard
To the extent set forth in the Nuclear Hazard Clause of Section I - Conditions. Intentional Loss. Meaning any loss arising out of any act committed by or at the direction with the intent to cause a loss.
20 SECTION 1 - CONDITIONS Several of the HO-2 conditions were derived from the Standard Fire Policy (SFP).
Loss Settlement.
The loss settlement provision presents several alternative paths to determine the amount of payment made to the insured in the event of loss.
Covered property losses are settled as follows:
Buildings under Coverage A or B at replacement cost without deduction for depreciation, subject to the following:
a. If, at the time of loss, the amount of insurance in this policy on the damaged building is 80% or more of the full placement cost of the building, immediately before the loss, we will pay the cost to repair or replace, after application of deductible and without deduction for depreciation, but not more than the least of the following amounts:
1. The limit of liability under this policy that applies to the building; 2. The replacement cost of that part of the building damaged for like construction and use on the same premises; or 3. The necessary amount actually spent to repair or replace the damaged building.
b. If, at the time of loss, the amount of insurance in this policy on the damaged building is less than 80% of the full replacement cost of the building immediately before the loss, we will pay the greater of the following amounts, but not more than the limit of liability under this policy that applies to the building:
1. The actual cash value of that part of the building damaged; or 2. That proportion of the cost to repair or replace, after application of deductible and without deduction for depreciation, that part of the building damaged, which the total amount of insurance in this policy on the damaged building bears to 80% of the replacement cost of the building.
Replacement Cost and Insurance to Value Requirement
The loss settlement provision of HO-2 contains a penalty provision that applies if the insured has purchased less than 80 percent of replacement cost. The HO penalty
21 provision is similar to the commonly found in commercial property insurance policies. The purpose of both the coinsurance clause and the HO loss settlement clause is to make under insurance unattractive to the insured. Both clauses provide for that the insured to pay a penalty based on the amount of under insurance.
Many property policies contain a clause requiring the insured to purchase some minimum amount of insurance if the insured wants full coverage on all losses. If the insured purchases less than the minimum amount, there will be only partial recovery for losses. The minimum amount of insurance the company requires usually is stated as a percentage of the replacement cost of the insured property.
To determine whether the insured has met the coinsurance requirement on the dwelling, -insurers uses the following formula: amount of insurance purchased amounts X of = insurance 80% of replacement cost loss proceeds
If the first term in the equation is less than 1, the insured will bear a portion of the loss. The insured is said to be a "coinsurer of the loss." If the fraction is equal to or greater than 1, the insurer will pay the full amount of the loss, limited to the face amount of insurance purchased.
Reasons for the Coinsurance Requirement
What is the reason for the coinsurance requirement? It exists to keep insurance rates fair.
If property owners, recognizing most losses are partial, purchased insurance equal to only 50 percent of the value of the covered property, they might think that the most significant part of the risk had been transferred. Without the coinsurance penalty, they would have an advantageous deal. The coinsurance requirement of property insurance policies prevents insured’s from taking advantage of the insurers average rate structure. If someone purchases insurance equal to 50 percent of the value of the property when the insurer requires 80 percent coverage, that insured will receive only partial recovery for a loss.
Mortgage Clause
The HO has provisions protecting creditors making loans secured by the insured property. This protection is found in the mortgage is evidence of a debt. It is the security agreement when a loan is made on real estate. A mortgage gives the lender (mortgagee) a legal interest in the property mortgaged. If the borrower (mortgagor) defaults on the loan agreement, the mortgagee may foreclose on the mortgage and sell the property to satisfy the debt. Both the mortgagor and the mortgagee have an insurable interest in the property.
22 The word 'mortgagee' includes trustee. If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment will be the same as the order of the mortgages.
If we deny your claim, that denial will not apply to a valid claim of the mortgagee, if the mortgagee:
Notifies us of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware
Pays any premium due under this policy on demand if you have neglected to pay the premium
Submits a signed, sworn statement of loss within 60 days after receiving notice from us of your failure to do so
Policy conditions relating to Appraisal, Suit Against Us and Payment apply to the mortgagee. If the policy is cancelled or not renewed by us, the mortgagee will be notified at least IO days before the date of cancellation or non -renewal takes effect.
If we pay the mortgagee for any loss and deny payment to you:
We are subrogated to all the rights of the mortgagee granted under the mortgage on the property
At our option, we may pay to the mortgagee the whole principal on the mortgage plus any accrued interest. In this event, we will receive a full assignment and transfer of the mortgage and all securities held as collateral to the mortgage debt
Subrogation will not impair the right of the mortgagee to recover the full amount of the mortgagee's claim.
SECTION 2 - LIABILITY COVERAGE
COVERAGE E - PERSONAL LIABILITY
If a claim is made or a suit is brought against and for damages because of or caused by an to which this coverage applies, we will:
Pay up to our limit of liability for the damages for which the is legally liable
23 Provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate. Our duty to settle or defend ends when the amount we pay for damages resulting from the occurrence equals our limit of liability.
COVERAGE F - MEDICAL PAYMENTS TO OTHERS
We will pay the necessary medical expenses that are incurred or medically ascertained within three years from the date of an accident causing Medical expenses means reasonable charges for medical, surgical, x-ray, dental, ambulance, hospital, professional nursing, prosthetic devices and funeral services. This coverage does not apply to you or regular residents of your household except residence employees. As to others, this coverage applies only:
1. To a person on the insured location with the permission of an insured 2. To a person off the insured location, if the bodily injury: a. Arises out of a condition on the insured location or the ways immediately adjoining; b. Is caused by the activities of an insured. c. Is caused by a residence employee in the course of the residence employee's employment by the insured. d. Is caused by an animal owned by or in the care of an insured.
The interpretation of these clauses is that the insurer agrees to pay for successful judgments against the insured resulting from the non-business activities of the named insured and his household residents. It agrees to provide the insured with a lawyer to defend lawsuits. The insurer retains the right to make a settlement with a claimant if the insurer thinks a settlement is expedient (advantageous). In professional liability insurance policies, such as medical liability insurance, the insured, whose professional reputation may be at issue, can prevent an insurer from trying to settle a claim without a court fight.
The insurers duty to make payment on its insured's behalf is not exactly coincident with its duty to defend its insured’s. Payment is required only for covered acts. A legal defense is required even for false, fraudulent, or groundless lawsuits. Because of the potential difference between the duty to defend an insured and the duty to pay liability claims, the issue of the insurer's obligation has been litigated.
Section 2 - Exclusions
24 Because coverage's E and F are comprehensive-type coverage, several important exclusions limit the insurer's liability. Among the claims not covered are those arising from bodily injury or property damage.
Which is expected or intended by an insured. The "intent" required to exclude coverage is neither the "Intent to act nor the “Intent to cause a specific injury complained of”. Rather it is the "intent to cause bodily injury."
Arising out of "business pursuits." A review of the litigation on this point does not lead to any general conclusions. Different courts in different jurisdictions have reached different conclusions given similar circumstances. Perhaps the safest point to note is that if an insured injures somebody while engaged in an activity done for monetary gain, a possibility exists that the HO will not provide liability coverage.
Arising out of the rendering or failure to render professional services. This clause reinforces he preceding clause, making it clear that if an insured is sued for actions as an accountant, attorney, or physician, the HO will not provide coverage.
Arising from the ownership, maintenance, use of motor vehicles, aircraft, or watercraft. There are some exceptions to these exclusions, so the HO provides some coverage in limited circumstances. Arising from the transmission of communicable diseases. An increasing amount of litigation during the later half of the 1980s alleged injury resulting from transmission of communicable disease, especially sexually transmitted diseases. The purpose of this exclusion is to relieve the insurer of responsibility for paying such claims or defending such lawsuits.
This exclusion is recent and may not appear in all companies' policy forms yet. Section 2, like Section 1 of HO-2, contains some additional coverage and some conditions. They follow the pattern developed in Section 1.
Sections 1 and 2 - Conditions
The final section of HO-2 contains conditions applicable to both Sections 1 and 2.
Concealment and fraud; Waiver provisions; Cancellation by insurer and insured; Assignment (not valid unless insurer has given written consent); Subrogation; Death of an insured (the legal representative of the insured continue to receive coverage after the insured's death).
Liability insurance policies generally provide for the full limit of liability for each occurrence. In addition, there usually is no additional premium to be paid. The HO is a
25 combination of fire, personal liability, and additional expense protection. The major divisions of HO-2 include the following-
Definitions Section 1 -Property Coverage's Section 1-Perils Insured Against Section 1-Exclusions Section 1-Conditions Section 2-Liability Coverage's Section 2-Exclusions
We will continue this session with a look at other personal property insurance coverage's that can be used by individuals and families.
26 CHAPTER 3: PROPERTY INSURANCE COVERAGES
DWELLING 77 PROGRAM
The Dwelling 77 Program is designed for dwellings that are ineligible for coverage under the standard homeowners contracts and for persons who do not want or need a homeowners contract. Most of these homes can be insured under a Dwelling 77 policy.
ELIGIBLE DWELLINGS
Several types of residential properties are eligible for coverage. The dwelling forms can be used to insure a one- to four-family building that is occupied as a residence. Certain incidental business operations are permitted in the dwelling. They include a private school, a studio, an office, and a small service operation, such as a beauty parlor or telephone answering service. A completed home or home construction can also be insured under the dwelling forms: the home may be occupied by its owner or by a renter. A townhouse or row-home can be similarly covered if the structural unit does not exceed four families in size. Even a mobile home or trailer can be insured if the policy period does not exceed one year, and if the mobile home or trailer remains at a permanent location described in the policy.
Certain types of dwellings are ineligible for coverage. Farm dwellings and dwellings that house more than five boarders or roomers cannot be insured under the dwelling forms.
TYPES OF DWELLING FORMS
DWELLING PROPERTY 1 (BASIC FORM)
The basic form can be used to insure any of the eligible dwellings described earlier. Several coverage’s are provided, which are similar to the homeowners (HO-2) coverage’s.
27 Coverage A insures the dwelling and structures attached to the dwelling. However, losses are indemnified on the basis of actual cash value, not replacement cost.
Coverage B provides insurance on other structures, such as a detached garage, tennis court, or tool shed. Under the basic form, 10 percent of the amount of the insurance on the dwelling can be applied to cover the other structures. However, this is not additional insurance.
Coverage C insures personal property that is owned or used by the insured and residing family members. Personal property away from the premises is also covered. The insured can apply up to 10 percent of the insurance under coverage to cover personal property anywhere in the world. Again, the extension of coverage is not additional insurance.
Coverage D covers the fair rental value if a loss makes part of the dwelling rented to others or held for rental unfit for normal use. A maximum of 10 percent of the insurance on the dwelling can be applied to cover the loss of rents, subject to a maximum monthly limit of 1/1 2 of that IO percent. For example, if the dwelling is insured for $48,000, a total of $4800 can be applied to cover the loss of rents, with a maximum monthly limit of $400 (1/12 X $8800). This insurance is not additional insurance.
The basic form covers only a limited number of perils. The perils of fire, lightning, and internal explosion can be purchased alone. The insured also has the option of adding the extended coverage perils plus vandalism and malicious mischief by payment of an additional premium. The extended -coverage perils are windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, and smoke.
DWELLING PROPERTY 2 (BROAD FORM)
The broad form extends the coverage contained in the basic form. Covered losses to the dwelling and other structures are indemnified on the basis of replacement cost rather than the actual cash value. Replacements cost provisions are similar to those found in the homeowner contracts. In addition to Coverage's A, B, C, and D, the broad form adds a new benefit for additional living expenses If a covered loss makes the property unfit for normal use, the additional increase in living expenses is paid. The broad form covers all of the perils that can be insured under the basic form, plus other perils. The covered perils area follows:
Fire, lightning, internal explosion; Windstorm or hail; Explosion; Riot or civil commotion; Aircraft; Vehicles; Smoke;
28 Vandalism or malicious mischief; Breakage of glass or safety glazing material; Burglars; Failing Objects; Weight of ice, snow, or sleet; Collapse of buildings or any part of a building; Accidental discharge or overflow of water or steam; Explosion of a steam or hot water system, air conditioning system, or an appliance for heating water; Freezing of a plumbing, heating, or air conditioning system, or household Appliance; Sudden and accidental damage from an artificially generated electrical current.
DWELLING PROPERTY 3 (SPECIAL FORM)
The special form covers the dwelling, other structures, and any other property covered under Coverage A or Coverage B for all direct physical losses except for those losses specifically excluded. Personal property, however, is covered for the same named perils that are found in the Dwelling Property 2 (broad form) policy discussed earlier.
MOBILE HOME INSURANCE
Mobile Home Insurance is presently written by an endorsement to either Homeowner’s 2 or Homeowners 3, which tailor the homeowners’ policy to meet the characteristics of mobile homes.
ELIGIBILITY To be eligible for coverage, the mobile home must be at least ten feet wide and forty feet long. In addition, it must be capable of being towed on its own chassis, and it must be designed for year-round living. The policy can be issued only to the owner- occupant of the mobile home, and the occupancy must be only for private residential purposes. These requirements are imposed to eliminate coverage for camper trailers that are pulled by automobiles and are insured under an automobile policy.
COVERAGE The coverage on a mobile home are similar to those found in the homeowners forms.
Dwelling $10,000 minimum;
29 Other Structures 10%ofCoverageA ($2000 minimum); Personal Property 40% of Coverage A 20% of Coverage A; Personal Liability $100,000; Medical payments to others $1 00,000 each person.
Coverage A insures the mobile home on a replacement cost basis. In addition, floor coverings; household appliances are also covered when installed on a permanent basis. Coverage A also applies to utility tanks and other structures attached to the mobile home such as a carport or small storage shed. Some mobile homes have depreciated to the point where replacement cost coverage is inappropriate. In such cases, an optional cash value endorsement can be added, which limits the insurers obligation to the lowest of (1) repair cost, (2) replacement with similar property but not necessarily from the same manufacturer, or (3) actual cash value of the damaged property.
Coverage B insures other structures subject to a minimum limit of $2000.
Coverage C insures unscheduled personal property and is limited to 40 percent of Coverage A.
Coverage D provides for loss-of-use coverage and is 20 percent of the Coverage A limit.
In addition, the mobile home endorsement provides for an additional coverage that pays up to $500 for the cost incurred in transporting the mobile home to a safe place when it is endangered from a covered peril. The $500 limit can be increased to a maximum of $2500 by an additional premium.
Finally, Coverage's E and F provide for comprehensive personal liability insurance and medical payments to others. This coverage is identical to the coverage provided in the homeowner’s contracts.
OCEAN AND INLAND MARINE INSURANCE
Marine insurance is one of the earliest forms of insurance protection. Commerce by ship was well established in the Mediterranean Sea 2,000 years before the birth of Christ. Coincident with the development of this trade, insurance transactions emerged as distinct commercial agreements, was a transaction protecting an owner from financial loss if his ship were destroyed. If the ship-owner acquired the ship by means of a loan, an interest rate was paid to a moneylender. The moneylender, for a premium beyond the ordinary interest rate, would agree to forgive the loan if the ship were destroyed. Clearly, a bottomry loan was an early forerunner of ocean marine insurance.
On the other hand, some elements of the modem insurance transaction were missing. Today, marine insurance still does not reach the level of mathematical accuracy in
30 rate making that life or fire insurance does. Judgmental estimates remain the basis of marine underwriting. Loans were comparable to bottomry loans, the difference being the subject of the loan. The ship's cargo, rather than the ship itself, was the subject of the loan. Otherwise, the transaction was comparable. A merchant, placing cargo on a ship, would take out a loan using the cargo as collateral. The moneylender, for a premium in addition to the regular interest charged, agreed to forgive the loan if the cargo were lost.
Today, as in historical times, ocean marine insurance plays a large role in international commerce.
Four distinct types of potential loss exposures are insured with ocean marine insurance policies.
The hull exposure is the value of the ship. This coverage is comparable to the bottomry loan in that the insurer agrees to pay the ship owner if the- ship is lost while the policy in is force.
The cargo exposure is the value of the goods being shipped. This coverage is comparable to respondentia loans in that the shipper is compensated for losses suffered while the goods are being shipped.
The loss of freight is the loss of income the ship's owner would have earned if the cargo (or passengers) had been delivered rather than lost. This coverage is comparable to the business interruption consequential loss coverage of fire insurance.
The liability loss exposure is the loss a ship owner would suffer if the ship were held to be legally responsible for negligently injuring other people or their property.
INLAND MARINE INSURANCE
Inland marine insurance is essentially an American insurance distinction. Other countries have not separated the underwriting powers of insurers to the extent we have. That is, in other countries, if an insurer (underwriter) wants to write fire insurance, marine insurance, or perhaps even life insurance, it is a private decision, and the insurer may proceed unconstrained by law. In America, however, there was an early tradition of allowing fire insurers to write fire insurance exclusively and marine insurers to write marine coverage exclusively.
In 1933, a nationwide definition of marine insurance was developed. (For the purpose of historical accuracy, the first title was the Nationwide Definition and Interpretation of the Insuring Powers of Marine and Transportation Underwriters).
31 In 1953, a second “nationwide definition” was adopted. This second definition, currently effective in a majority of states, provides for five types of property to be the proper subject of inland marine insurance:
Property designated for export; Imported property until it reaches its destination; Domestic property in the process of shipment; Property used to facilitate (“instrumentality's of”) transportation, such as bridges, tunnels, pipelines, and electrical transmission towers; Personal property that is easily moved and typically of significant value, such as jewelry, furs, and cameras.
Inland Marine Floaters
People own valuable personal property that is frequently moved from one location to another, such as jewelry, furs, cameras, clothes and luggage, boats, musical equipment, sports equipment, and similar property. An appropriate inland marine floater can insure this property. And is a policy that provides broad and comprehensive protection on personal property that is frequently moved from one location to another.
Although inland marine floaters are not uniform, they have several common characteristics.
The insurance can be tailored to the specific type of personal property to be insured. Under the personal article floater, nine classes of property can be insured.
The desired amount of insurance can be selected. The homeowner’s policy has various limits on the amount of coverage on certain types of personal property. Higher limits are available by a floater policy.
Broader and more comprehensive coverage can be obtained. Floaters can be written on an all-risks basis, which provides broad protection. However, in the current edition of most inland marine floaters by ISO, the word "all" has been deleted from the all-risks description of the perils insured against. The reason for the deletion is to avoid creating reasonable expectations among policy-owners that the floater covers all losses, even those that specifically excluded in the policy.
Most floaters cover insured property anywhere in the world. However, fine arts are covered only within the United States and Canada.
32 PERSONAL ARTICLES FLOATER
The personal article floater (PAF) is the principal contract now used to provide comprehensive protection on valuable personal property. The personal article floater insures nine-optional classes of personal property against risks of direct physical loss to the property. All direct physical losses to the insured property are covered except those losses specifically excluded. Individual items are listed or scheduled and, insured for specific amounts. Coverage is worldwide with the exception of fine art.
Personal jewelry is covered anywhere in the world. Each item must be described and a specific amount of insurance shown for it. Original bills of sale or a signed appraisal from a reputable jeweler are normally required.
Personal furs and garments trimmed with fur, imitation fur, items consisting principally of fur, and fur rugs can be insured with the PAF. Each item must be listed separately with a specific amount of insurance for each item.
Most photographic equipment can be insured under the PAF. Each item must be individually described and valued. Miscellaneous small items, such as carrying cases, filters, and holders can be written on a blanket basis without scheduling each item if the total of the value of the blanketed items does not exceed 10 percent of the total amount of insurance on cameras.
Musical instruments, including cases, sound and amplifying equipment and similar articles can also be insured under the PAF. An important exclusion applies to this coverage. Instruments played for pay during the policy period are not covered unless an endorsement is added to the policy and a higher premium is paid.
The PAF can also be used to insure silverware and goldware. However, pens, pencils, flasks, smoking implements, or jewelry, cannot be insured as silverware. Such property is insured as jewelry.
Golf clubs, golf carts, and other golf equipment are covered anywhere in the world. The golfers clothes in a clubhouse locker or other building used in connection with the game of golf are also covered. Golf balls are covered for loss only by fire and by burglary when there are visible marks of forced entry into the building, locker, or room.
Fine arts can also be insured under the PAF. This includes paintings, antique furniture, rare books, statuary, rare glass and bric-a-brac, and manuscripts. Coverage of fine arts is on a valued basis.
Newly acquired property is automatically covered for ninety days. The insured must notify the company within ninety days and pay an additional premium.
33 The amount of insurance on newly acquired property is limited to 25 percent of the total insurance.
Several important exclusions apply to fine arts:
Damage caused by repairing, restoration, or retouching is specifically excluded. Breakage of art glass windows, glassware, statuary, marble, bric-a-brac, porcelains, and similar fragile articles is specifically excluded. However, breakage is covered if caused by fire or lightning, explosion, aircraft or collision, windstorm, earthquake, or flood, malicious damage or theft, or derailment or overturn of a conveyance. Breakage can be covered by payment of an additional premium.
There is no coverage for property on exhibition at fair grounds or on the premises of national or international expositions unless the premises are covered by the policy.
A valuable stamp or coin collection can be insured on either a blanket or scheduled basis. If the items are insured on a blanket basis, the stamps or coins are not described, and the insurance applies to the entire collection. However, if the stamps and coins are valuable, the property should be scheduled so that each item is specifically listed and insured.
In the case of loss to an item insured on a blanket basis, the amount paid is the cash market value at the time of the loss. However, there is a $1 000 maximum limit on any unscheduled coin collection, and a $250 maximum limit on any single stamp, coin, or individual article, or any single pair, block, series sheet, or card.
In the case of loss to a scheduled item, the amount paid at the time of loss is the lowest of the following:
Actual cash value; Reasonable cost of repairs; Replacement cost; Amount of Insurance.
Several important exclusions apply to stamps or coins. The following losses are specifically excluded:
Damage from fading, creasing, denting, scratching, tearing, or thinning;
Transfer of colors, inherent defect, dampness, extremes of temperature, or depreciation.
34 Mysterious disappearance unless the item is scheduled or specifically insured, or is mounted in a volume and the page to which it is attached is also lost;
Loss to property in the custody of transportation companies;
Shipments by mail other than registered mail;
Theft from any unattended automobile unless shipped as registered mail;
Losses to property not part of a stamp or coin collection.
The intent of the above exclusions is to exclude losses that are due to careless ness or losses that are the responsibility of other parties.
The personal article floater can also be added to the homeowner’s policy by the scheduled personal property endorsement (HO-6). The endorsement provides essentially the same coverage provided by the personal article floater. Some homeowners wish to cover personal property insured under the homeowner’s policy on a broader and more comprehensive basis. Also, some homeowners have personal property whose value exceeds the limits of liability on certain property under the homeowner’s policy. Higher limits can be obtained by adding this endorsement to the homeowner’s policy.
PERSONAL PROPERTY FLOATER
The personal property floater (PPF) should not be confused with the personal article floater. The PPF provides extensive coverage on unscheduled personal property owned or used by the insured that is normally kept at the insured's residence. Thirteen classes of unscheduled personal property can be insured, and a separate amount of insurance applies to each class. The property is insured on a risks-of-direct- physical-loss basis. All losses are covered except those losses excluded. Worldwide coverage is provided when the property is temporarily away from the premises.
The PPF, however, does not cover certain types of personal property, which includes the following:
Animals, fish or birds; Motor vehicles designed for transportation or recreation; Boats, aircraft, campers, and trailers; Equipment for the preceding vehicles unless removed from the vehicle and at the insured's residence; Owned property used in a business, occupation, or profession (but professional books and equipment are covered while in the insured's residence); Property normally kept at another location throughout the year.
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Use of the PPF has declined in recent years because of the growth of homeowners insurance. However, renters can use the PPF and condominium owners who wish to insure their unscheduled personal property on other than a named-perils basis.
INSURANCE ON PLEASURE BOATS
The homeowner’s policy provides only limited coverage of boats. Coverage on a boat, its equipment, and boat trailer is limited to $ 1000. Theft of the boat away from the premises is excluded. Direct loss to a boat, equipment, motor, and trailer from windstorm or hail is covered only if the property is inside a fully enclosed building. Finally, boats and boating property are covered only against a limited number of named perils (broad form perils), and broader protection may be needed. For these reasons, boat owners frequently insure their boats under other insurance contracts that provide broader and more comprehensive protection.
Insurance on recreational boats generally can be divided into three categories.
1. Outboard motor and boat insurance is designed for motorboat owners who have adequate personal liability insurance under the homeowners policy but desire more comprehensive physical damage insurance on the boat. An inland marine floater can obtain this protection. Although the floaters on boats are not uniform, they have certain common characteristics. They are summarized as follows.
a. Covered Property. The floater can be written to cover the boat, equipment, motor, and boat trailer or carrier. The insurance is written on an actual cash value basis and usually contains a deductible.
b. Insured Perils. The floater can be written either on a named- perils basis or risks-of-direct-physical-loss basis. Most floaters currently are written on a risks-of-direct- physical-loss basis. This means that all direct physical losses to insured property are covered except those losses specifically excluded.
Personal liability insurance is not provided since it is assumed that the boat owner has, adequate liability insurance under a homeowner’s policy or comprehensive personal liability policy. However, the floater may contain collision damage liability insurance that protects the insured against a property damage lawsuit if the insured's boat collides with another boat while afloat.
c. Exclusions. The outboard motor and boat insurance floaters contain numerous exclusions depending on the company. Some common exclusions are the following.
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Certain general exclusions appear in all inland marine floaters. There is no coverage for loss due to wear and tear, vermin and marine life, rust and corrosion, gradual deterioration, inherent vice, latent defect, mechanical breakdown, and freezing or extremes of temperature.
There is no coverage if the boat is used to carry passengers for compensation or the boat or covered property is rented to another party, or covered property is being used in any official race or speed contest. The intent here is to exclude coverage for business loss exposures that require substantially higher premiums.
There is no coverage for loss or damage resulting from the repair, refinishing, or renovation of the boat or equipment. The party doing the work should be held responsible for the damage.
2. The boat owner’s policy is a special package policy for boat owners that combine physical damage insurance, medical expense insurance, liability insurance, and other coverage into one contract. Although boat owner policies are not uniform, they contain certain common features as follows:
a. The boat owner’s policy provides physical damage coverage on a direct and accidental, loss basis. The insurer agrees to pay for all direct and accidental loss to covered property except those losses specially excluded. The physical damage insurance applies to the boat, equipment, accessories, motor, and trailer.
b. Liability coverage is also included that covers the insured for property damage and bodily injury liability from the negligent ownership or operation of the boat.
c. Medical expense coverage is similar to that found in automobile insurance contracts. Medical expense coverage pays the necessary medical expenses incurred or medically ascertained within three years from the date of a boating accident that causes bodily injury to a covered person. A covered is the named insured or any family member while occupying any watercraft, or any person while occupying the covered watercraft.
d. Some boat owner policies have optional uninsured boaters coverage for bodily injury caused by an uninsured boater, whish is similar to the uninsured motorists coverage in automobile insurance.
e. Boat owner policies also contain several exclusions.
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1. Usual exclusions that are found in inland marine floaters for wear and tear, inherent vice, latent defect, mechanical breakdown, faulty manufacture, war, and nuclear hazard.
2. Damage caused by any repair or restoration process (except for fire);
3. Carrying people or property for a fee or renting covered property to others;
4. Using covered property (except sailboats) in any official race or speed test;
5. Exclusion of portable electronic, photographic or water sports equipment or fishing gear. For example, loss of cameras, portable radios, fishing equipment, or scuba diving equipment is not covered.
In addition, certain common exclusions apply to liability insurance and medical expense insurance.
1. Intentional injuries or damage by a covered person.
2. Renting the boat to others or carrying persons or property for a fee.
3. Using watercraft without a reasonable belief that the person is entitled to do so.
4. Using watercraft (except sailboats) in any official race or speed test.
5. Losses covered by a workers compensation law or similar law or by a nuclear energy liability policy.
6. Property damage to property owned, rented, or used by a covered person.
7. Liability of any person while employed or engaged in the business of selling, repairing, servicing, storing, or moving watercraft.
3. Personal Yacht Insurance is a form of ocean marine insurance that is designed for larger boats such as cabin cruisers and inboard motorboats. The yacht coverage includes several coverages.
38 a. Hull insurance. Hull insurance is the term used to describe physical damage coverage on the boat. In addition to the boat, the sails, tackle, machinery, furniture, and other equipment are also covered. The insurance is typically written on an 'all-risk" basis, which means all physical damage losses from external causes are covered, except those losses specifically excluded.
b. Protection and indemnity insurance is a form of marine liability insurance. The owner of the vessel is covered for property damage and bodily injury liability on an indemnity basis.
c. Additional Overages. Several optional coverage’s can be added to the yacht policy:
1. Medical payments insurance for covered persons.
2. Possible liability of the insured to maritime workers covered under the United States Longshoremen and Harbor Workers Compensation Act who are injured in the course of employment.
3. Boat Trailer Insurance.
4. Land transportation insurance that covers the insured vessel while being transported by land conveyance
5. Water skiing clause that provides liability protection if the vessel is used for water skiing, aquaplaning, or any sport in which persons or objects are being towed.
AIRCRAFT PROPERTY INSURANCE
The term “aircraft” as used in insurance is quite broad. In addition to airplanes, private and commercial, the term also applies to helicopters, hot air balloons, hand gliders, and space satellites. In many respects, aircraft insurance principles parallel those of ocean marine insurance. That is, aircraft owners need to purchase insurance to protect the hull, freight, and cargo (if commercial aircraft), and liability exposure.
The airplane itself, including its electronic equipment, is spoken of as a hull. An aircraft hull policy provides protection, either for damage done by specified perils or on an open peril basis. Remember, “open perils” does not mean all losses will be covered. It means, unless otherwise excluded, all losses will be covered.
39 The cost of aircraft insurance is a function of the perils covered; all-risk coverage is more expensive than specified peril coverage. Commercial insurers pay more for coverage because their planes are generally in the air more than private planes are. On the other hand, light planes are more susceptible to damage or theft while on the ground. An additional factor an insurer will consider in setting a rate is the experience and training of the airplane's pilot. In the United States, two different groupings of insurers provide most of the aircraft property (and liability) insurance. Associated Aviation Underwriters and United States Aircraft Insurance Group both write aircraft hull, aircraft liability, and airport liability insurance. Each of these groups has over thirty different member companies.
These groupings or pools of insurance companies were necessary to provide the large amount of capital necessary to deal with very large loss potential in aircraft coverage combined with a relatively small number o exposure units among which losses must be predicted and spread. Lloyd's of London, either directly or through reinsurance arrangements, also plays an important role in the American (and worldwide) aircraft insurance market.
FEDERAL PROPERTY INSURANCE PROGRAMS
Federal insurance programs are often necessary because certain perils are difficult to insure privately, and coverage may not be available at affordable premiums from the private sector. Although there are numerous federal insurance programs, only the following will be covered in this section.
FEDERAL FLOOD INSURANCE
Buildings exposed to damage from a flood are difficult to insure privately without some government assistance. The requirements of an insurable risk are not easily met. The exposure units in flood-prone areas are not independent of each other, and if a flood occurs, a catastrophic loss may result. Thus, the premiums for property insurance in flood areas would be too high for most insured’s to pay. The problem of adverse selection also makes the flood peril difficult to insure privately, since only property owners in flood-prone areas are likely to seek protection.
The Federal Flood Insurance Program was created by the National Flood Insurance Act of 1968 and operates under the auspices of the Federal Insurance Administration (FIA). The purpose of the Act is to provide flood insurance at subsidized rates to persons who reside in flood areas.
Write-your-own-program. The flood insurance program originally was a joint undertaking of the federal government and private insurers. The partnership between the federal government and private insurers ended in 1978 when the federal government took over the program. However, in late 1983, the federal government
40 enacted-write-your own-program to encourage private insurers to write flood insurance with financial assistance provided by the federal government.
Under the write-your-own program, private insurers sell flood insurance under their own names, collect the premiums, retain a specified percentage for commissions and expenses, and invest the remaining premiums. The companies service the flood insurance contracts, adjust losses, and pay their own claims. If premiums and investment income do not cover the insurers’ losses, they are reimbursed for the difference. However, any profits go to the United States Treasury.
The FIA determines eligibility, rates, and coverage limitations. Agents and brokers who are not affiliated with the private insurers can write federal flood insurance directly with the National Flood Insurance Program (NFIP).
ELIGIBILITY REQUIREMENTS
Most buildings and their contents can be insured for flood insurance if the community agrees to adopt and enforce sound flood control and land use measures. When a community first joins the program, it is provided with a flood hazard boundary map that shows the general area of flood losses, and residents are allowed to purchase limited amounts of insurance at subsidized rates under the emergency portion of the program.
A flood insurance rate map is then prepared that divides the community into specific zones to determine the probability of flooding in each zone. When this map is prepared, and the community agrees to adopt more stringent flood control and land use measures, the community enters the regular phrase of the program. Higher amounts of flood insurance can then be purchased at actuarial rates.
To encourage participation in the flood insurance program, lending institutions that make federally insured loans cannot approve mortgages on property in flood zones unless federal flood insurance is purchased. Property owners in flood zones are ineligible for federal disaster relief benefits if the have not purchased flood insurance.
Finally, certain dwellings are ineligible for coverage. They include:
1. Homes built over water or below a high tide line;
2. Unanchored mobile homes in special hazard areas ;
3. Mobile homes placed in parks that were opened in coastal high-hazard areas after April 1, 1982.
AMOUNTS OF INSURANCE
41 Under the emergency program, the amount of federal insurance that can be purchased at subsidized rates is limited to $35,000 on a single-family dwelling and $10,000 on the contents. For other residential structures, the maximum amount of insurance is limited to $100,000.
Under the regular program, the maximum amount of coverage for a single family home is $185,000 and $60,000 on the contents. Other residential structures can be insured up to $250,000.
DEFINITION OF FLOOD
Flood is defined as a general and temporary condition of partial or complete inundation of normally dry areas from:
The overflow of inland or tidal waters; The unusual and rapid accumulation of runoff or surface waters from any source; Mudslide.
Mudslide damage that is caused by conditions on the property or by conditions within the insured's control is not covered. A general condition of flooding must first exist. Water damage from a broken water pipe or clogged sewer is not covered. Property damage from water seepage or from the backup of sewers is covered only if the loss results from a general flooding condition.
FAIR PLANS
During the 1960s, major riots occurred in many cities in the United States, resulting in millions of dollars in property damage. Many property owners in riot-prone areas were unable to obtain property insurance at affordable premiums. This problem resulted in the creation of a FAIR plan, which were enacted into law. The basic purpose of a FAIR plan is to make property insurance available to urban property owners who are unable to obtain coverage in the normal markets. FAIR plans typically provide coverage for fire and extended-coverage insurance, vandalism, malicious mischief, and, in a few states, crime insurance and sprinkler leakage. FAIR plans exist in twenty-six states, the District of Columbia, and Puerto Rico.
FEDERAL CRIME INSURANCE
Persons residing in high crime rate areas often find it difficult to obtain crime insurance at affordable rates. For that reason, federal crime insurance became operational in 1971. Federal crime insurance provides crime insurance at subsidized rates in the areas where the Federal Insurance Administration has determined that insurance is not
42 available at affordable rates. Federal crime insurance can be purchases in twenty- three states, the District of Columbia, Puerto Rico, and the Virgin Islands. A servicing insurer has a contract with the Federal Insurance Administration to perform various insurance functions in selling crime insurance in a specific area. However, the Federal Insurance Administration is the actual insurer.
There are two federal crime insurance contracts:
Residential policy; Commercial crime policy.
The residential crime policy covers the loss of personal property from a burglary or robbery (including observed theft) while the property is on the insured premises or is in the presence of the insured.
The residential crime policy also covers damage to the insured's living quarters from a burglary or robbery, including damage to the insured's personal property. Damage to insured property away from the premises from vandalism or malicious mischief is also covered. However, damage to the building is covered only if the insured owns the building or is legally liable for damages.
Despite the high incidence of crime, federal crime insurance is not widely sold.
FEDERAL CROP INSURANCE
Federal crop insurance provides comprehensive coverage at subsidized rates for unavoidable crop losses, including those that result from hail, wind, excessive rain, drought, freezing, plant disease, snow, floods, and earthquake.
The insured is guaranteed a certain amount of crop production under the program. The guarantee is expressed in terms of bushels, pounds, or other commodity units. The program does not provide complete protection; only a maximum of 75 percent of the average production over a representative number of years is guaranteed.
TITLE INSURANCE
Title insurance protects the owner of property or the lender of money against any unknown defects in the title to the property under consideration. Defects to a clear title can result from an invalid will, incorrect description of the property, defective probate of a will, undisclosed liens, easements, and numerous other legal defects. The owner could lose the property to someone with a superior claim, or incur other losses because of an unknown lien, un-marketability of the title, and attorney expenses. Title insurance is designed to provide protection against these losses. Title insurance policies have certain characteristics that distinguish them from other contracts.
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The policy provides protection against title defects that have occurred in the past prior to the effective date of the policy. Title insurance refers to past defects that are discovered in the future after the policy goes into effect.
The insurer based on the assumption that no loss will occur writes the policy. Any, known title defects or facts that have a bearing on the title are listed in the policy and excluded from coverage.
The premium is paid only once when the policy is issued. No additional premiums are required even though the policy term runs indefinitely in the future.
The policy term runs indefinitely in the future. As long as title defect occurred before the issue date of the policy, any insured loss is covered no matter when it is discovered in the future.
If a loss occurs, the insured is indemnified in dollar amounts up to the policy limits. The policy does not guarantee possession by the owner-, removal of any title defects, or a legal remedy against known defects
Focus Points
o The Dwelling 77 Program is designed for dwellings that are ineligible for coverage under the standard homeowners’ contracts.
o Dwelling 77 used to insure a one- to four-family building that is occupied as a residence.
o Town homes can be covered if the unit does not exceed four families in size.
o Mobile homes can be insured if the policy period does not exceed one year, and it remains at a permanent location.
o Farm dwellings and dwellings that house more than five boarders cannot be insured under the dwelling forms.
o Mobile homes must be at least ten feet wide and forty feet long to be eligible for coverage.
o The coverage on mobile homes is similar to homeowner’s forms.
o Rate making in marine insurance is not as accurate as life or fire insurance is.
44 o The four types of potential loss exposure insured by marine insurance are hull, cargo, freight, and liability. o The currently definition used for marine insurance was developed in 1953. o Inland marine floater polices protect frequently moved personal property. o PAF’s insure nine-optional classes of property against risks of direct physical loss. o With the exception of fine art, PAF coverage is worldwide. o Newly acquired property is automatically covered for ninety days under a PAF. o PAF article floater can also be added to the homeowner’s policy. o PPF’s provides coverage on unscheduled personal property kept at the insured's residence. o PPF’s cover thirteen classes of unscheduled personal property. o Homeowner’s policies provide limited coverage of boats. o Homeowner’s coverage on a boat, its equipment, and trailer is limited to $ 1000. o Damage resulting from the repair, refinishing, or renovation of the boat or equipment is not covered. o Personal Yacht Insurance is designed for larger boats such as cabin cruisers and inboard motorboats. o Aircraft insurance principles parallel those of ocean marine insurance. o Aircraft insurance protects the hull, freight, cargo and liability exposure. o The Federal Flood Insurance Program was provides flood insurance to persons who reside in flood areas. o FAIR plans typically provide coverage for fire, vandalism, and malicious mischief. o The two federal crime insurance contracts are residential policy and commercial crime policy. o The residential crime policy covers the loss of personal property from a burglary or robbery.
45 o Federal crop insurance provides comprehensive coverage for unavoidable crop losses. o Title insurance protects the insured against any unknown defects in the title to the covered property.
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CHAPTER 4: MOTOR VEHICLE INSURANCE
Automobile accidents can cause financial and economic havoc to individuals and families. Legal liability arising out of the negligent operation of an automobile can reach traumatic levels. Medical expenses, pain and suffering, the death of a family member, and the damage or loss of property, or loss of an automobile can be devastating.
THE TORT LIABILITY SYSTEM AND AUTOMOBILE INSURANCE
Each person has certain legal rights. A legal wrong is a violation of a person's legal rights or a failure to perform a legal duty owned to a certain person or to society as a whole.
A tort is a legal wrong. A tort can be defined as a legal wrong, other than a breach of contract, for which the law allows a remedy in the form of money damages. The person who is injured or harmed (called the plaintiff or claimant) by the actions of another person (called the defendant or tort feasor) can sue for damages.
Torts can generally be classified into three categories:
Intentional Torts
An intentional act or omission that results in harm or injury to another person or damage to the person's property. (Assault, battery, trespass, false imprisonment, fraud.)
Absolute Liability
Means that persons are liable for damages even though fault or negligence cannot be proven. (Occupational injury, blasting operations that injure another person, manufacturing of explosives, crop spraying by airplanes.)
47 Negligence
Negligence is a legal wrong or tort that results in harm or injury to another person. Negligence typically is defined, as the failure to exercise the standard of care required by law to protect others from harm. The meaning of the term “standard of care” is based on the care required of a reasonably prudent person. Actions are compared with the actions of a reasonably prudent person under the same circumstances. The standard of care required by law is not the same for each wrongful act.
Liability coverage is the most important part of the Personal Auto Policy. It protects a covered person against a suit or claim arising out of the negligent ownership or operation of an automobile.
AN OVERVIEW OF THE PERSONAL AUTO POLICY
The Personal Automobile Policy is designed to be the most commonly purchased insurance policy for the average family automobile. The Insurance Services Office first introduced it in 1977. The ISO form of the Personal Automobile Policy is written in simplified English, making it easier to read and understand than earlier contracts. It contains simple definitions and short sentences, highly technical terms have been eliminated, and the policy language is informal and personal.
The Personal Auto Policy emphasizes liability protection, making it the first coverage in the policy rather than the last as in the Homeowners Policy. The nature of the property covered, mobile rather than stationary makes the policies different. The potential number of non-family members using an automobile is greater than those potentially living in the family house. The possibility that the insured may drive several different non-owned automobiles also makes the Personal Auto Policy a more complicated policy with respect to defining 'the insured.
POLICY LAYOUT
The Personal Auto Policy begins with a Declarations page, an insuring agreement, and Definitions. The Declarations identify the named insured, the vehicles covered, and the premium charged for the coverage. The insuring agreement makes the contract effective.
THE DECLARATIONS PAGE
The Declaration section is the first part of an insurance contract. Declarations are statements that provide information about the property being insured. Information contained in the declaration section is used for under-writing and rating purposes and
48 for identification of the property to be insured. The declaration section can be found on the first page of the policy or on a policy insert. In some contracts the declarations are part of the written application that is attached to the policy. In property insurance, the declarations section contains information concerning the identification of the insurer, name of the insured, name of the insured, location of the property, period of protection, amount of insurance, amount of the premium, size of the deductible (if any), and other relevant information.
LIMIT OF LIABILITY
The Declaration page lists a single limit of liability for the insurer, such as $1 00,000. This is the limit for all types of damage an insured may cause, including bodily injury and property damage. If judgments are greater than this limit, the insured, not the insurer, pays the excess.
The Personal Auto Policy may also be written on a split limit basis, i.e. $50,000/$100,000/$25,000. With Coverage A written with split limits of $50,000/$1001000/$25,000, the insurer will pay only $50,000 to any one individual and only$100,000foroneaccident. These amounts are available for bodily injury liability. The $25,000 indicates the amount for property damage liability.
AGREEMENT
In return for payment of the premium and subject to all the terms of this policy, we agree with you as follows:
DEFINITIONS
A. Throughout this policy, “you” and “your” refer to:
1. The "named insured' shown in the Declarations; an 2. The spouse if a resident of the same household.
B. “We,” “us” and “our” refer to the Company providing this insurance. For purposes of this policy, a private passenger type auto shall be deemed to be owned by a person if leased:
1. Under a written agreement to that person; and 2. For a continuous period of at least 6 months.
C. Bodily injury means bodily harm, sickness or disease, including death that results.
49 D. Business includes trade, profession or occupation.
E. Family member means a person related to you by blood, marriage or adoption that is a Resident of your household. This includes a ward or foster child.
F. Occupying means in, upon, getting in, on, out or off.
G. Property damage means physical injury to, destruction of or loss of use of tangible property.
H. Trailer means a vehicle designed to be pulled by a:
1. Private passenger auto; or 2. Pickup or van.
It also means a farm wagon or farm implement while towed by a vehicle listed in1 or 2 above.
ELIGIBLE VEHICLES
Only certain types of vehicles are eligible for coverage under the Personal Auto Policy. An eligible vehicle is a four-wheel motor vehicle (other than truck-type) that is owned by the insured or is leased by the insured for at least six continuous months.
Pickups and vans are also eligible for coverage if the vehicle is not customarily used in the insured's business or occupation other than farming or ranching. A vehicle that is owned by a family farm or ranch partnership or corporation is eligible for coverage if the vehicle is garaged principally on the farm or ranch, and other eligibility requirements are met.
A private passenger automobile owned by two or more resident relatives or two or more non-related individuals together can insure living by adding a miscellaneous type vehicle endorsement to the policy. Motorcycles, motor homes, motor scooters, golf carts, and similar vehicles can be insured under the Personal Auto Policy by adding the same endorsement to the policy.
Your covered auto means:
1. Any vehicle shown in the Declarations.
2. Any of the following types of vehicles on the date you become the owner:
a. A private passenger auto; or b. A pickup or van.
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1. This provision applies only if:
a. You acquire the vehicle during the policy period b. You ask us to insure it within 30 days after you become the owner c. With respect to a pickup or van, no other insurance policy provides coverage for that vehicle.
2. If the vehicle you acquire replaces one shown in the Declarations, it will have the same coverage as the vehicle it replaced. You must ask us to insure a replacement vehicle within 30 days only if:
a. You wish to add or continue Coverage for Damage to Your Auto b. It is a pickup or van used in any “business” other than farming or ranching
3. If the vehicle you acquire is in addition to any shown in the Declarations, it will have the broadest coverage we now provide for any vehicle shown in the Declarations.
4. Any “trailer” you own.
5 Any auto or “trailer” you do not own while used as a temporary substitute for any other vehicle described in this definition which is out of normal use because of its:
a. Breakdown; b. Repair; c. Servicing; d. Loss; or e. Destruction.
SUMMARY OF PERSONAL AUTO POLICY COVERAGES
The insuring agreement is the heart of an insurance contract. The insuring agreement summarizes the major promises of the insurer. In the insuring agreement, the company agrees to pay any damages for bodily injury or property damage for which you are legally responsible because of an automobile accident.
LIABILITY COVERAGE
INSURING AGREEMENT
51 A. We will pay damages for bodily injury or property damage for which any covered person becomes legally responsible because of an auto accident. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted. We have no duty to defend any suit or settle any claim for 'bodily injury' or 'property damage' not covered under this policy.
Liability coverage is generally written as a single limit that applies to both bodily injury and property damage liability. That is, the total amount of insurance applies to the entire accident without a separate limit for each person. The Personal Auto Policy can also be written with split limits. Split limits mean the amounts of insurance for bodily injury liability and property damage are stated separately.
In addition to the payment for damages for which you are legally liable, the company also agrees to defend you and pays all legal defense costs. The defense costs are paid in addition to the policy limits. However, the company's duty to settle or defend the claim ends when the limit of liability has been exhausted. Once the policy limits are paid out, the company has no further obligation to defend you. The company also has no obligation to defend any claim not covered under the policy.
Insured Persons
Coverage is provided for four groups of insurers under the liability section of the Personal Auto Policy.
B. Insured as used in this Part means:
1. You or any “family member” for the ownership, maintenance or use of any auto or “trailer”.
In Category 1 the named insured and resident family members are covered for the ownership, maintenance, or use of any auto, whether it is owned or borrowed, unless exclusions applies.
2. Any person using “your covered auto”.
Category 2 relates to any person using a covered auto. The car owner's insurance, not the driver's insurance, would pay a claim if the owner let somebody borrow his or her car. Coverage on the car involved in an accident is considered primary coverage. If the owners insurance is exhausted by the claim, then the driver could turn to his own insurer to pay the remainder of the claim until his own insurance was exhausted.
52 3. For “your covered auto”, any person or organization but only with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under this part.
4. For any auto or “trailer”, other than 'your covered auto,' any other person or organization but only with respect to legal responsibility for acts or omissions of you or any 'family member 'for whom coverage is afforded under this Part. This provision (B.4.) applies only if the person or organization does not own or hire the auto or 'trailer.'
In Categories 3 and 4 some situations, people or organizations other than a driver can be sued due to a driver’s negligence. In some of these instances the Personal Auto Policy will cover the liability of these people. Assume that a trade union sends a member, John, to buy some supplies for a union picnic. Also assume that John uses his own car. If an accident occurs during this trip, the Personal Auto Policy would cover the trade union's liability in a suit resulting from the accident. The union's liability arises because John was technically an agent of the union while on his way to purchase supplies for the picnic. The difference between Categories 3 and 4 is between the insured driving an owned or non- owned vehicle.
SUPPLEMENTARY PAYMENTS
In addition to our limit of liability, we will pay on behalf of an "insured:”
1. Up to $250 for the cost of bail bonds required because of an accident, including related traffic law violations. The accident must result in 'bodily injury' or 'property damage' covered under this policy.
Premiums on a bail bond can be paid up to $250 because of an automobile accident that results in property damage or bodily injury. Payment would not be made for a traffic violation such as a speeding ticket except if an accident occurs.
2. Premiums on appeal bonds and bonds to release attachments in any suit we defend.
3. Interest accruing after a judgment is entered in any suit we defend. Our duty to pay interest ends when we offer to pay that part of the judgment, which does not exceed our limit of liability for this coverage.
Premiums on an appeal bond and a bond to release an attachment of property in any suit defended by the insurer are also paid as a supplementary payment. If interest accrues after a judgment is handed down, the interest is also paid as supplementary payment. However, any prejudgment interest is part of the liability limits.
53
4. Up to $50 a day for loss of earnings, but not other income, because of attendance at hearings or trials at our request.
5. Other reasonable expenses incurred at our request.
You may be a defendant in a trail and be requested to testify. If you have meal or transportation expenses, they would be paid as a supplemental payment.
EXCLUSIONS
A. We do not provide Liability Coverage for any person:
1. Who intentionally causes “bodily injury” or “property damage”?
If you intentionally run over a bicycle with your car, the property damage is not covered.
2. For damage to property owned or being transported by that person.
If a suitcase or camera were damaged in an automobile accident while a person is on vacation, the damage would not be covered.
3. For damage to property: Rented to; Used by; In the care of that person.
This exclusion (A.3.) does not apply to damage to a residence or private garage.
If you rent some skis that are damaged in an automobile accident, the property damage is not covered. However, if you rent a house and carelessly back into a partly opened garage door, the property damage would be covered.
4. For “bodily injury” to an employee of that person during the course of employment. This exclusion (A.4.) does not apply to 'bodily injury' to a domestic employee unless workers compensation benefits are required or available for that domestic employee.
The intent here is to cover the employee's injury under a workers compensation law.
However, a domestic employee injured during the course of employment would be covered if workers compensation benefits are not required or available.
54 5. For that person's liability arising out of the ownership or operation of a vehicle while it is being used to carry persons or property for a fee. This exclusion (A.5.) does not apply to a share-the-expense car pool.
There is no liability coverage on a vehicle while it is being used to carry persons or property for a fee. If bus drivers or taxicab drivers are on strike and you transport passengers for a fee, your liability coverage does not apply.
6. While employed or otherwise engaged in the “business” of:
Selling; Repairing; Servicing; Storing; Parking.
Vehicles designed for use mainly on public highways. This includes road testing and delivery. This exclusion (A.6.) does not apply to the ownership, maintenance or use of “your covered auto" by:
You; Any family member; Any partner, agent or employee of you or any "family member."
If a person is employed or engaged in the automobile business, liability arising out of the operation of vehicles in the automobile business is excluded. The automobile business refers to the selling, repairing, servicing, storing, or parking of vehicles designed for use mainly on public highways. This also includes road testing and delivery. If an automobile mechanic has an accident and injures someone while road testing your car, your Personal Auto Policy liability coverage does not apply. However, if you are sued because you are the owner of the car, coverage applies. The intent of this exclusion is to exclude loss exposures that should be covered under the employee’s liability policy, such as a garage policy.
7. Maintaining or using any vehicle while that person is employed or otherwise engaged in any “business” (other than farming or ranching) not described in Exclusion A.6. This exclusion (A.7.) does not apply to the maintenance or use of a:
Private passenger auto Pickup or van that you own Trailer used with a vehicle described in a. or b. above
The purpose here is to exclude liability for commercial vehicles and trucks that are used in a business. However, if you drive your car on company business, your Personal Auto Policy liability coverage is in force.
55
8. Using a vehicle without a reasonable belief that the person is entitled to do so.
If your car is stolen, and someone is injured in an ensuing accident, the injured party is covered under your liability policy.
9. For “bodily injury” or “property damage” for which that person:
Is an insured under a nuclear energy liability policy Would be an insured under a nuclear energy liability policy but for its termination upon exhaustion of its limit of liability
A nuclear energy liability policy is a policy issued by any of the following or their successors:
American Nuclear Insurers; Mutual Atomic Energy Liability Underwriters; Nuclear Insurance Association of Canada.
B. We do not provide Liability Coverage for the ownership, maintenance or use of:
1. Any motorized vehicle having fewer than four wheels.
Motorcycles, motor scooters, mini-bikes, mopeds, and trail bikes are excluded under the policy; however, adding a miscellaneous vehicle endorsement to the policy can cover these vehicles.
2. Any vehicle, other than “your covered auto”, which is:
Owned by you; Furnished or available for your regular use.
You can occasionally drive another person's car and still have coverage under your policy. If a non-owned vehicle is driven regularly or is furnished or made available for your regular use, your Personal Auto Policy liability coverage does not apply. If your employer furnishes you with a car, or a car is available for your regular use in a company carpool, the liability coverage does not apply.
3. Any vehicle, other than “your covered auto”, which is:
Owned by any 'family member"; Furnished or available for the regular use of any “family member”.
56 If a son or daughter drives a non-owned vehicle on a regular basis, or the vehicle is furnished or made available for their regular use, the liability coverage does not apply.
However, this exclusion (B.3.) does not apply to your maintenance or use of any vehicle, which is:
Owned by a “family member” or Furnished or available for the regular use of a “family member”
The exclusion does apply to the named insured and spouse, or if a mother occasionally drives a car owned by another household member, i.e., a son or daughter, the mother's Personal Auto Policy provides coverage while driving her son or daughter's car.
LIMIT OF LIABILITY
A. The limit of liability shown in the Declarations for this coverage is our maximum limit of liability for all damages resulting from any one-auto accident. This is the most we will pay regardless of the number of-
"Insureds"; Claims made; Vehicles or premiums shown in the Declarations; Vehicles involved in the auto accident.
B. We will apply the limit of liability to provide any separate limits required by law for bodily injury and property damage liability. However, this provision (B.) will not change our total limit of liability.
The company's maximum limit of liability from any single automobile accident is the amount stated in the declarations. This is true regardless of the number of insureds, claims made, vehicles or premiums shown in the declarations, or vehicles involved in the auto accident.
OUT OF STATE COVERAGE
If an auto accident to which this policy applies occurs in any state or province other than the one in which 'your covered auto' is principally garaged, we will interpret your policy for that accident as follows:
A. If the state or province has:
57 A financial responsibility or similar law specifying limits of liability for “bodily injury” or “property damage” higher than the limit shown in the Declarations, your policy will provide the higher specified limit.
If an accident occurs in a state that has a financial responsibility law with higher liability limits than the limits shown in the declarations, the Personal Auto Policy automatically provides the higher specified limits.
A compulsory insurance or similar law requiring a nonresident to maintain insurance whenever the nonresident uses a vehicle in that state or province, your policy will provide at least the required minimum amounts and types of coverage.
If the state has a compulsory insurance or similar law that requires a nonresident to have insurance whenever he or she uses a vehicle in that state, the Personal Auto Policy also provides the required minimum amounts and types of coverage’s.
B. No one will be entitled to duplicate payments for the same elements of loss.
FINANCIAL RESPONSIBILITY
When this policy is certified as future proof of financial responsibility, this policy shall comply with the law to the extent required.
OTHER INSURANCE
If there is other applicable liability insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide for a vehicle you do not own shall be in excess over any collectible insurance.
In some cases, more than one automobile liability policy covers a loss. If other applicable liability insurance applies to an owned vehicle, the company pays only its pro rate share of the loss. The company's share is the proportion that its limit of liability bears to the total applicable limits of liability under all policies. However, if the insurance applies to a non-owned vehicle, the company's insurance is in excess over any other collectible insurance.
Medical Payments Coverage is an optional accident benefit that can be added to the Personal Auto Policy.
Focus Points
58 o A tort is a legal wrong, for which the law allows a remedy in the form of money damages. o Torts are classified as Intentional, Absolute Liability, or Negligence.
o The Personal Automobile Policy is the most widely purchased policy for the average automobile. o The Personal Auto Policy emphasizes liability protection.
o The Personal Auto Policy consists of a declarations page, an insuring agreement, and Definitions. o The declaration page identifies the insured, vehicles covered, and the premium for the coverage. o The insuring agreement summarizes the major promises of the insurer. o The Personal Auto Policy may be written on a split limit basis. o Split limits mean the amounts of insurance for bodily injury liability and property damage are stated separately.
o Only certain types of vehicles are eligible for Personal Auto Coverage. o Liability coverage is written as a single limit applicable to bodily injury and property damage liability.
59 CHAPTER 5: MEDICAL PAYMENTS COVERAGE
INSURING AGREEMENT
A. We will pay reasonable expenses incurred for necessary medical and funeral services because of “bodily injury”:
Caused by accident; Sustained by an “insured”.
We will pay only those expenses incurred within 3 years from the date of the accident.
The company will pay all reasonable medical and funeral expenses incurred by an insured within three years from the date of the accident. The benefits limits apply to each insured that is injured in the accident.
Medical payments coverage's is not based on fault. If you are injured in an automobile accident and you are at fault, medical payments can still be paid to you and to other injured passengers in the car.
B. “Insured” as used in this Part means:
1. You or any 'family member:'
While "occupying”; As a pedestrian when struck by; a motor vehicle designed for use mainly on public roads or a trailer of any type.
The named insured and family members are covered if they are injured while occupying a motor vehicle or are injured as pedestrians when struck by a motor vehicle designed for use mainly on public roads. If a farm tractor, snowmobile, or bulldozer injures you, your injury is not covered.
2. Any other person while “occupying” “your covered auto”. If an individual owns his car and is the named insured, all passengers in his car are covered for their medical expenses under his policy. However, if the insured is operating a non-owned vehicle, other passengers in the car (other than family members) are not covered for their medical expenses
60 under his policy. The reason for this is to have the other passengers in the non-owned vehicle to seek protection under the medical expense coverage that applies to the non-owned vehicle.
EXCLUSIONS
We do not provide Medical Payments Coverage for any person for “bodily injury”:
1. Sustained while 'occupying' any motorized vehicle having fewer than four wheels.
If you are injured while operating a motorcycle or moped, medical expense coverage does not apply.
2. Sustained while occupying your covered auto when it is being used to carry persons or property for a fee. This exclusion (2) does not apply to a share the expense car pool.
3. Sustained while occupying any vehicle located for use as a residence or premises.
If you own and occupy a house trailer as, a residence, medical expense coverage does not apply to injuries arising out of use of that vehicle.
4. Occurring during the course of employment if workers compensation benefits are required or available for the “bodily injury”.
Coverage does not apply if the injury occurs during the course of employment and workers compensation benefits are required or available.
5. Sustained while occupying or when struck by, any vehicle (other than your covered auto) which is:
Owned by you; Furnished or available for your regular use.
The purpose here is to exclude medical payments coverage on an owned or regularly used car that is not described in the policy and for which an appropriate premium has not been paid.
6. Sustained while “occupying”, or when struck by, any vehicle (other than 'your covered auto') which is:
Owned by any 'family member" ; Furnished or available for the regular use of any family member.
61 However, this exclusion (6) does not apply to you. If a son living at home owns a car that is separately insured, and the parents are injured while occupying the son's car, the parent's medical expenses would be covered under their policy. ,
7. Sustained while 'occupying' a vehicle without a reasonable belief that that person is entitled to do so.
If a covered auto is stolen, the thief has no coverage for medical payments.
8. Sustained while occupying a vehicle when it is being used in the business of an insured. This exclusion (8) does not apply to “bodily injury” sustained while “occupying” a:
Private passenger auto; Pickup or van that you own; “Trailer” used with a vehicle described in a or b. above.
The purpose here is to exclude medical payments coverage for non-owned trucks and commercial vehicles used in the business of an insured person. The exclusion does not apply to a private passenger auto (owned or non-owned), an owned pickup or van, or trailer used with any of the preceding vehicles.
9. Caused by or as a consequence of:
Discharge of a nuclear weapon (even if accidental); War (declared or undeclared); Civil war; Insurrection; Rebellion or revolution.
10. From or as a consequence of the following, whether controlled or uncontrolled or however caused
Nuclear reaction; Radiation; Radioactive contamination.
If you are driving your car in the vicinity of a nuclear power plant and a nuclear meltdown occurs, the radiation exposure is not covered.
LIMIT OF LIABILITY
A. The limit of liability shown in the Declarations for this coverage is that our maximum limit of liability for each person injured in any one accident. This is the most we will pay regardless of the number of:
62 “Insureds”; Claims made; Vehicles or premiums shown in the Declarations; Vehicles involved in the accident.
B. Any amounts otherwise payable for expenses under this coverage shall be reduced by any amounts paid or payable for the same expenses under Part A or Part C.
C. No payment will be made unless the injured person or that person's legal representative agrees in writing that any payment shall be applied toward any settlement or judgment that person receives under Part A or Part C.
OTHER INSURANCE
If there is other applicable auto medical payments insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide with respect to a vehicle you do not own shall be excess over any other collectible auto insurance providing payments for medical or funeral expenses.
Some people drive without liability insurance. The uninsured motorists coverage is designed to pay for the bodily injury (and property damage in some states) caused by an uninsured motorist, hit-and-run driver, or by a driver whose company is insolvent.
UNINSURED MOTORISTS COVERAGE
INSURING AGREEMENT
A. We will pay damages which an “insured” is legally entitled to recover from the owner or operator of an “uninsured motor vehicle” because of “bodily injury”:
Sustained by an “insured”; Caused by an accident.
The owner's or operator’s liability for these damages must arise out of the ownership, maintenance or use of the 'uninsured motor vehicle.'
Any judgment that is for damages arising out of a suit brought without our written consent is not binding on us. The company pays the damages that an insured person is legally entitled to receive from the owner or operator of an uninsured motor vehicle because of bodily injury caused by an accident. However, the
63 coverage applies only if the uninsured motorists are legally liable. If the uninsured motorists are not liable, the company will not pay for the bodily injury.
B. “Insured” as used in this Part means:
You or any “family member”; Any other person “occupying” your covered auto; Any person for damages that person is entitled to recover because of “bodily injury” to which this coverage applies sustained by a person described in 1 or 2 above.
C. “Uninsured motor vehicle” means a land motor vehicle or trailer of any type:
To which no bodily injury liability bond or policy applies at the time of the accident; To which bodily injury liabilities bond or policy applies at the time of the accident. In this case its limit for bodily injury liability must be less than the minimum limit for bodily injury liability specified by the financial responsibility law of the state in which “your covered auto” is principally garaged.
This means the maximum amount paid for a bodily injury usually is limited to the state's financial responsibility or compulsory insurance law requirements.
Which is a hit and run vehicle whose operator or owner cannot be identified and which hits:
You or any family member; A vehicle which you or any family member are occupying or; Your covered auto.
If a hit-and-run driver while occupying a covered auto, non-owned auto or while walking strikes the named insured or any family member, the uninsured motorists coverage will pay for the injury.
To which bodily injury liabilities bond or policy applies at the time of the accident at the bonding or insuring company:
Denies coverage; Is or becomes insolvent.
However, “uninsured motor vehicle” does not include any vehicle or equipment:
Owned by or furnished or available for the regular use of you or any “family member”; Owned or operated by a self-insurer under any applicable motor vehicle law;
64 Owned by any government unit or agency; Operated on rails or crawler treads; Designed mainly for use off public roads while not on public roads; While located for use as a residence or premises.
EXCLUSIONS
A. We do not provide Uninsured Motorists Coverage for “bodily injury” sustained by any person:
While “occupying”, or when struck by, any motor vehicle owned by you or any 'family member' which is not insured for this coverage under this policy. This includes a trailer of any type used with that vehicle.
The reason for this exclusion is to prevent “free” uninsured motorists coverage on automobiles owned by the named insured or family member.
If that person or the legal representative settles the “bodily injury” claim with our consent.
If a person settles a bodily injury claim without the company's consent, coverage does not apply. The purpose of this exclusion is to protect the company's interest in the claim.
While “occupying” “your covered auto” when it is being used to carry persons or property for a fee. This exclusion (A.3.) does not apply to a share-the-expense car pool. Using a vehicle without a reasonable belief that that person is entitled to do so. If a thief steals your car and is later injured by an uninsured motorist, the thief is not covered under your policy.
B. This coverage shall not apply directly or indirectly to benefit any insurer or Self-insurer under any of the following or similar law:
Workers compensation law; Disability benefits law.
The uninsured motorist coverage cannot directly or indirectly benefit a workers compensation insurer or self-insurer. A workers compensation insurer may have a legal right of action against a third party who has injured an employee. If an uninsured driver injures an employee who receives workers compensation benefits, the workers compensation insurer could sue the uninsured driver or attempt to make a claim under the injured employee's uninsured motorist
65 coverage. This exclusion prevents the uninsured motorist coverage from providing benefits to the workers compensation insurer.
LIMIT OF LIABILITY
A. The limit of liability shown in the Declarations for this coverage is our maximum limit of liability for all damages resulting from any one accident. This is the most we will pay regardless of the number of:
“Insureds”; Claims made; Vehicles or premiums shown in the Declarations; Vehicles involved in the accident.
B. Any amounts otherwise payable for damages under this coverage shall be reduced by all sums:
1. Paid because of the “bodily injury” by or on behalf of persons or organizations that may be legally responsible. This includes all sums paid Under Part A; and
2. Paid or payable because of the “bodily injury” under any of the following or similar law:
Workers compensation law; Disability benefits law.
C. Any payment under this coverage will reduce any amount that person is entitled to recover for the same damages under Part A.
The amount paid under the uninsured motorist’s coverage can be reduced under certain conditions. The amount paid is reduced by any sums paid by the negligent driver or organization legally responsible for the accident or by any benefits payable under workers compensation, disability benefits, or similar law.
OTHER INSURANCE
If there is other applicable similar insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide with respect to a vehicle you do not own shall be excess over any other collectable insurance.
66 UNDERINSURED MOTORIST COVERAGE
The underinsured motorist coverage can be added to the Personal Auto Policy to provide more complete protection. This coverage pays damages for a bodily injury caused by the ownership or operation of an underinsured vehicle. The maximum amount paid under this coverage is the underinsured motorists limit less the amount paid by the negligent driver's insurer.
Under insurance Motorist Coverage and Uninsured Motorist Coverage are exclusive and do not duplicate each other. An insured can collect on one coverage or the other, but not both.
The conditions that must be satisfied before an underinsured motorist’s coverage can be written are:
Higher uninsured motorist coverage limits must be carried than the limits required by the state's financial responsibility or compulsory insurance law.
Both the uninsured and the Underinsured motorist coverage must be written for the same amount of insurance.
The underinsured motorist coverage must apply to all automobiles covered under the policy.
ARBITRATION
A. If an “insured” and we do not agree:
Whether that person is legally entitled to recover damages under this Part;
As to the amount of damages.
Either party may make a written demand for arbitration. In this event, each party will select an arbitrator. The two arbitrators will select a third. If they cannot agree within 30 days, either may request that a judge of a court having jurisdiction make selection.
B. Each party will:
Pay the expenses it incurs; Bear the expenses of the third arbitrator equally.
67 C. Unless both parties agree otherwise, arbitration will take place in the county in which the “insured” lives. Local rules of law as to procedure and evidence will apply. A decision agree to by two of the arbitrators will be binding as to:
Whether the “insured” is legally entitled to recover damages;
The amount of damages. This applies only if the amount does not exceed the minimum limit for bodily injury liability specified by the financial responsibility law of the state in which “your covered auto” is principally garaged. If the amount exceeds that limit, either party may demand the right to a trial. This demand must be made within 60 days of the arbitrator decision. If this demand is not made, the amount of damages agreed to by the arbitrators will be binding.
PART D – COVERAGE FOR DAMAGE TO YOUR AUTO
A. We will pay for direct and accidental loss to "your covered auto' or any 'non- owned auto,' including their equipment, minus any applicable deductible shown in the Declarations. We will pay for loss to "your covered auto' caused by:
Other than “collision” only if the Declarations indicate that Other Than Collision Coverage is provided for that auto;
Collision only if the Declarations indicate that Collision Coverage is provided for that auto.
If there is a loss to a “non-owned auto”, we will provide the broadest coverage applicable to any “your covered auto” shown in the Declarations.
The company agrees to pay for any direct and accidental loss to a covered auto or any non-owned auto, including its equipment, less any applicable deductible. A covered auto can be insured for both (1) a collision loss and (2) an other than collision loss (formerly called comprehensive). A collision loss is covered only if the declaration page indicates that collision coverage is provided for that auto. Coverage for an other than collision loss is in force only if the declarations page indicates that other than collision coverage is provided for that auto. If both coverage’s are selected, the premium for each coverage is shown separately on the declaration page.
B. “Collision” means the upset of your covered auto or its impact with another vehicle or object.
68 Collision losses are paid regardless of fault. If the insured causes the accident, the insurer will pay for the damage to his car, less any deductible. If another driver damages his car, he can collect from the negligent driver (or the negligent driver's insurer), or from his insurer. If an insured collects from his own company, he must give up subrogation rights to the company.
Loss caused by the following is considered other than “collision”:
Missiles or failing objects; Fire; Theft or larceny; Explosion or earthquake; Windstorm; Hail, Water or Flood; Malicious mischief; Riot or Civil Commotion; Contact with bird or animal; Breakage of glass.
If breakage of glass is caused by a “collision”, you may elect to have it considered a loss caused by “collision”.
This is important because both coverage's (collision loss and other-than-collision loss) may be written with deductibles. Without this qualification, an insured would have to pay two deductibles if the car had both body damage and glass breakage in the same accident (assuming both coverage’s are elected). By treating glass breakage as part of the collision loss, only one deductible has to be satisfied.
C. “Non-owned auto” means any private passenger auto, pickup, van or trailer, not owned by or furnished or available for the regular use of you or any family member while in the custody of or being operated by you or any family member. However, “non-owned auto” does not include any vehicle used as temporary substitute for a vehicle you own which is out of normal use because of its:
Breakdown; Repair; Servicing; Loss; Destruction.
A non-owned auto is defined as any private passenger auto, pickup, van or trailer not owned by or furnished or made available for the regular use of the named insured or family member, while it is in the custody of or is being operated by the named insured or family member.
69 The key point is not how frequently you drive a non-owned auto, but whether the vehicle is furnished or made available for your regular use.
Note: Part D coverage’s that apply to a covered auto also apply to a temporary substitute vehicle for that auto.
TRANSPORTATION EXPENSES
In addition, we will pay up to $10 per day, to a maximum of $300, for transportation expenses incurred by you. This applies only in the event of the total theft or “your covered auto”. We will pay only transportation expenses incurred during the period:
Beginning 48 hours after the theft;
Ending when “your covered auto” is returned to use or we pay for its loss.
Payments can be for a train, bus, taxi, rental car, or any other transportation expense.
EXCLUSIONS
We will not pay for:
1. Loss to 'your covered auto’, which occurs while ft, is used to carry persons or property for a fee. This exclusion (1) does not apply to a share-the-expense car pool.
2. Damage due and confined to:
Wear and tear; Freezing; Mechanical or electrical breakdown or failure; Road damage to tires.
This exclusion (2) does not apply if the damage results from the total theft of “your covered auto”. The intent of this exclusion is to cover tire defects under the tire manufacturer warranty and to exclude normal maintenance costs of operating an automobile.
3. Loss due to or as a consequence of-
Radio active contamination; Discharge of any nuclear weapon (even if accidental); War (declared or undeclared); Civil war;
70 Insurrection; Rebellion or revolution.
4. Loss to equipment designed for the reproduction of sound. This exclusion (4) does not apply if the equipment is permanently installed in “your covered auto” or any “non-owned auto”.
5. Loss to tapes, records or other devices for use with equipment designed for the reproduction of sound.
An endorsement can be added that covers tapes, records, or other devices owned by the named insured or family members.
6. Loss to a camper body or “trailer” you own whish is not shown in the Declarations. This exclusion (6) does not apply to a camper body or "trailer" you:
Acquire during the policy period;
Ask us to insure within 30 days after you become the owner.
7. Loss to any non-owned auto or any vehicle used as a temporary substitute for a vehicle you own, when used by you or any family member without a reasonable belief that you or that family member is entitled to do so.
8. Loss to:
TV antennas; Awnings or cabanas;; Equipment designed to create additional living facilities Loss to any of the following or their accessories; Citizens band radio; Two-way mobile radio; Telephone; Scanning monitor receiver.
This exclusion (8) does not apply if the equipment is permanently installed in the opening of the dash or console of “your covered auto” or any “non-owned auto." The auto manufacturer for the installation of a radio must normally use this opening.
9. Losses to any custom furnishings or equipment in or upon any pick up or van. Custom furnishings or equipment include but are not limited to:
Special carpeting and insulation, furniture, bars or television receivers;
71 Facilities for cooking and sleeping; Height-extending roofs; Custom murals, paintings or other decals or graphics.
A special customizing equipment endorsement can be added that covers the excluded furnishings or equipment by payment of an additional premium.
10. Loss to equipment designed or used for the detection or location of radar.
This exclusion has been enacted because radar detection equipment is designed, and has been used, to circumvent state and federal speed laws.
11. Loss to any "non-owned auto” being maintained or used by any person while employed or otherwise engaged in the “business” of:
Selling; Repairing; Servicing; Storing; Parking.
…vehicles designed for use on public highways. This includes road testing and delivery.
The above are business loss exposures that should be covered under a commercial garage policy.
12. Loss to any “non-owned auto” being maintained or used by any person while employed or otherwise engaged in any “business” not described in exclusion (11). This exclusion (12) does not apply to the maintenance or use by you or any “family member” of a “non-owned auto” which is a private passenger auto or “trailer”.
The above is a business loss exposure that should be insured by a commercial policy covering the “business”. This exclusion does not apply to a non-owned auto, which is a private passenger auto or trailer.
LIMIT OF LIABILITY
A. Our limit of liability for loss will be the lesser of the:
Actual cash value of the stolen or damaged property; or Amount necessary to repair or replace the property.
72 However, the most we will pay for loss to any “non-owned auto” which is a “trailer” is $500.
The actual cash value of the vehicle at the time of loss is determined by adjusting for depreciation and the physical condition of the damaged property. If the vehicle is declared a total loss, the amount paid is the actual cash value of the vehicle (less any deductible).
B. An adjustment for depreciation and physical condition will be made in determining actual cash value at the time of loss.
PAYMENT OF LOSS
We may pay for loss in money or repair or replace the damaged or stolen property. We may, at our expense, return any stolen property to:
You; The address shown in this policy.
If we return stolen property we will pay for any damage resulting from the theft. We may keep all or part of the property at an agreed or appraised value.
In the case of an expensive antique or customized car, a stated amount endorsement can be inserted in the policy. This endorsement does not create a valued policy. if the stated amount of insurance is less than the actual cash value of the car, or the amount of insurance is paid, (less any deductible). If the stated amount of insurance exceeds the actual cash value of the car, or the amount necessary to repair or replace the car, the lower of these latter two figures is the amount paid (less any deductible).
NO BENEFIT TO BALLEE
This insurance shall not directly or indirectly benefit any carrier or other bailee for hire.
OTHER INSURANCE
If other insurance also covers the loss we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide with respect to a “non-owned auto” or any vehicle used as a temporary substitute for a vehicle you own shall be excess over any other collectible insurance.
73 APPRAISAL
A. If you and we do not agree on the amount of loss, either may demand an appraisal of the loss. In this case, each party will select a competent appraiser. The two appraisers will select an umpire. The appraisers will state separately the actual cash value and the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will:
Pay its chosen appraiser; Bear the expenses of the appraisal and umpire equally.
B. We do not waive any of our rights under this policy by agreeing to an appraisal.
DUTIES AFTER AN ACCIDENT OR LOSS
A. We must be notified promptly of how, when and where the accident or loss happened. Notice should also include the names and addresses of any injured persons and of any witnesses.
B. A person seeking any coverage must:
1. Cooperate with us in the investigation, settlement or defense of any claim or suit. 2. Promptly send us copies of any notices or legal papers received in connection with the accident or loss. 3. Submit, as often as we reasonably require to physical exams by physicians we select. We will pay for these exams.
a. To examination under oath and subscribe to the same.
4. Authorize us to obtain:
a. Medical reports b. Other pertinent records.
5. Submit a proof of loss when required by us.
C. A person seeking Uninsured Motorist Coverage must also:
Promptly notify the police if a hit and run driver is involved; Promptly send us copies of the legal papers if a suit is brought.
D. A person seeking Coverage for Damages to Your Auto must also:
74 Take reasonable steps after the loss to protect “your covered auto” and its equipment from further loss. We will pay reasonable expenses incurred to do this; Promptly notify the police if “your covered auto” is stolen; Permit us to inspect and appraise the damaged property before its repair and disposal.
Under no circumstances should the insured admit that he caused the accident. The question of negligence and legal liability will be resolved by the insurers involved (or court of law if necessary) and not by the insured. The insured does not have the right to admit that he is responsible for the accident.
Failure to report an accident promptly to your insurer could jeopardize your coverage if the other driver later sues you.
GENERAL PROVISIONS
BANKRUPTCY
Bankruptcy or insolvency of the “insured” shall not relieve us of any obligations under this policy.
CHANGES
This policy contains all the agreements between you and us. Its terms may not be changed or waived except by endorsement issued by us. If a change requires a premium adjustment, we will adjust the premium as of the effective date of change. We may revise this policy form to provide more coverage without additional premium charge. If we do this, your policy will automatically provide the additional coverage, as of the date the revision is effective in your state.
FRAUD
We do not provide coverage for any “insured” that has made fraudulent statements or engaged in fraudulent conduct in connection with any accident or loss for which coverage is sought under this policy.
LEGAL ACTION AGAINST US
75 A. No legal action may be brought against us until there has been full compliance with all the terms of this policy. In addition, under Part A, no legal action may be brought against us until:
We agree in writing that the “Insured'” has an obligation to pay; or The amount of that obligation has been finally determined by judgment after trial.
B. No person or organization has any right under this policy to bring us into any action to determine the liability of an “insured”.
OUR RIGHT TO RECOVER PAYMENT
A. If we make a payment under this policy and the person to or for whom payment was made has a right to recover damages from another we shall be subrogated to that right. That person shall do:
1. Whatever is necessary to enable us to exercise our rights; and
2. Nothing after loss to prejudice them.
However, our right in this paragraph (A) does not apply under Part D, against any person using “your covered auto” with a reasonable belief that that person is entitled to do so.
B. If we make a payment under this policy and the person to or for whom payment is made recovers damages from another that person shall:
1. Hold in trust for us the proceeds of the recovery, and
2. Reimburse us to the extent of our payment.
POLICY PERIOD AND TERRITORY
A. This policy applies only to accidents and losses, which occur:
1. During the policy period as shown in the Declarations 2. Within the policy territory
B. The policy territory is:
1. The United States of America, its territories or possessions 2. Puerto Rico
76 3. Canada
This policy also applies to loss to, or accidents involving, “your covered auto” while being transported between their ports.
TERMINATION
A. Cancellation. This policy may be cancelled during the policy period as follows:
1. The named insured shown in the Declarations may cancel by:
Returning this policy to us; Giving us advance written notice of the date cancellation is to take effect.
2. We may cancel by mailing to the named insured shown in the Declarations at the address shown in this policy:
At least 10 days notice; If cancellation is for nonpayment of premium; If notice is mailed during the first 60 days this policy is in effect and this is not a renewal or continuation policy; or at least 20 days notice in all other cases.
3. After this policy is in effect for 60 days, or if this is a renewal or continuation policy, we will cancel only:
a. For nonpayment of premium b. If your drivers license or that of
1. Any driver who lives with you 2. Any driver who customarily uses your covered auto has been suspended or revoked.
This must have occurred:
1. During the policy period; or 2. Since the last anniversary of the original date if the policy period is other than 1 year, or
c. if the policy was obtained through material misrepresentation.
B. Non-renewal. If we decide not to renew or continue this policy, we will mail notice to the named insured shown in the Declarations at the address shown
77 in this policy. Notice will be mailed at least 20 days before the end of the policy period. If the policy Period is other than 1 year, we will have the right not to renew or continue it only at each anniversary of its original effective date.
C. Automatic Termination. If we offer to renew or continue and you or your representative does not accept, this policy will automatically terminate at the end of the policy period. Failure to pay the required renewal or continuation premium when due shall mean that you have not accepted our offer.
If you obtain other insurance on “your covered auto”, any similar insurance provided by this policy will terminate as to that auto on the effective date of the other insurance.
D. Other Termination Provisions.
1. If the law in effect in your state at the time this policy is issued, renewed or continued:
Requires a longer notice period; Requires a special form of or procedure for giving notice; or Modifies any of the stated termination reasons; We will comply with those requirements.
2. We may deliver any notice instead of mailing it. Proof of mailing of any notice shall be sufficient proof of notice.
3. If this policy is cancelled, you may be entitled to a premium refund. If so, we will send you the refund. The premium refund, if any, will be computed according to our manuals. However, making or offering to make the refund is not a condition of the cancellation.
3. The effective date of cancellation stated in the notice shall become the end of the policy period.
TRANSFER OF YOUR INTEREST IN THIS POLICY
A. Your rights and duties under this policy may not be assigned without our written consent. However, if a named insured shown in the Declarations dies, coverage will be provided for:
The surviving spouse if resident in the same household at the time of death. Coverage applies to the spouse as if a named insured shown in the Declarations;
78
The legal representative of the deceased person as if a named insured shown in the Declarations. This applies only with respect to the representative's legal responsibility to maintain or use “your covered auto”
B. Coverage will only be provided until the end of the policy period.
TWO OR MORE AUTO POLICIES
If this policy and any other auto insurance policy issued to you by us apply to the same accident, the maximum limit of our liability under all the policies shall not exceed the highest applicable limit of liability under any one policy.
INSURING MOTORCYCLES AND OTHER VEHICLES
The personal auto policy does not provide coverage for motorcycles, motor homes or off-road vehicles. A Miscellaneous type vehicle endorsement can be added to the Personal Auto Policy to provide coverage to motorcycles, motor homes, mopeds, golf carts, dune buggies, and other vehicles not covered under this policy. Snowmobiles and large trucks however cannot be added to the policy with the miscellaneous type vehicle endorsements It provides the same coverage’s that are found in the Personal Auto Policy, and it has a schedule that describes the vehicle to be covered, the limits of liability for each coverage, and the premium owed.
If the miscellaneous type vehicle endorsement is added to the Personal Auto Policy, there are certain conditions that should be brought to the policyholder attention.
First, liability coverage does not apply to a non-owned motorcycle with his permission, however, liability coverage does not apply is the insured is operating a non-owned motorcycle.
Second, property damage to a non-owned vehicle is excluded; a borrowed or rented vehicle would not be covered.
Third, passenger hazard exclusion is available; this excludes liability for bodily injury to any passenger on the vehicle. The election of this exclusion reduces the premium.
Finally, the amount paid for any physical damage losses to the vehicle is limited to the lowest the stated amount shown in the endorsement, (2) the actual cash value, or (3) the amount necessary to repair or replace the property (less any deductible).
79 APPROACHES FOR COMPENSATING AUTOMOBILE ACCIDENT
VICTIMS
1. Financial Responsibility Laws. This requires persons to furnish proof of financial responsibility up to certain minimum dollar limits.
Financial responsibility laws can be divided into two broad categories:
Security-type laws; Security and proof method.
Under a security-type law, a person involved in an automobile accident is required to furnish proof of financial responsibility up to certain minimum dollar limits. Purchasing an automobile liability policy for the specified limits, by posting a bond, depositing securities, can do this or money in the amount required by law, or by showing that the person is a qualified self-insurer.
Under the security-and-proof method, the driver's license and vehicle registration can be suspended unless the involved person submits security to pay for a judgment arising out of a current accident and also shows proof of financial responsibility for future accidents. Both conditions must be met before the driver's license and registration is restored.
Some flaws in the financial responsibility laws are:
There is no guarantee that all accident victims will be paid. Financial responsibility laws normally have no penalties other than the loss of driving privileges;
Accident victims may not be fully indemnified for their injuries. Most financial responsibility laws require only minimum liability insurance limits. If the bodily injury exceeds the minimum limit, the accident victim may not be fully compensated;
There may be considerable delay in compensating the accident victim if the case goes to trial.
2. Compulsory Insurance Laws. These laws require the owners and operators of automobiles to carry automobile liability insurance at least equal to a certain amount before the automobile can be registered and licensed. More than half of the states have enacted some type of compulsory automobile liability insurance law as a condition for driving with within the state.
80 Compulsory insurance laws are considered superior to financial responsibility laws because they provide a stronger guarantee of protection to the public against loss.
However, compulsory insurance laws do have their flaws:
A compulsory insurance law may not reduce the number of uninsured motorists. Drivers may let their insurance lapse after their vehicle is licensed.
Compulsory laws do not provide complete protection. The laws require only a minimum amount of liability insurance, which may not meet the full needs of the victims.
Payment to all injured persons is not guaranteed. Some injured victims may not be compensated because an out-of-state, uninsured driver injures them.
Compulsory laws do not prevent or reduce the number of automobile accidents, which is the heart of the automobile accident problem.
3. Unsatisfied Judgment Funds. Maryland, Michigan, New Jersey, New York, and North Dakota have established unsatisfied judgment funds for compensating innocent accident victims. An unsatisfied judgment fund is a fund established by the state to compensate victims who have exhausted all other means of recovery. To receive compensation from the unsatisfied judgment fund, first, the accident victim must obtain a judgment against the negligent motorist who caused the accident and must show that the judgment cannot be collected.
Second, the negligent motorist is not relieved of legal liability when payments are made out of the fund. The negligent motorist must repay the fund or lose his or her driver's license until the fund is reimbursed.
4. Uninsured Motorist Coverage. The insurer agrees to pay the accident victim who has a bodily injury (or property damage) caused by an uninsured motorist, by a hit-and-run driver, or by a driver whose company is insolvent.
5. No-Fault Automobile Insurance.
No-fault insurance means that after an automobile accident each party collects from his or her own insurer, regardless of fault. It is not necessary to determine who is at fault and prove negligence before a loss payment is made. A true no- fault law places some restrictions on the right to sue the negligent driver who actually caused the accident. If a claim is below a certain dollar threshold, ($2,500 for example) the motorist would not be permitted to sue but would in
81 stead collect from his or her own insurer. If the injury exceeds the threshold amount, the injured person has the right to sue the negligent driver for dam ages. A verbal threshold means that a suit for damages is allowed only in serious cases, such as those involving death, dismemberment, disfigurement, or permanent loss of a bodily member or function.
Under a pure no-fault law, the injured cannot sue at all, regardless of the serous ness of the claim, and no payments are made for pain and suffering. In effect, the tort liability system is abolished. The insured person receives unlimited benefits from his or her own insurer for medical expenses and the loss of wages. No state has enacted a pure no-fault law at this time.
Under a modified no-fault law an insured person has the right to sue a negligent driver only if the claim exceeds the monetary or verbal threshold.
An add-on plan pays benefits to an accident victim without regard to fault, but the injured person still has the right to sue the negligent driver who caused the accident.
6. Arguments for no-fault laws.
Difficulty of determining fault. Most accidents occur suddenly and unexpectedly, and details surrounding them can seldom be accurately determined;
Limited scope of reparations system. Smaller claims may be over paid, while serious claims may be underpaid. Small claims may be over compensated because inflated settlements cost insurers less than taking claims into court;
Large proportion of premium dollars used to pay legal costs. For each dollar of liability insurance premium collects, 23 cents were used for the salaries and fees of defense attorneys, plaintiffs' attorneys, claims investigators, and other claim costs. Only 44 cents go to automobile accident victims to compensate them for their losses;
Delay in payments. Large numbers of claims may not be promptly paid because of investigations, negotiations, and wafting for court dates. Seriously injured persons or their survivors had to wait an average of sixteen months for final payment from automobile liability insurance.
7. Arguments against no-fault laws.
The defects of the negligence system are exaggerated; Claims of efficiency and premium savings are exaggerated;
82 Safe drivers may be penalized; The present system needs only to be reformed.
8. Basic characteristics of no-fault laws.
a. About half the states have some type of no-fault insurance plan in existence. The majority of states have modified no-fault plans where restrictions are placed on the right to sue.
b. No-fault benefits are provided by adding an endorsement to the automobile insurance policy. The endorsement is typically called personal injury protection coverage. The following no-fault benefits are typically provided:
1. Medical expenses usually paid up to some maximum limit.
2. No-fault benefits are made for a stated percentage of the disabled person's weekly or monthly earnings, with a maximum limit in term of time and duration. 3. Benefits are also paid for essential services expenses for certain services ordinarily performed by the injured person.
4. Funeral expenses are also paid up to some limit.
5. Survivors' loss benefits can also be paid to eligible survivors, such as a surviving spouse and dependent children.
Although no-fault laws contain some defects, the original objectives of these laws generally are being attained.
AUTOMOBILE INSURANCE FOR HIGH-RISK DRIVERS
Drivers who have difficulty in obtaining automobile insurance through normal market channels have an opportunity to obtain automobile insurance in the residual market (the shared market). In this market automobile insurers participate to make insurance available to drivers unable to obtain coverage in the standard market.
Automobile Insurance Plans (Assigned Risk Plans) Under this arrangement, all automobile insurers in the state are assigned their proportionate share of high-risk drivers based on the amount o automobile liability insurance premiums written in the state.
First, persons applying for insurance in an automobile insurance plan must show that they have tried but were unsuccessful in obtaining automobile insurance within sixty days of the date of application.
83 Responsibility law requirements
Second, the premiums paid for the insurance are substantially higher than the insurance obtained in the voluntary markets.
Finally, a company is not required to insure a high-risk driver for more than three years.
The major advantage of the Assigned Risk Plan is that a high-risk driver generally has at least one source for obtaining liability insurance
The major disadvantages of automobile insurance plans include then following:
First, despite higher premiums paid by high-risk drivers, the automobile insurance plans have incurred substantial underwriting losses.
Second, high premiums may cause many high-risk drivers to go uninsured.
Third, the driver does not have a choice of insurers.
Joint Underwriting Associations, (JUA)
A joint underwriting association is an organization of automobile Insurers operating in the state in which high-risk business is placed in a common pool, and each company pays its pro-rate share of pool losses and expenses. Florida, Hawaii, Michigan, Missouri, and New Jersey have established joint underwriting associations to make automobile insurance available to high-risk drivers.
Reinsurance Facilities
Under this arrangement, the company must accept all applicants for insurance a both good and bad drivers. If the applicant is considered high-risk drivers the company has the option of placing the driver in the reinsurance pool. In the past, the reinsurance facilities have experienced substantial underwriting losses.
Maryland Automobile Insurance Fund
The Maryland Automobile Insurance Fund was created in 1973 for the purpose of providing insurance for state motorists who could not obtain insurance in the voluntary markets. The state fund came into existence because of high rates charged by private insurers, large number of motorists who had been placed in the assigned risk plan, and difficulties in obtaining insurance by high-risk drivers.
84 Specialty Automobile Insurers
Specialty Automobile insurers are companies that specialize in insuring motorists with poor driving records. These companies typically insure drivers who have been cancelled or refused insurance, teenage drivers and drunk drivers. The premiums are substantially higher than premiums paid in the normal or standard markets.
COST OF AUTOMOBILE INSURANCE
There are a number of major factors for determining the rates of private passenger automobile premiums.
Territory
Each state is divided into rating territories; a large city, a suburb, or a rural area. Largely, the territory where the automobile is principally sued and garaged determines the base rate.
Age, Sex, and Marital Status
Most states permit three factors to be used in determining premiums. Age is an important rating since young drivers account for a disproportionate number of accidents. Young male drivers who own or are the principal operators of automobiles normally pay the highest rates, since this group has the highest accident rate and the most costly accidents.
Use of the Automobile
Insurers classify automobiles on the basis of the purpose for which the car is driven.
Pleasure use; not used in business or driven to work less than a specified distance, for example, less than three miles one way;
Driven to work; not use in business but driven less Han a specified number of miles to work each day;
Business use; customarily used in business or professional pursuits;
Farm use; garaged on a farm or ranch, and not used in any other business or driven to school or other work;
85 A car classified for farm use has the lowest rating factor, using a car for business purposes requires a higher rating factor.
Driver Education
This discount is based on the premise that driver education courses for teenage drivers can reduce accidents and hold down insurance costs.
Good Student Discount
This discount is available form a limited number of companies and is based on the premise that good students are better drivers. To qualify the driver must be a full4ime high school or college student and be at least sixteen years of age. A school official must sign a form certifying that the student has met the scholastic requirements.
Number and Type of Automobiles
The multi-car discount is based on the assumption that two cars owned by the same person will not be driven as frequently as only one car owned by the same person. the year, make and model of the cars also affect the cost of insurance on the car.
Individual Driving Record
Some companies offer safe driver plans where the premiums paid are based on the individual driving record of the insured and operators who live with the insured. In states that have an accident point system, the actual premium paid may be based on' the total number of accumulated points assessed against the insured's driving record.
Purchase Higher Deductibles
If the insured purchases a higher deductible on collision and comprehensive insurance, the premium can be reduced by as much as twenty percent.
Improve Your Driving Record
A clean driving record covering the previous three years can substantially reduce the premiums of a high-risk driver. A conviction for drunk driving can be extremely costly when purchasing automobile insurance.
86
SUMMARY
Approximately $1 00 Billion a year in damage is estimated to be caused by automobile accidents. This damage includes destroyed property, medical and funeral expenses, and the lost income of people involved in accidents.
87 CHAPTER 6: UMBRELLA POLICY QUESTIONS
WHY WOULD I NEED AN UMBRELLA POLICY?
There are many situations where a standard liability policy is simply not enough coverage. An umbrella policy allows you to protect yourself against major lawsuits in two ways. First, the umbrella provides excess liability over underlying coverage. Second, the umbrella provides liability coverage that may be excluded by homeowners or auto policies.
WHAT IS A PERSONAL UMBRELLA POLICY?
Often times referred to as a personal catastrophe policy, a personal umbrella policy, supplements the basic personal liability coverage provided under homeowners and auto policies. The umbrella was created to protect people from large losses.
WHAT SPECIAL PROTECTION IS AFFORDED BY AN UMBRELLA POLICY?
Personal injury losses that may be limited or excluded under most homeowner’s policies will receive broader coverage under an umbrella policy. As a rule, personal injury does not have a uniform definition; however, just about all umbrellas will refer to personal injury to include bodily injury. Most policies also include in their definition of personal injury:
Mental anguish, false arrests, wrongful eviction, wrongful detention, malicious prosecution, invasion of privacy, assault and battery, slander, libel and defamation of character.
IS THERE DIFFERENCES IN PERSONAL UMBRELLA POLICIES?
There is no standard personal umbrella policy. The insurance coverage, as well as the exclusions, will vary by company. It is important that you compare the costs against the coverage the policy provides. In some cases, it is more important to know what is excluded from coverage. Additionally, you need to
88 know what coverage and limits are required on the underlying homeowners and auto policies.
HOW THE POLICY WORKS
Generally, an umbrella policy pays all of the covered loss that exceeds the limits of the base or underlying policy.
If, for example, the basic policy paid $200,000 on a slip and fall injury and the claim was for $250,000, the umbrella would cover the $50,000 over the basic policy's $200,000 limit.
IS THERE A DEDUCTIBLE?
Usually umbrella liability policies have two types of deductibles. These are also referred to as retained limits. Depending on the loss, one of them pays first before the umbrella pays. If the loss is covered by the underlying policy, that policy pays first up to its maximum limit and then the umbrella policy kicks in. Another consideration is that a loss may occur and is covered by the personal umbrella but not by an underlying policy. In this case, the insured must meet a deductible that is referred as the SIR, which stands for Self-Insured Retention. For example, a $1 million umbrella usually has a $250 SIR that the insured must pay before the umbrella kicks in.
OTHER EXCLUSIONS IN AN UMBRELLA POLICY
Typically, the umbrella policy will exclude losses that are better covered under other policies. Although there are differences, most umbrellas will not cover the following:
Obligations under workers' compensation or similar laws. If a domestic employee is injured, coverage is afforded under workers, compensation and will not be duplicated under the umbrella policy.
Damage to property owned by you. This precludes any coverage for property damage best insured under some form of property (homeowners) or inland marine (jewelry floater) insurance.
Damage to property on which you have agreed to provide insurance. The intent is to prevent the insurance company from paying for a loss that should be insured under some form of
89 property insurance, especially since the insured has agreed to provide coverage.
Liability arising out of a business pursuit - unless your homeowners cover it or auto insurance. If your homeowner’s policy covers some business pursuits (i.e., an office at home), the umbrella will also extend coverage. Some policies also provide coverage to persons who are involved in civic activities, other than a person's regular employment, that may prompt lawsuits.
Liability arising from your rendering (or failing to render) professional services. This typically excludes malpractice, which is better covered by malpractice insurance.
Liability arising from the ownership, maintenance or use of any aircraft. Such potentially catastrophic losses are excluded.
Liability arising from the ownership, maintenance or use of watercraft not covered under the homeowners’ policy (subject to certain restrictions). The umbrella covers small boats that are typically afforded coverage under the homeowner's policy; however, large watercrafts are excluded because of the increased liability risk.
Liability covered by a nuclear energy policy. Nuclear energy policies contain a person’s insured or "omnibus" clause that encompasses virtually everyone who may be responsible for a nuclear accident, barring only the U.S. government. If a person should become involved in a nuclear incident covered by a nuclear energy policy, such a person would be covered by that policy and would not need protection under the umbrella. Therefore, coverage is excluded under the personal umbrella policy.
Focus Points
o Umbrella policies protect against major lawsuits.
o Homeowners and auto policies may be supplemented by Personal Umbrella policies.
o There is no standard personal umbrella policy.
o The Umbrella Policy covers losses exceeding the limits of an underlying policy.
90 CHAPTER 7: RISK MANAGEMENT
THE PROCESS OF RISK MANAGEMENT
Unfortunately, an unavoidable part of everyday life is risk. Different people handle risk in different ways. Usually your past experiences determine how you will respond to uncertainty. Before you can determine the best way to handle a risk, you must be able to identify risk probability and severity.
This is, referred to as risk management. It is the process of:
Determining what exposures to loss exist; Determining the seriousness of exposures; Developing a way of minimizing the effect of the loss exposure.
The goal of risk management is to make the best possible arrangements ahead of time so that one will not be seriously financially affected when a loss occurs.
Risk management is intended to protect income and assets against unforeseen, unintended or accidental loss.
A risk manager follows five basic steps in the risk management process:
Identifying the loss; Evaluating the exposure and eliminating the severity and frequency; Selecting the most economical way of handling the risk; Formulating a risk management plan; Revising and monitoring the risk management plan.
Let us discuss these five steps in more detail.
Identifying Loss Exposures
Before a person can "manage" risk, he or she must first identify all the possibilities of loss or the loss exposures to which he or she is subject and that can be guarded against in some way. The term loss exposure is used to describe the property or person facing a condition in which loss is possible and unpredictable. Potential property losses include
91 direct and indirect losses; potential liability losses are those associated with torts or, to a much lesser extent, breach of contract.
Property Loss Exposures
The individual risk manager begins the risk management process by compiling an inventory of all real and personal property that indicates the amount of property owned and its present value. Real property consists of land and, generally, whatever is erected or growing upon or affixed to it.
The definition of real property included the earth's surface, the air above and the ground below, as well as all appurtenances to the land, including buildings, structures, fixtures, fences and improvements erected upon the land.
Excluded are growing crops. The term also includes the interests, benefits and rights inherent in the ownership of real estate. Personal property consists of tangible, movable possessions and includes things such as furniture, jewelry, automobiles and recreational vehicles.
After the inventory is complete, the risk manager can identify the possible property loss exposures that should be addressed. The possible causes of property losses that should concern property owners are too numerous to list; however, two basic types of risk that may cause financial loss may classify these losses. These risks include:
Direct physical damage to property caused by perils such as fire, wind, water and other perils that may damage or destroy the property; and
Indirect loss that occurs following a direct loss to property by an insured peril and that included additional loss expenses for the extra cost of food, transportation and housing incurred by the insured.
Property may be damaged or destroyed by physical perils, such as fire, smoke, explosion, hail, etc. Deviations from expected individual conduct, such as theft, vandalism, or arson, may be termed social perils that cause property loss.
Finally, certain economic perils, which occur less frequently, may result in property loss. For example, people protesting a factory layoff may cause damage to nearby property. Two or more perils, such as fire and vandalism, may be involved in a loss.
Liability Loss Exposures
The term liability may be used in a number of ways. Generally, the term is synonymous with moral or legal responsibility and involves the concept of facing a penalty when a particular responsibility is not met. In this text, we are primarily concerned with the term
92 legal liability, which is defined as the condition of being bound in law to do (or not to do) something that may be enforced in the courts.
The law does not recognize moral responsibility alone as legally enforceable, but people who do not meet their moral responsibility may also become legally obligated to pay for another's injuries.
Under our legal system, a person may be held responsible for causing injury to another person or damage to another's property. People are faced with the possibility of having to defend themselves against a lawsuit, even if the suit is groundless.
The risk of being held financially responsible for judgments and legal defense and court costs, as well as the indirect expenditures of time, energy and money, is the greatest risk that most people face. Therefore, in addition to property loss exposures, risk managers must identify two basic types of liability loss exposures:
a. Casualty loss that results from perils such as robbery, burglary, vandalism or arson; and
b. Liability risk where the law of negligence is used as the basis to determine whether an individual may be held responsible for the financial cost of other people's bodily injuries or for damage to their property.
People may incur liability loss exposures in a number of ways. A person may be held legally responsible for injuries or damages that result from his or her ownership of an auto, recreational vehicle, watercraft or residence premises; from personal or business activities; from obligations assumed under a contract; from the employment of domestic workers; from libel, slander and other personal injury offenses; and from a number of other events.
Individuals may be held criminally or civilly liable, depending on the nature and form of their actions. Criminal liability is clearly established by statute or administrative rules. In a criminal action, a district attorney or attorney general of either the state or federal government initiates the criminal action against the accused wrongdoer.
For example, a district attorney will file charges against an accused murderer. If the accused is convicted, the state or federal government imposes penalties.
On the other hand, civil liability is established by statutes, administrative rules and prior court decisions that outline the rights of the parties as opposed to each other. One party normally brings a civil liability action against another party for the wrongs alleged. The litigants at their own expense bring these legal actions (with the court costs usually imposed on the losing party). The sources of civil liability are classified as those arising from:
Contractual or similar agreements;
93 Torts, which are acts or omissions other than breach of contract; Equitable actions such as fraud, errors or mistakes; Actions that do not fall into the first three categories.
Remedies based on contractual agreements and tort actions seek monetary damages; those based on equitable actions usually seek some other remedy, such as performance of a contract.
Evaluating Loss Exposures
In the second step of the risk management process, the risk manager must evaluate the loss exposures and decide which risks are intolerable, which are difficult to tolerate and which are tolerable. Intolerable risks are those that are so large that a loss from one might cause a person's bankruptcy.
These risks typically include liability risk and the risk of the destruction of a home because of a natural disaster. Difficult to tolerate risks are those that would cause the individual a significant financial loss but that would not lead to bankruptcy.
An example would be the destruction of an automobile. Finally, tolerable risks include loss or damage to personal property that might be large but are not intolerable in terms of the individual finances. An example would be replacement of a broken windshield.
Having identified the risks, the risk manager then estimates both the maximum possible loss and the maximum probable loss the property owner faces. These two estimates are useful in determining the best way or ways to handle a loss exposure.
The maximum possible loss is the worst loss that could possibly happen, while the maximum probable loss is the worst loss that is likely to happen. For example, it is possible for a house located in Arizona to be completely destroyed by flood; however, it is unlikely that such a loss will occur.
Therefore, if a house is not located in a flood area, it is usually unnecessary (and sometimes impossible) for the insured to purchase flood insurance.
After the risks have been classified in this way, the risk manager then evaluates the frequency and severity of each loss. Frequency is a measure of how often a particular event has occurred; severity is a measure of the damage caused by each incident.
For example, counting the number of times a person's dog has bitten a neighbor is a frequency measurement, but calculating the medical and legal costs of those bites is a severity measurement. After this step has been completed, the risk manager can decide how to effectively deal with his or her property and liability loss exposures.
94 Selecting the Best Way to Handle Risk
The risk manager may select one or more risk management techniques to handle the risks he or she has identified.
These techniques include avoidance, retention, loss control, non-insurance transfer and insurance. When considering which of the risk management techniques to implement, the risk manager should remember three general, practical rules of risk management:
a. The size of the potential loss must relate favorably to the resources of the one who must bear the loss.
b. The possible benefits of taking a risk must be reasonably related to the possible costs.
c. The amount of potential loss can usually be reduced or prevented through effective loss control programs.
The risk manager must determine whether it is best to reduce, eliminate or transfer the risk. Let us look at how these general rules of risk management apply when selecting a risk management technique.
First, selecting a technique begins by using information gathered in the second step of the risk management process. The risk manager has approximated the total loss from one event, or occurrence, and has estimated how often a particular loss is likely to occur (loss frequency) and how much could be lost if a certain event should occur (loss severity). For example, if a homeowner is estimating the potential loss frequency and severity of a fire, the following losses are possible:
Direct fire and smoke damage to the house and its contents;
Indirect damage in the form of burn injuries to a visitor in the house;
Damage to neighboring property if the fire spread;
Loss of use of the property because the fire damage makes it necessary for the homeowner to move to another location, at least temporarily.
The risk manager should determine the probability and possibility of each type of loss, as well as the loss frequency and severity of those losses.
Second, the risk manager must determine the amount of money that will be available to meet the potential loss. Obviously, this amount will vary widely by individual. To find out how much a person is worth in dollars and cents, he or she should complete a personal balance sheet.
95 This is a financial inventory of all personal assets (that which is owned) and liabilities (that which is owed). The difference between assets and liabilities is a person's net worth.
The balance sheet provides people with a record of their financial progress and can help them with a future savings and investment program. By determining net worth on an annual or semiannual basis, people can see whether their net worth is increasing, decreasing or remaining the same, and if they are keeping pace with the rate of inflation.
They can also determine what portion of their assets could easily be converted into cash if they experienced a property or liability loss and needed cash to pay for the loss.
Finally, the benefits and costs of any available alternative method of handling the risk in certain situations must be considered. In many cases, insurance is the answer; however, other risk management techniques, such as loss prevention or self-insurance, may also be viable options under various circumstances.
Implementing a Risk Management Plan
The fourth step of the risk management process is executing the plan that the risk manager has devised. Insurance coverage, which is the focal point of most individual plans, is usually purchased. The risk manager's objective is to purchase policies that will provide the most comprehensive coverage at the most reasonable cost. Insurance contracts will be one of three types:
Primary insurance required by law (e.g., automobile liability insurance) or by contract (e.g., homeowners insurance required under a mortgage contract);
Desirable insurance that provides protection against losses that could financially harm an individual but that would not completely destroy his or her savings (e.g., physical damage insurance protects against damage to the insured's auto);
Catastrophic insurance that provides protection against losses that could financially destroy an individual (e.g., flood, earthquake and personal umbrella liability insurance provide protection against devastating losses).
The risk manager selects limits of liability that adequately cover the risk's probable maximum loss, as well as reasonable deductibles that help to reduce the annual premium for insurance coverage.
Because some of the risks faced by the individual may not be insurable, these risks must be handled in some other way. For example, war risk is not covered by
96 insurance so individuals must retain that risk. In other words, if property is damaged or destroyed by an act of war, property owners must pay for the loss themselves.
Monitoring the Plan
The final step in the risk management process involves a well-planned program for monitoring and updating the original plan. This consists of regularly identifying any changes in the risk manager's loss exposures, net worth, ability to personally bear financial losses and so forth. All of these are very important considerations for individuals.
Risk management as a process grew out of businesses, insurance management, but insurance is hardly the sole method of treating risk.
As noted earlier, there are various alternative methods available. For example, as a person's net worth increases, he or she needs more insurance to protect the possible financial costs of losses to that property, the loss of use of that property and additional expenses that could arise from such losses.
On the other hand, increased wealth might mean that a person would feel comfortable retaining more losses and may, therefore, take a larger deductible to reduce the cost of his or her insurance premiums.
When an insurance agent participates in the risk management process with a client, he or she assumes important responsibilities. The client looks to the agent as a professional who can provide sound advice and, when necessary, can work with other experts in applying the principles of risk management.
When insurance protection is necessary for transferring a risk, the agent will be expected to propose a practical and effective insurance plan that provides proper coverage in the correct amounts to offer adequate protection at the most reasonable cost.
PRIMARY INSURANCE POLICIES
The average person selects insurance, with some retention in the form of a deductible, as his or her primary risk management technique. Most people will purchase homeowners and/or a personal auto policy to cover their loss exposures. The policies are referred to as primary, basic or underlying insurance policies.
Although various homeowners and personal automobile forms are in use, most follow a format similar to the programs developed by the Insurance Services Office (ISO). When
97 we refer to any personal insurance coverage in this text, we will be referring to the standard ISO forms.
HANDLING LIABILITY LOSS EXPOSURES
We will primarily be concerned with liability losses in this text. Most people handle the risk of legal liability arising out of their personal acts with personal liability insurance. Because liability losses involve a third party, the insurance company or the courts must make a determination of fault.
In the event of a lawsuit involving bodily injury or property damage to another person, the insurance company will provide a legal defense and will pay those sums the insured is legally obligated to pay, up to the limits of the policy. Bodily injury refers to bodily harm, sickness or disease, including injury that results in death.
Coverage also applies for any required care or loss of services of anyone whose bodily injury is negligently caused by the insured. For example, at common law, a husband may be entitled to monetary compensation if his wife is injured in an accident and unable to provide certain duties owed her husband under the marriage contract.
These duties are collectively call consortium and the spouse may be compensated for lack of consortium. Additional coverage called property damage coverage applies to damage to or destruction of tangible property, including the loss of such property.
Personal liability insurance may be purchased as a separate policy or, more commonly, it is provided as part of a package policy, either an auto or a homeowner’s package. Because these liability coverage’s are quite similar, we will primarily discuss the homeowner’s liability coverage’s.
The liability section of the homeowner’s policy protects the insured in at least two ways:
If a claim is made or a lawsuit is brought against an insured, the policy will pay for damages for which the insured is found legally liable, up to the policy's limit of liability, typically $100,000 per occurrence. Higher limits may be obtained for an additional premium. Typically, coverage will apply for claims arising out of the ownership or use of the insured location; personal activities, such as sports or social activities on or away from the insured premises; and actions of a residence employee, such as a cook, maid, nanny or baby sitter, in the course of employment.
In addition to the limits of liability, the insurance company must defend any claim or lawsuit that is brought against the insured for bodily injury or property damage - even if the claim is false, baseless or groundless. In come cases, the policy specifies that the insurer's obligation to settle or defend claims ends when the amount the insurer pays for legal defense
98 equals the policy's limits of liability. As a practical matter and to avoid expensive litigation, most personal liability lawsuits are settled out of court.
As mentioned earlier, individuals who own or operate automobiles may purchase liability protection in the form of an automobile policy. The Personal Auto Policy, for example, includes Part A Liability Coverage, which provides protection against economic loss to an insured for "bodily injury" or "property damage" that arises out of the operation, maintenance or use of an insured automobile.
Under this policy section, the insurance company makes two promises to the insured:
To pay damages on behalf of the insured for which he or she becomes legally responsible because of an accident; and
To settle or defend any claims under the policy, up to the policy's limit of liability.
It is important to note that the insurer has no duty to defend lawsuits or to settle any claims that are not covered under a particular insurance policy. For example, an insurer who provides automobile or homeowners insurance is not required to defend an insured who is sued by a neighbor for intentionally using a motor vehicle to damage the neighbor's lawn because intentional damage is not covered.
HANDLING PERSONAL INJURY LIABILITY
The personal liability provided under the ISO homeowners’ policy specifically covers two types of liability:
Bodily injury, meaning bodily harm, sickness or disease, including required care, loss of services and death that results;
Property damage, meaning physical injury to, destruction of or loss of use of tangible property.
The policy does not mention coverage for personal injury losses meaning any injury to another's person, rights or reputation, including torts such as libel, slander or invasion of privacy. Many insurers contend that they did not intend to provide coverage for personal injury liability under a standard homeowner’s policy and coverage is often denied on that basis.
When coverage is not provided by the homeowner’s policy itself, a personal injury endorsement may be added to the policy to provide coverage for certain offenses committed during the policy period.
The ISO personal injury endorsement does not provide coverage for liability:
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Arising out of disputes between insureds;
From contracts not related to the premises;
From the injured person's employment by the insured;
Involving a violation of a penal law;
Arising out of business pursuits;
Arising out of civic or public activities performed for pay.
Personal injury liability protection may also be extended by a personal umbrella liability policy.
THE STRUCTURE OF PRIMARY POLICIES
Property-casualty policies usually contain the same policy elements, regardless of what type of property or liability coverage’s they provide. Each policy begins with a Declarations page that contains information found on the client's application for insurance and any information that is unique to that particular policy.
A Declarations page usually contains the name and mailing address of the insured(s), the name of the insurance company providing coverage, the policy number, the inception date and expiration date of the policy, the dollar amount of the applicable policy limits and deductibles, the numbers and edition dates of any forms and endorsements and the premium.
Policies usually contain a separate Definitions section that explains the meaning of certain words that are used in the insurance contract. The defined words may appear in boldface type, Italics or within quotation marks.
For instance, this section often explains that throughout the policy the named insured is referred to as "you," "your" and "yours" and the insurance company is referred to as "we," "us" and "our." If a word is not defined in the Definition section or in the body of the policy, rules of contract interpretation are used to determine the meaning.
For example, technical words are interpreted according to their ordinary technical meaning and legal words are assigned their usual legal meaning.
The policy's Insuring Agreements provision sets forth the insurance company's promise to pay the insured (or to pay on behalf of the insured) for a covered loss. In return for
100 the insurers promise the insured must pay a premium and comply with certain policy requirements, which are spelled out in a section call Conditions.
The Conditions section states that the insured must, in addition to paying a specified premium, report losses promptly, cooperate with the insurer in settling a loss and avoid anything that might harm an insurer's right to recover damages from a responsible third party.
If the insured fails to comply with these conditions, the insurer may be relieved of its obligation to pay for the loss or defend a lawsuit.
Policies also contain a number of coverage exclusions that restrict or eliminate insurance coverage for specified loss exposures. These exclusions appear throughout the policy as well as in a separate section call Exclusions.
Finally, some policies may contain various amendments or Endorsements to the basic policy provisions. The insurance company or its duly appointed agent must issue these endorsements.
Focus Points
o Risk management helps to protect against income and assets against potential loss.
o There are five basic steps risk managers follow when assessing risk.
o Loss exposure is the exposure to possible and unpredictable future loss.
o Risk management begins by inventorying real and personal property owned and its present value.
o Real property consists of land and anything erected on, growing on or affixed to it.
o Personal property consists of tangible, movable possessions.
o Two basic types of risk cause financial loss: direct physical damage and indirect loss.
o Liability deals with moral or legal responsibility held by a party.
o Individuals may be held criminally or civilly liable for their actions.
o Criminal liability is established by statute or administrative rules.
101 o Civil liability is established by statutes, administrative rules and prior court decisions. o The risk manager must evaluate the loss exposures. o Intolerable risks are those so large that a loss from one may cause bankruptcy. o The risk manager estimates the maximum possible loss and the maximum probable loss the property owner faces. o The maximum possible loss is the worst loss that could possibly happen. o The maximum probable loss is the worst loss that is likely to happen. o How often a particular event has occurred is measured by Frequency. o Severity is a measure damage caused by each incident. o Risk managers determine if it is best to reduce, eliminate or transfer risks. o Risk manager select limits of liability to adequately cover the risk's probable maximum loss. o Risk management involves a well-planned program for monitoring and updating the original plan. o Insurers need not defend lawsuits or settle claims not covered under a particular insurance policy. o Personal liability, under the ISO homeowners’ policy, covers bodily injury and property damage liability. o The Definitions section explains meanings of words used in the insurance contract. o The Insuring Agreements provision is the insurance company's promise to pay the insured for a covered loss. o The Conditions section describes the requirements the insured must meet to be covered. o Any policy exclusions will appear in the Exclusions section.
102 CHAPTER 8: THE NEED AND PURPOSE OF UMBRELLAS
WHAT IS THE NEED?
People can be held legally liable to pay damages for the bodily injury or property damage caused by their negligence. The need for liability can arise as a result of a person's personal or recreational activities as well as a person's business. Some of the higher liability claims arise when insureds are entertaining guests or permitting people to use their property.
Consider how a jury's desire to punish a negligent person could result in a judgment for damages in the following situations:
A practical joke misfires and results in a lawsuit for defamation of character; A neighbor or guest falls on a person's property, resulting in permanent disability; A protective watchdog proves that his bite is even worse than his bark; A person's child accidentally breaks an expensive vase while at another person's house; A moment's inattention while driving results in a multi-car accident; A spark from burning leaves starts a fire that inadvertently burns a neighbor's roof; A letter to the editor triggers a libel suit.
At this point, it is important to make a distinction between two terms frequently used in liability suits: coverage and liability.
The word coverage refers to the contractual obligation imposed on the insurance company that agrees to indemnify the insured for sums he or she becomes legally responsible to pay as damages. Liability refers to the legal responsibility of the policyholder to other persons arising out of an occurrence.
In some cases, a particular peril will not be covered by the policy and the insurance company is under no contractual obligation to indemnify the insured. For example, assume the insurer issued homeowners policy covering an insured's liability arising out of the ownership of a certain property. The insurer is under no obligation to provide coverage under that homeowner’s policy for an automobile accident that occurred
103 away from the residence premises even if the insured was at fault. In this case, there may be liability on the part of the insured, but there is no coverage provided under the policy.
On the other hand, there may be coverage under the policy but no liability on the part of the insured. For example, the Personal Auto Policy provides coverage for property damage up to the policy limits.
However, if the insured vehicle is stolen and the thief uses the car to damage several lawns in the area, the insured has no liability for the damage. Even if the insured feels sorry for the neighbors and perceives some moral obligation to repair their lawns, he or she has no legal liability to do so.
Likewise, the insurance company has no responsibility, either by way of settlement or as a gift, to make any payment to the neighbors. In this case, while three may be coverage under the policy, but there is no liability on the part of the insured.
Insureds should be cautioned to remember that even when there is no apparent liability on the part of the insured or available insurance coverage, the insured may still be sued and found legally responsible.
In a civil case, it is possible that the plaintiff, who must establish his or her claim by a preponderance of evidence, may produce evidence that is more credible and convincing than that of the defendant's. And, if the plaintiff's case is more believable, the plaintiff will win.
The settlement the plaintiff receives might be quite substantial because of three factors:
The public's attitude toward claims;
The application of the law of negligence;
The jury's opinion about damage awards.
IDENTIFYING GAPS IN LIABILITY COVERAGE
Insureds routinely believe that their policies cover every possible loss exposure, but this is simply not the case. When a liability loss occurs, insureds may be surprised to learn that there are serious holes, or gaps, in their insurance coverage.
As stated earlier, an insurance policy covers the insured only up to its liability limits; beyond these limits, a liability insurance policy does not protect the insured.
104 The majority of policies covering liability for bodily injury have two limits, a limit of liability for one person and another limit (usually higher) for any single occurrence, where more than one person is involved.
For example, assume an insured has a Personal Auto Policy that covers him or her up to a $300,000 liability limit for bodily injury for each accident or occurrence. If the insured is involved in an accident and is held liable for $200,000 in bodily injury damages, the auto policy will pay for those damages.
However, if the insured is held liable for damages in excess of $300,000, he or she will be held personally liable for the additional damages.
The underlying personal liability insurance, in addition to paying only up to certain limits of liability, excludes certain loss exposures.
For example, the liability portion of the homeowner’s policy does not cover the following:
Damage from the intentional acts of the insured; Damage caused by the rendering or failure to render professional services; Damage from acts of war; Damage from communicable diseases; Damage arising out of business activities.
In addition, not all individuals on the insured's property or in the insured's auto are afforded coverage by the insured's primary liability insurance.
Residence employees, defined as an employee of the insured whose duties are related to the maintenance or use of the residence premises, including household or domestic services, may not be covered under the liability section of the homeowner’s policy if the insured is required to have workers' compensation coverage in force for such employees.
The basic Personal Auto Policy excludes liability coverage for:
Damage caused by intentional acts of an insured; Damage to property owned by, rented to, used by or in the care of an insured; Bodily injuries to employees covered under workers' compensation; Damages resulting from the ownership or operation of a vehicle while it is being used as a public or livery conveyance; Damages incurred while a party is employed or engaged in the business of selling, repairing, servicing, storing or parking vehicles.
Finally, underlying policies generally do not provide liability coverage for unusual loss exposures or for losses that occur outside the United States.
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For example, the Personal Auto Policy limits coverage to accidents and losses that occur within the policy territory, meaning the United States of America, its territories or possessions; Puerto Rico; Canada; or while the auto is being transported between their ports.
PURPOSE OF UMBRELLA POLICIES
The Personal Umbrella Liability Policy was created to expand the insured's liability coverage by filling gaps in the basic liability coverage provided by underlying policies and to reduce the insured's worry, trouble and burden of facing personal litigation on his or her own.
Personal umbrella liability coverage is usually sold in units of $1 million or more and may be added to a basic homeowners or auto policy that is already written by the insurance company. Many companies also write stand alone, or separate, personal umbrella policies without writing the underlying coverage.
To qualify for stand-alone coverage, however, the applicant is usually required to show proof of certain underlying insurance coverage with other insurance companies. Umbrella policies provide insurance for accidents and other situations not ordinarily covered under primary insurance, subject to a deductible of between $250 and $1,000.
There is no standard personal umbrella liability policy. The policy's forms, format and coverage vary by insurer. This does not necessarily mean that because one company's policy looks more extensive that it is superior to another policy. Rather, each contract should be reviewed to determine which offers the best coverage for a particular policyholder.
Regardless of which company is providing the policy, all personal umbrella policies are designed to give insureds and their families two types of extra liability protection:
They add to the liability of any homeowners, automobile or other liability policies currently in force. Most homeowner’s policies provide basic personal liability coverage of $100,000; auto policies typically contain a combined single limit of $300,000 per occurrence. An umbrella policy supplements these basic personal liability coverage’s. If, for example, the insured has a standard auto policy with liability limits of $300,000 and a personal umbrella policy with limits of $1 million, the insured is protected up to $1,300,000, if a covered auto accident occurs and the insured is found legally responsible.
They are designed to cover liability exposures that other policies do not cover. The personal umbrella policy is designed to cover some of the more unusual exposures, such as personal injury claims, that an insured
106 might face but that are typically not covered under most standard liability policies.
A personal umbrella is the liability counterpart of Difference in Conditions (DIC) insurance, a property coverage that expands insurance written on a named perils basis to an open perils basis and protects the insured against risks of direct physical loss to the insured property, subject to certain exclusions and deductibles.
An umbrella contract provides (subject to a deductible) liability coverage where no other liability insurance exists, and in addition provides coverage for liability when the limit of the primary or underlying insurance has been exhausted.
SPECIAL CHARACTERISTICS OF UMBRELLA POLICIES
The insurance company that issues the umbrella policy provides additional liability coverage over the primary policies, up to the limits listed on the Declarations page of the umbrella policy, even if the same insurer does not provide the underlying insurance.
The personal umbrella policy covers any number of accidents or occurrences that occur during the policy term, regardless of how many claims are presented. However, the policy restricts payment for any one accident to the limit listed in the policy (usually up to $1 million per occurrence).
In other words, even though the insurer may pay for ten claims totaling $10 million during a one-year period, it will not pay more than $1 million for any one occurrence.
To limit the insurer's liability, however, many umbrella policies are beginning to offer aggregate limits, meaning a maximum dollar amount that may be paid during the policy period or during the insured's lifetime, as specified in the policy.
A policy with a $10 million aggregate limit, for example, may pay several claims for $1 million each, but it will only pay out a maximum of $10 million during a given policy period.
It is important to remember that the personal umbrella is a third party liability policy that covers only another person's claim against the insured. It does not cover damage to the insured's own property, motor vehicles, home or other valuables.
Focus Points
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o People can be held liable for the bodily injury or property damage due to negligence. o Coverage is the obligation imposed on the insurance company to cover the insured. o Liability is the legal responsibility of the policyholder to other persons. o Insurance policies cover the insured only up to its liability limits. o Underlying policies do not provide liability coverage for unusual loss exposures. o Personal Umbrella Liability Policies provide additional coverage to underlying policies. o There is no standard Personal Umbrella Liability policy. o Personal Umbrella Policies give two types of liability protection. o A personal umbrella policy covers liability. o Difference in Conditions (DIC) insurance covers property o Umbrella policies usually normally pay up to $1 million per occurrence. o Personal umbrella is a third party liability policy that covers only another person's claim against the insured.
108 CHAPTER 9: THE BASIC POLICY AND COMPONENTS
PERSONAL UMBRELLA LIABILITY POLICIES
The insurance industry has developed a number of liability contracts over the years to meet the basic liability exposures of individuals and businesses. It was not until 1960, however, that a personal catastrophe liability contract (or as it is more commonly called a personal umbrella liability policy) was developed.
The contract was originally aimed at insurance buyers with the idea of providing broader insurance protection for individuals, especially professionals and wealthy members of society, who were excellent targets for liability lawsuits that could result in significant claims.
Today, however, it is not unusual for liability claims to exceed the basic limits of liability afforded by an average insured's homeowners or auto policy. These claims, which may result from personal activities or professional or business pursuits, are usually covered by a personal umbrella liability policy.
As we have said, there is no standard personal umbrella liability policy form or format. Each insurer develops its own policy based on its own preferences and/or the needs of its clients.
Because coverage varies by insurer, it is important for the insurance producer and his or her client to examine each personal umbrella policy to make sure that it is not merely an ordinary excess liability contract. An excess policy provides only additional layers of coverage to the coverage already furnished by the underlying policy.
The terms and conditions of an excess policy should be precisely the same as those of the underlying policy. A true umbrella policy, on the other hand, provides not only excess liability but also responds to claims that may be excluded in the underlying policy but are not excluded under its own form.
Personal umbrella liability insurance is intended for catastrophe type claims; an umbrella insurer is simply not interested in covering small claims. To support this intent, personal umbrella policies that cover loss exposures that are not covered by the underlying policies are subject to deductibles commonly referred to as a retention or
109 self-insured retention. Most insurers offer minimum deductibles of $250 but offer higher ones for additional reductions in premium.
In some cases, an insurance underwriter will require a substantial deductible when a particular risk is not otherwise insurable because of some unusual exposure to loss.
In general, the purpose of a personal umbrella policy is not only to provide million dollar-plus excess limits but also to broaden basic liability protection in several ways.
In most cases, the personal umbrella liability policy is intended to:
Apply worldwide coverage (where permitted by law), without territorial restriction as is the case with most primary insurance coverage;
Provide liability coverage for the insured who uses certain non-owned automobiles, watercraft and aircraft when this coverage is excluded under Section II of the homeowners policy;
Include coverage for liability assumed, by the insured under certain oral or written agreements;
Cover a broad range of personal injury hazards such as libel, slander, false arrest, humiliation, defamation of character, false imprisonment, wrongful eviction, wrongful detention, malicious prosecution or invasion of privacy;
Provide payment of defense costs when primary insurance does not apply.
To adequately protect the insured, a personal umbrella liability policy should serve three purposes:
It should add an additional amount of liability coverage above the limits provided by the insured's homeowners, personal auto or other underlying policies;
It should provide insurance coverage for some exposures that are not covered (or only minimally covered) by the insured's underlying policies;
It should provide protection for the insured against certain catastrophic liability losses that might otherwise cripple the insured financially.
BASIC POLICY COMPONENT PARTS Depending on the preferences of the insurance company, the actual format of the personal umbrella liability policy will vary among companies. In addition, the amounts and types of coverage may also vary.
110 Regardless of how it looks or exactly what it covers, however, a personal umbrella policy will usually contain six basic components or policy provisions that outline the details of the contract between the insurer and the insured.
DECLARATIONS
This part identifies the parties to the contract and defines who and what the policy insures and for what period of time. The premium and amount of insurance are also stated in the Declarations.
DEFINITIONS
The contract's commonly used words and phrases are defined in this section to reduce any misunderstandings between the parties about what the insurer intends to cover.
INSURING AGREEMENTS
An umbrella policy contains a number of promises and specific obligations assumed by the insurance company, including its duty to pay certain losses on behalf of the insured. In addition to an introductory insuring clause, there may be several additional statements within the body of the policy that must be referenced when a loss occurs to determine both the insured's and the insurer's responsibilities.
CONDITIONS
This policy provision describes the policy requirements with which the insured must comply before the insurer is obligated to pay.
EXCLUSIONS
This provision specifically lists causes of loss for which the insurer does not intend to provide coverage.
MISCELLANEOUS PROVISIONS
Some policy provisions, such as the insured's duties when a loss occurs, do not neatly fit into the Declarations, Definitions, Insuring Agreement, Conditions or Exclusions headings. These provisions may be grouped together as Miscellaneous Provisions.
111 In the following sections, we will briefly describe each of these policy components.
DECLARATIONS PAGE
The preliminary section of each umbrella liability policy contains a Declarations page (also called a dec. page or the dec.) that contains pertinent information about the insurance risk, on the basis of which the policy was issued. The insurer, which draws up the insurance contract, is expected to represent clearly the intent and terms of the policy.
Therefore, the purpose of the Declarations page is to provide information about who is covered (the named insured), what is covered (the property and perils listed in the policy), when it is covered (the effective dates of coverage), where it is covered (the described location) and why it is covered (a premium has been paid) so that there is no ambiguity.
The entire policy, including any endorsements or changes to the policy, is inserted into a policy jacket that serves the same function as the covers of a book. The policy jacket keeps the Declarations page and all the policy forms in one place, thereby allowing the insured to easily find, read and review his or her insurance policy.
INSURING AGREEMENTS
Every umbrella liability policy contains an insuring clause that is a general statement of the promises the insurance company makes to the insured. In addition to this general clause, the policy often contains a number of other guarantees referred to as Insuring Agreements. These Agreements state what the company promises to do, such as agreeing to defend the insured in a liability lawsuit.
DEFINITIONS
In response to complaints from insureds and the courts that the terms used in insurance policies were not clearly defined, the insurance industry developed a section called Definitions that is now contained in every insurance policy, including a personal umbrella policy. Personal umbrella liability policy definitions are not standardized. An insurer develops its own definitions and policy wording, which may later be modified by the underwriter to meet the requirements of the applicant or to adapt to unique situations presented by different underlying forms of coverage.
For example, an insurance company's definition of an insured may include the person named in the Declarations page (the "named insured"), the named insured's spouse,
112 any relatives and persons under a specified age and in the care of any of the persons previously named - if they live in the insured residence.
However, another company’s definition might specifically remove coverage for any person, other than the named insured, using automobiles or watercraft while engaged in an automobile or boat-related business.
CONDITIONS
Like other insurance contracts, the umbrella policy is a conditional contract. The insured must pay the premium indicated in the Declarations and abide with certain requirements specified in the policy.
The personal umbrella policy's Conditions component describes the rights and duties of both parties to the insurance contract - the insurer and insured. Conditions are provisions inserted in the contract that qualify or place limitations on the insurer's promise to pay for losses.
In addition to being contained in a separate section, a policy's conditions may also be found anywhere in the contract where the insurer intends to limit coverage.
EXCLUSIONS
A personal umbrella policy does not cover every risk that the insured faces. For example, many insurers will not provide coverage for perils that they consider being uninsurable, such as war or some other potentially catastrophic event.
They also intend to deny coverage under the umbrella if coverage could be better provided by another type of insurance policy or if there are extraordinarily hazardous conditions present. Finally, insurers exclude coverage for losses that are difficult to measure or for perils that are not needed by the typical insured.
Therefore, the personal umbrella policy also contains an Exclusions component that specifically lists causes of loss for which there will be no coverage. The policy may place limitations on coverage or exclude certain perils or types of losses.
Typically, personal umbrella policies exclude the following types of losses:
Obligations under workers' compensation, unemployment compensation, disability benefits or similar laws;
Business pursuits, professional services and liability resulting from owned or rented aircraft and watercraft excluded under the homeowners policy;
Property damage to any property owned by the insured or in the care, custody or control of the insured;
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Any act committed by or at the direction of the insured with the intent to cause personal injury or property damage;
Personal injury or property damage for which the insured is covered under a nuclear energy liability policy.
Although these exclusions are fairly standard, additional exclusions may be listed in the policy. In some cases, the insurer allows the insured to "buy back" certain coverages, such as workers, compensation, for an additional premium.
The agent should be familiar with each insurer's exclusions and be careful to point them out to his or her clients so that there will be fewer surprises if a loss occurs that is not covered under the umbrella liability policy.
MISCELLANEOUS PROVISIONS
Some umbrella policies contain provisions that cannot be strictly classified within one of the previous five policy components. These Miscellaneous Provisions might include a discussion of the insurer's production and underwriting rules, its required underlying limits or any other special company guidelines.
In addition, any endorsements that add to, delete or modify the provisions in the original contract may be included in this section.
An endorsement is an attachment to an insurance policy that is used to clarify, extend or restrict coverage with regard to perils, coverage periods or premiums. It can be a standard endorsement that is used to fit a general situation or it may be worded to fit a particular situation.
These special endorsements are called manuscript forms. When an endorsement is attached to a policy, the endorsement's terms normally take precedence over any conflicting wording in the policy.
However, if state law requires any provisions in the policy, an endorsement cannot be used to subvert the intention of the required legislation.
For example, the law may hold a person liable for damages if he or she is found guilty of negligently operating a motor vehicle. The personal umbrella and underlying auto policies cannot be endorsed to delete liability for negligence.
If endorsements are in conflict with a state regulation or law, the laws take precedent and the policy is read and interpreted as if the conflicting endorsements had not been added. In other words, the original intent and coverage’s are preserved.
114 REQUIREMENTS OF A LEGAL CONTRACT
A contract is an agreement entered into by two or more parties under the terms of which one or more of the parties, for a consideration, undertakes to do or to refrain from doing some specified act or acts.
In order to be binding on the parties involved, a contract must meet five basic requirements:
Offer and acceptance; Consideration; Competent parties; Legal purpose; Legal form (in some cases).
Let's briefly review each of these requirements.
OFFER AND ACCEPTANCE
A contract is in essence an enforceable promise. In order for a valid contract to exist, there must be a valid offer and an unqualified acceptance of that offer, so that the seller understands the buyer’s offer and the buyer understands to what the seller has agreed. In other words, a contract begins with a meeting of the minds.
The general rule is that it is the applicant for insurance who makes the offer, and it is the insurance company that accepts or rejects the offer. For example, the potential insured requests insurance and fills out an application for personal umbrella insurance; the application constitutes the offer.
The agent then accepts the offer on behalf of his or her company. Assuming that the other requirements for a valid contract are met, the property casualty agent can usually bind coverage and make it effective immediately.
However, the insurer retains the right to investigate, underwrite and cancel the coverage (as described in the policy and in accordance with state law) if the risk does not meet the company's underwriting guidelines. For example, the applicant may not have disclosed several large liability losses that would have made him or her ineligible for umbrella coverage with some insurance companies.
In this case, the insurance company may decline to offer coverage. In most cases, the agent cannot bind personal umbrella liability insurance.
CONSIDERATION
115 The second requirement of a valid contract is consideration, which is the value that each party gives to the other. In the case of an umbrella policy, the insured's consideration is the payment of the first premium (or the promise to pay) and his or her agreement to abide by the conditions specified in the policy.
The insurance company's consideration is the promise to do certain things that are specified in the policy. This includes indemnifying the insured for covered losses and defending the insured in a liability lawsuit.
It should be noted that the values of the considerations exchanged are not always equal. When the insured purchases a policy, he or she usually pays a relatively small premium in exchange for a comparably large amount of insurance protection. For example, the annual premium for a $1 million umbrella policy might be less than $200, a decidedly unequal exchange of values if a large loss occurs.
In fact, for the benefits the insured receives, a personal umbrella policy may be the best buy in insurance. This relatively inexpensive policy raises the insured's liability coverage to a million dollars or more, and protects him or her from personal responsibility for damages.
COMPETENT PARTIES
In order to be legally enforceable, a contract must be between at least two bona fide parties. A person cannot make a legally enforceable promise to himself or herself. Thus, John Doe cannot agree to sell a piece of property to himself; however, he could agree to deed the property to himself and his wife as tenants in common.
The parties involved must be legally competent in order top enter into a valid contract. Generally speaking, competent parties are adults (usually age 18 or 21, depending on the state) who are able to understand the terms and conditions of the contract into which they are entering. In some states, however, minors as young as 14 may enter into some contracts. For example, minors have limited ability to contract, which means that the contract of a minor is valid only if the minor does not disavow a contract entered into during his or her minority or shortly after reaching majority (usually age 18 or 21). For example, a minor possesses the limited capacity to enter into a valid contract to purchase property from an adult.
Such a contract would be enforceable by the minor against the adult, but would be voidable by the minor. A voidable contract is an agreement that for a reason satisfactory to the courts may be set aside by one of the parties to the contract. Contracts made by minors to obtain such necessities as food, clothing or shelter, however, are not voidable by the minor and will be enforced against him or her.
Some entities are excluded parties to legally binding contracts. When a person has been adjudicated insane or is an officer of a corporation who is not authorized to
116 execute a contract on behalf of the corporation, he or she has no capacity to contract. Lack of a capacity would also cover acts of a corporation beyond its powers as defined in the articles of incorporation.
Also considered incompetent is any person who is impaired by reason physical or mental disability, drugs, alcohol, age or any other cause to the extent that he or she lacks sufficient understanding or capacity to make or communicate responsible decisions concerning himself or herself. Therefore, insane and, in certain, intoxicated people are incapable of entering into valid contracts.
An illiterate person, however, is not incompetent as long as he or she understands the nature of his or her acts.
LEGAL PURPOSE
In order to be enforceable, contracts must be made for some legal purpose. If the contract does not have a legitimate purpose, it would be contrary to public policy to enforce such a contract. For example, Robert may contract with another person to paint his house f or a fee.
Such a contract is considered legal and binding. However, Robert cannot legally contract with another person to kill his wife. Because murder-for-hire is not legal, it is not considered a valid contract and would not be enforceable in a court of law.
LEGAL FORM
Unless otherwise required by laws, oral contracts can be just as valid as written contracts. Generally, however, an insurance contract must follow a specific legal form and must be in writing to be enforceable. All essential terms of the contract must be complete and certain so that the entire agreement is set forth in writing and nothing material to the contract is left to be agreed upon in the future. Once the policy is issued, changes may be made by endorsement, but only if the insurer agrees to the requested changes.
Focus Points
o The personal umbrella liability policy was developed in1960.
o Umbrella policies were aimed at buyers who were targets for large liability lawsuits.
o Umbrella liability policies cover personal and professional activities or business pursuits.
o Personal umbrella liability insurance is intended for catastrophe type claims
117 o Umbrella policies cover loss exposures that are not covered by the underlying policies. o Umbrella policies contain sections for Declaration, Definitions, Insuring Agreement, Conditions, Exclusions, and Misc. Provisions. o The Declaration lists the parties to the contract, who and what the policy insures and for what period of time. o The Definitions sections contain the definitions of words commonly used in the contract. o The obligations assumed by the insurance company are defined in the Insuring Agreements section. o The Conditions describe the requirements the insured must meet before the insurer is obligated to pay claims. o The Exclusions section list causes of loss for which the buyer will not be covered. o Items not included in other sections of the policy are included under Miscellaneous Provisions. o A contract is a set of terms agreed upon by two or more parties. o Legally binding contracts have 5 basic components. o A valid contract must have an offer and an acceptance of that offer. o Consideration is the value that each party gives to the other. o Competent parties are adults who are understand the conditions of the contract o Enforceable contracts must be made to serve some legal purpose. o Insurance contract must written in specific legal form to be enforceable.
118 CHAPTER 10: COMMON UMBRELLA CONDITIONS
KNOWING POLICY CONDITIONS
Insurance policies are conditional contracts that create a continuing relationship between the insured and the insurance company. In the policy' s Insuring Agreement, the insurance company promises to pay on behalf of the insured those sums for which the insured is found legally responsible, to provide a defense for the insured or to furnish other services as stated in the policy.
However, the insurer's promises are enforceable only if an insured peril occurs and if the insured has complied with certain conditions contained in the policy. Insureds understand that they must pay premiums in order to keep their insurance policies in force, but that is not the only thing they have to do. Additional duties are spelled out in the Conditions section of the policy.
As an insurance professional, you should review insurance policies before they are forwarded to your clients to assure that the policies have been issued as you requested. You should also discuss the policy with your client to assure that they understand what is covered and excluded.
You should also be certain they are aware of their rights and obligations under their contracts so they will have fewer problems should a loss occur. We will discuss the important conditions that apply to most personal umbrella liability policies and explain how you can help your insureds to understand this important part of their insurance coverage.
UNDERSTANDING POLICY CONDITIONS
All property-casualty insurance contracts are written subject to certain conditions or prerequisites. The duties of the insured are primarily listed in the Conditions section of the policy; however, other provisions that qualify the otherwise enforceable promise of the insurer may also be found elsewhere in policy forms or endorsements. As explained previously, insureds should fully understand their obligations under their policies because they cannot expect the insurance company to fulfill its part of the contract
119 unless the insured fulfills all of the required policy conditions. Failure to do so may release the insurer from its obligations.
Most of the policy's conditions have to do with such matters as loss settlements, actions required at the time of a loss, cancellation of coverage and suits against the insurer. Under most umbrella contracts, insureds are obligated to report losses in a timely manner; provide any required documentation of losses to the insurer; cooperate with the insurer in investigating, negotiating and settling claims; and avoid any action that would risk the insurer's rights to recover from a responsible third party.
COMMON PERSONAL UMBRELLA CONDITIONS
Personal umbrella liability policies contain a number of conditions that describe the circumstances under which the contract is to operate. Insureds should be certain that they understand how these conditions modify, suspend or rescind the original obligations. In the Conditions section of most policies, the insurer explains that the insured must meet a number of obligations before insurance coverage will apply.
For instance, the policy might state:
There are certain responsibilities, which you must fulfill (in addition to paying the premium) as a condition for us to provide coverage.
Policy conditions may be classified in one of two ways:
A condition precedent; A condition subsequent.
A condition precedent is a requirement or qualification that must take place before the contract exists. For example, in a contract of insurance, the insured agrees to pay the premium and the insurer agrees to provide certain insurance coverage’s in return.
The principal duty of the insurer is to provide this coverage, but this obligation is conditioned on the insured's payment of the premium. The failure of the insured to pay the premium (condition precedent) relieves the insurance company of its principal obligation and, in fact, nullifies or voids the contract.
A condition subsequent is a requirement that must be met after the contract is in force. For example, the insured must report all accidents and potential claims to the insurer as soon as possible.
A typical clause might read:
In case of a claim or "occurrence" that may be covered by this policy or if a "covered person" is sued in connection with an "injury" or
120 "damage" which may be covered under this policy, the "covered person" must do the following:
1. Promptly notify us or our agent in writing;
2. Promptly send us copies of any notices, legal documents and any other documents that will help us with your defense;
3. Cooperate with us in the investigation, settlement or defense of any claim.
Assume the insured is involved in an auto accident. The insured feels he or she was not at fault, so the insurance company is not notified of the accident until a year later when the other driver files a lawsuit.
Because the insured breached the contract by not notifying the insurance company "promptly," the insurer may be relieved of its obligation to defend and indemnify the insured for that particular loss. The insured's failure to comply with this policy condition does not void the entire contract.
The insurer will still respond to other losses during the policy term with the same obligation to defend and indemnify the insured provided the insured complies with the policy's terms and conditions.
The things that an insured or other covered person must do as a condition before the insurance company will provide coverage will vary by company. Generally speaking, umbrella insurers will include conditions relating to claims notification, assignment of the policy, cancellation of coverage and legal action against the insurer.
UNDERSTANDING INSURING AGREEMENTS
You'll recall that an insurance contract is an agreement entered into by two parties, the insurance company and the insured. The contract usually begins with an insuring clause (or clauses) called Insuring Agreements that outlines the insurance coverage that the company promises to provide in return for the insured's promise to pay a premium and compliance with the terms of the contract.
Technically, complying with these conditions is also a part of the consideration. If a covered loss occurs but the conditions are not met by the insured, the insurer has no obligation to pay.
A rather broad Insuring Agreement might read:
121 “We will provide the insurance described in this policy if you pay the premium and comply with all the terms of the policy.”
With this statement, the insurance company (one competent party) enters into a legally binding contract with the insured (a second competent party). Based on the insured' s application for insurance (offer) and payment of a specified premium (consideration), the umbrella insurer agrees to provide coverage (acceptance) and issues a personal umbrella liability policy (legal form).
In return for the insured's premium and promise to abide with the terms of the policy, the insurer agrees to assume many of the insured's liability loss exposures. The exact terms of the agreement are specified in the various policy provisions.
COVERAGE RESTRICTIONS
At first glance, Insuring Agreements like the one above might appear to cover every loss exposure. However, because it is unlikely that a company intends to provide unlimited coverage, the insurance producer should look for words or phrases in a policy's Insuring Agreements that might restrict or limit coverage.
In our first example, the words insurance described in this policy are included to warn the reader to look for additional definitions, conditions, exclusions and miscellaneous provisions throughout the policy that will clarify exactly what the insurer intends to cover under the policy. The policy is not intended to cover every hazard an insured faces. Coverage applies only as described throughout the policy.
Insurance companies may include words or phrases in their Insuring Agreements that have a special meaning as used in its personal umbrella policy. This interpretation may be quite different from that normally used by the average person.
As explained previously, many insurers use boldface type, Italics or quotation marks throughout the policy to identify words or phrases that may be used in a special way by the insurer. An insurance producer or insured who is uncertain about what the insurer intends to cover when a loss occurs will usually find that the intended meaning of a term is explained in the Definitions section of the policy.
The definitions are included to reduce confusion about what the insurer expects to cover.
For example, the following Insuring Agreements contain a number of accented words.
The company agrees to indemnity the "insured" for "ultimate net loss" in excess of the "retained limit" which the "insured" shall become legally obligated to pay as damages because of "personal liability”.
122 In this case, the insurer wishes to alert the insured that certain words, including "insured”, " ultimate net loss”, " retained limit" and "personal liability," are used in a way that may be unique to this particular company.
The insurance producer and the insured should use the policy's Definitions section to determine whether these terms are used in a way that is familiar to them. Let's review how most insurance companies define these highlighted terms.
INSURED
An Insured (or covered person) is defined under most personal umbrella policies as the person named in the Declarations, his or her spouse and any relatives living in the named insured's household.
As mentioned earlier, some companies will limit coverage to relatives under a specified age or require that the named insured have custody of child or stepchild in order for coverage to apply. In many cases, any person insured under the named insured's basic or underlying policies is also covered under the personal umbrella.
ULTIMATE NET LOSS AND RETAINED LIMIT
The intent of an ultimate net loss provision is to limit the insurer's liability to the amount specified in the Declarations less any required retained limits, either specified underlying limits or a retained limit or self-insured retention (a form of deductible). The policy wording will usually go on to explain exactly how and when the insurer intends to make payments under the policy.
A Retained limit provision requires the insured to pay some portion of a covered loss before the umbrella policy pays. A retained limit is the larger of:
The total of the applicable limit(s) of all required underlying insurance required by the insurer and described in the Declarations or elsewhere in the policy and any other insurance available to a covered person; or
Any deductible required by the insurer or by the state in which the insurer does business.
The insured bears the risk to the extent of the uninsured amount. The retained limit or retention applies on a per loss basis to any loss covered under the umbrella policy but excluded in primary underlying policies. The retained limit does NOT apply when the umbrella is simply supplementing a primary policy that has exhausted its limits in the payment of a covered claim.
In other words, before the umbrella insurer makes any payment, the primary coverage must pay first or the insured must meet a specified deductible, such as $250 per
123 occurrence. There is a common misunderstanding that there is a GAP or space between the primary and the umbrella coverage. No such corridor exists.
In those cases where the insured has purchased the required underlying primary coverage, the protection applies right up to the top collar of the umbrella. In other words, if the insured has the required primary coverage, only that coverage and the umbrella coverage come into play. The insured is not out of pocket for any deductible.
PERSONAL LIABILITY
In most umbrella policies, the term personal liability means:
Bodily injury, sickness, disease, disability, shock, mental anguish and mental injury;
False arrest, false imprisonment, wrongful entry or eviction, wrongful detention, malicious prosecution or humiliation; and
Assault and battery, including death resulting there from.
Many policies also include injury to or destruction of tangible property, including it's loss of use.
To illustrate how an umbrella policy would indemnify an insured for a loss, assume an insured's umbrella policy specifies that its retained limits are the larger of either the minimum underlying comprehensive personal liability limits of $300,000 or $250. The insured's homeowners’ policy has a $300,000 limit of liability.
The insured is found legally responsible for covered damages of $500,000 when someone is injured. In this case, the primary coverage (the liability section of the homeowners policy) pays the first $300,000 (the retained limit). The umbrella policy pays the remaining $200,000. There is no corridor or gap between the primary and excess coverage’s, and the insured pays no deductible himself or herself.
Now, assume that the insured is found legally responsible for slander in the amount of $500,000. Coverage for personal injury damages is not provided under the homeowner’s policy. However, coverage is provided under the personal umbrella, up to its policy limits of $1 million. In this case, there is no underlying coverage so the insured must pay the first $250 (retained limit) before the umbrella insurer is obligated to pay the remaining balance of $499.750.
Now, assume that the insured in these examples allows the required homeowners policy to lapse and is subsequently found legally responsible for covered damages of $500,000 when someone is injured on his or her property.
124 In this case, there is no primary liability coverage available; however, the personal umbrella insurer is NOT relieved of its obligation to pay even though the insured has failed to maintain the basic liability limits required as a condition of obtaining and maintaining personal umbrella liability coverage.
Before the insurer pays, however, the insured, in essence, must take the place of the primary insurer and pay the amount that the primary insurer would have paid if the homeowner’s coverage had been in force. The umbrella insurer then responds in the same way it would have had the primary liability insurance been in force to act as the retained limit.
In this case, the insured pays the first $300,000 (the retained limit before the personal umbrella insurer pays the remaining $200,000. The insured does NOT pay an additional $250 deductible
EXCESS VERSUS PERSONAL UMBRELLA LIABILITY INSURANCE
Many insurance producers use the term excess personal liability insurance and umbrella insurance interchangeably. These two insurance coverage’s are actually quite different and should not be confused.
Unlike excess liability that provides additional coverage ONLY if the underlying policy provides coverage for a loss exposure, a typical personal umbrella policy will respond in two ways;
If the listed underlying insurance coverage’s, such as the homeowners policy or personal auto policy, are exhausted in the payment of a loss, the umbrella picks up the protection and continues payment on behalf of the insured until the personal umbrella's limit of liability is also exhausted.
If a loss occurs that is NOT insured under the underlying policies, because of policy exclusion or for any other reason, the personal umbrella policy will often cover a loss subject to a deductible, RETAINED LIMIT or SELFINSURED RETENTION payable by the insured. However, the umbrella policy does NOT cover every loss, and it should be analyzed to determine any coverage exclusions.
REQUIRED UNDERLYING LIMITS
The insurer will include policy language that clearly states the types and minimum limits of liability that the insured must carry. In some policies, this provision is called MAINTENANCE OF INSURANCE OR REQUIRED UNDERLYING LIMITS.
125 A typical provision might read:
The named insured agrees that as of the inception and for the duration of this policy
(1) The following underlying insurance shall be maintained in force for at least the minimum primary limits stated hereafter, and
(2) That such underlying insurance insures all residences occupied by the insured and all farms, watercraft and land motor vehicles owned, rented, hired or controlled by the named insured.
As explained earlier, an umbrella insurer does not intend to provide first-dollar coverage; therefore, the insurer requires that certain primary insurance be in place to provide the first layer of liability coverage if a loss occurs.
To illustrate how a claim involving and umbrella policy should be settled, assume the umbrella insurer requires underlying automobile liability insurance with split limits of 250/500/50 (or a combined single limit of $500,000) and homeowners liability coverage in the amount of $300,000 before it will insure a personal umbrella policy for $2 million.
The insured purchases the required policies in the required amounts and an umbrella policy is issued. The insured is
Involved in an auto accident and found legally liable for the other driver'sbodily injuries. Damages of $1.3 million are awarded. The insured's auto policy pays up to $500,000 for the covered accident and the umbrella policy pays the remaining $800,000.
To guarantee that the applicant is aware of its underlying insurance requirements, insurers include questions about underlying limits on their umbrella applications. In addition, when the umbrella policy is issued, the Declarations page typically includes information about the insured's primary insurance coverage. The types of loss exposures, names(s) of the insurance carrier(s), policy numbers, effective dates of coverage and limits of liability are shown.
Finally, the policy will include some explanation of how a loss will be handled when the primary insurance required by the umbrella policy is in place.
FAILURE TO PROVIDE UNDERLYING LIMITS
Although the insured is expected to supply certain underlying limits, these basic policies may be unavailable at the time of a loss for a number of reasons. For example, the insured may have allowed the primary policy to lapse or it may have been canceled for nonpayment of premium.
126 The limits of coverage may be less than required by the umbrella insurer or may have been reduced by payments of losses. The primary insurance company may have become insolvent or it may refuse to pay a claim because a covered person has not complied with the terms of the primary policy.
As stated earlier, umbrella insurers intend to pay only for damages that exceed. a retained limit. Therefore, insurers, safeguard themselves by having certain coverage exclusions, which will apply if the underlying insurance is missing.
For example, a policy might state:
If your “primary insurance” has terminated, is un-collectible, or reduced, this will not void coverage. In these cases, we will pay the same manner as though your "primary insurance" was in force, collectable and with required limits, and you had fully complied with all conditions or agreements.
This provision explains the insurer's intention for provide defense, investigation, legal fees, court costs or any similar fees or costs. However, the insured becomes PERSONALLY RESPONSIBLE for the amounts of coverage that would have been in effect if the policies had remained in force.
For example, if the underlying insurance would have provided the first $300,000 of liability coverage, the insured must pay that amount BEFORE the umbrella insurer steps in. The insurer has no legal obligation until the retained limit has been met. It should be noted, however, that the umbrella insurer retains the right to enter the matter sooner and provide a defense.
This could occur when the insurer sees the opportunity to quickly settle a lawsuit that could escalate if left uninvestigated or undefended.
SUMMARY
The Insuring Agreements contain the promises the insurer makes to the insured. Some umbrella policies have relatively simple Insuring Agreements. While others include a number of definitions, exclusions and conditions within their Insuring Agreements. Regardless of the policy wording, however, the Insuring Agreements provide a general description of the circumstances under which the policy becomes applicable.
In addition to Insuring Agreements, umbrella policies contain a separate section called CONDITIONS, which enumerates the duties of the parties to the contract, and in some cases, defines the terms being used. Many conditions found in an umbrella policy, such as notice of occurrence, assignment and the cooperation of the insured, are
127 common to most property-casualty policies. Other conditions, such as maintenance of underlying insurance and appeals, are peculiar to umbrella policies.
Focus Points
o Insurance policies are conditional contracts.
o Property-casualty insurance policies are written subject to certain conditions.
o A condition precedent is a requirement that must be met before a contract exists.
o A condition subsequent is a requirement that must be met after a contract is in force.
o Insuring Agreements outline coverage’s the company provides in return for the buyer’s compliance and payment.
o An Insured is the person named in the Declarations, his spouse and relatives living in the insured's household.
o The ultimate net loss provision limits the insurer's liability to the amount specified in the Declarations.
o Retained limit provisions require payment of some portion of a covered loss before the umbrella policy pays.
o The retained limit applies on a per loss basis to losses covered under the umbrella policy.
o Excess personal liability insurance and umbrella insurance are very different.
o Excess liability provides coverage only if the underlying policy provides coverage for a loss exposure,
128 CHAPTER 11: RESTRICTIONS AND EXCLUSIONS
The personal umbrella policy provides broader coverage than any underlying liability policy, but it is not intended to cover every risk that a person might face. Like other property and liability policies, the personal umbrella includes a number of provisions to clarify that certain perils are not to be covered. The wording of various provisions determines what is specifically excluded under the policy.
We will discuss a number of exclusions or coverage limitations that are commonly found in personal umbrella liability policies. Basically, policy exclusions are intended to prevent the insured from profiting from non-fortuitous losses, duplicate insurance coverage or unusual risks. To this end, a basic personal umbrella policy includes a number of exclusions that modify the policy's Insuring Agreements.
UNDERSTANDING POLICY RESTRICTIONS
Insurance policies contain a number of policy limitations or restrictions on specific perils, property, locations or losses for which the insurance company does not intend to provide coverage. The personal umbrella liability policy is no exception.
Policy exclusions are usually listed and explained in a separate section of the policy called: What Is Not covered or Exclusions. An Exclusions section explains any exceptions to the policy's Insuring Agreements and clarifies the insurer's intentions by limiting or modifying certain aspects of coverage that the insurer plans to provide.
In theory, the policy language should clearly express an insurer's intentions as they might apply to a wide variety of loss situations. Unfortunately, the meaning of certain phrases may be debated and it is not uncommon for the courts to find that coverage applies to losses that the insurer never intended to cover when the policy was developed.
In an attempt to be certain that an umbrella policy provides or limits certain coverage, an underwriter may issue an endorsement to amend, enlarge or completely eliminate coverage in the basic contract.
It should be clear that in order to determine what coverage a personal umbrella policy provides one must study the entire policy including any endorsements and exclusions.
129 In addition to those exclusions clearly outlined in the Exclusions section of the policy, other coverage limitations or exclusions may appear elsewhere in the policy.
Coverage restrictions may even begin with the Insuring Agreements that state:
We will pay that portion of the damages for personal injury or property damage a covered person is legally responsible for which exceeds the retained limit.
This restrictive policy wording means that before the insurance company will make any payment for a claim under the personal umbrella, certain elements must be in place:
The insurance company will pay only its share of covered losses after certain other conditions are met.
A covered person as defined in the policy (usually the named insured, a family member or a person using an auto, recreational vehicle or watercraft owned by the insured with the insured's permission) must have been involved in the event.
The covered person must have done something (or failed to do something) that resulted:
1. In personal injury, usually defined as bodily injury, sickness, disease, death, disability, false arrest, libel, slander and so on; or
2. In property damage, usually defined as physical injury to tangible property, to another person.
The covered person must be held legally responsible or liable under law, as interpreted by the courts, for the action.
The insured must meet a retained limit, usually the larger of the total applicable limits of all required underlying insurance or some set amount, such as $250 or more, before the umbrella policy responds to the claim.
REASONS FOR EXCLUSIONS
An insurance company is not required to explain its rationale for incorporating various exclusions in its policy; however, exclusions are generally used to clarify what the insurer does not intend to cover. Depending on the insurance company's underwriting philosophy, provisions that eliminate coverage for specific loss exposures are included in personal umbrella policies for at least five reasons:
130
1. Exclusions help the insurer avoid financial catastrophe. The theory of insurance is that in paying the relatively small premium, each policyholder has benefited by exchanging the uncertainty of a large future loss for the certainty of a small immediate loss (the premium paid). Pooling of losses is the essence of insurance. However, risks must fulfill certain requirements before they can be insured. For example, the chance of loss must be calculable,which means the loss must be determinable and measurable. In addition, the loss should not be catastrophic, so insurers exclude coverage for losses, such as from war or nuclear radiation, that involve an incalculable catastrophic potential.
2. Exclusions limit coverage of non-fortuitous (non-accidental) events - The policy does not intend to provide coverage for occurrences caused by moral or morale hazards. Moral hazards are intentional acts directly attributable to the insured and caused by defects or weaknesses in human character; morale hazards include the mental attitude that may indicate a subconscious desire for a loss. The policy specifically excludes non-accidental losses that may result from these hazards. For example, if the insured intentionally runs over a pedestrian, coverage would not be provided under either the personal auto policy or the personal umbrella policy.
Insurance coverage is provided only for losses that are accidental and unintentional for two reasons. First, if intentional losses were paid, moral hazard would be increased and premiums would rise as a result. A rise in premiums could result in fewer persons purchasing insurance, thereby making prediction of future losses difficult. Second, covering intentional bodily injury or property damage is contrary to the public good.
3. Exclusions help to standardize the risk - If an insurance company were to assume every possible risk facing a policyholder, the insurer would soon be out of business. To prevent adverse selection, an insurance company tries to cover only those risks that meet certain company underwriting guidelines. It would be inequitable to require all insureds to share the costs of covering the significant loss exposures of a few risks. Therefore, any loss exposures that would require special rating, underwriting or loss control, such as aircraft liability coverage or professional liability coverage, are usually excluded from the umbrella policy. In addition, coverage’s that are not needed by the typical purchaser of a personal umbrella policy are excluded. These coverage’s include workers, compensation and care, custody or control coverage’s. People who need these coverage’s may usually purchase them separately for an additional premium.
4. Duplication of coverage is usually prevented - Insurance is a contract in which the insurer, in consideration of the payment of a premium by the insured, agrees to make good the losses suffered through the occurrence of a designated, unfavorable eventuality. Because property and liability insurance policies are essentially contracts of indemnity, the insured cannot be enriched by a loss and may only receive reimbursement for the actual damage sustained. Therefore, as discussed in previous chapters, umbrella policies are designed to dovetail with the
131 underlying insurance policies and to pick up where the underlying policy leaves off. When the insured receives reimbursement for part or all of the loss from any other source, he or she cannot receive duplicate payment from the umbrella insurer. If two or more personal umbrella policies apply to a loss, each policy pays its share of the loss on a pro-rata basis.
5. Premiums are kept at a reasonable level - one of the most important functions of an insurance company relates to the pricing of its policies. The insurer does not know in advance what its actual costs are going to be for the year but it relies on the company's past loss experience and industry statistics to determine its rates. Insurance pricing must meet certain regulatory and business objectives in order to keep premiums at a reasonable level. From a regulatory standpoint, an insurer's rates must be adequate (high enough to pay all losses and expenses while earning a profit for the company), not excessive (rates should not be so high that policyholders are paying more than the value of their insurance coverage) and not unfairly discriminatory (similar exposure units should be charged the same rates).
From a business standpoint, an insurance company's rating system should be:
Easy to understand; Stable over short periods so consumer satisfaction can be maintained; Responsive over time to changing loss exposures and economic conditions; Encouraging of loss prevention activities by rewarding insureds with reduced rates for loss control measures that reduce the frequency and severity of losses;
COMMON PERSONAL UMBRELLA EXCLUSIONS
A liability insurance policy promises to pay on behalf of the insured the amount (up to the policy limit) that the insured becomes obligated to pay because of the liability imposed on him or her by law for damages caused by a covered occurrence. As explained previously, the term occurrence is defined as an accident that results in bodily injury or property damage neither expected nor intended by the insured. This definition includes continuous or repeated exposures to conditions that result in injury or damage.
Personal umbrella liability protection is quite broad, but it is possible for the insurance agent and the insured to overestimate the extent of financial protection actually afforded by a policy if they do not fully understand what is excluded from coverage.
Every peril or hazard is not covered. If, for example, a claim arises and the details of the incident show that the source of the claim is an excluded condition or incident, no
132 coverage is afforded under the umbrella policy. The insured would be personally responsible for the expense of investigating and defending the claim.
Furthermore, if the insured and the insurance company differ as to the details of the incident, it is the responsibility of the insured to convince the insurer that the incident falls within the policy coverage and should be covered.
Although personal umbrella policy exclusions will vary by insurer, most companies will usually exclude coverage for loss exposures that are better insured under another policy.
WORKERS' COMPENSATION
Most personal umbrella policies exclude coverage for injuries to employees that should be covered by workers' compensation policy. Workers' compensation insurance covers loss of income, medical and rehabilitation expenses that result from work- related accidents and occupational diseases. This insurance evolved as a means of enabling employers to meet the requirements of the workers, compensation laws of the states in which they operate.
Prior to the enactment of these laws, the only recourse open to any employee injured on the job was a negligence lawsuit against the employer a process that put the employer and the employee on opposite sides of a legal argument.
Briefly, workers, compensation legislation protects workers by providing benefits to a worker or a worker's dependents for injury, disability or disease contracted by the worker in the course of his or her employment. Compensation is made without regard to fault or legal liability.
Although specific workers, compensation benefits vary by state, medical and hospital expenses are generally fully reimbursed and monetary allowances are granted for various types of disability. In addition, burial expenses are paid up to a statutory limit.
CARE, CUSTODY OR CONTROL
Standard liability policies, including most personal umbrella policies, contain a Care, Custody or Control Exclusion. This provision eliminates coverage for property belonging to others that, for some reason is in the insured's possession and the insurer has agreed to assume liability for damage to the property.
The intention of this exclusion is to eliminate coverage for damage to property that:
Should have been prevented by the insured by exercising car;
Should have been covered by some other form of insurance coverage;
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Unfortunately, courts do not always agree about what constitutes "care, custody or control”. The courts may determine, for example, that leased machinery and equipment or property under construction is considered to be under the insured's custody. Therefore, the insured is held responsible for losses to that property.
Some umbrellas provide coverage if the insured was not obligated to provide insurance coverage property in his or her care, custody or control was damaged. In addition, umbrella coverage usually applies on an excess basis if the primary policy covers the loss.
NUCLEAR ENERGY
The personal umbrella policy is not intended to cover the catastrophic risk of a nuclear disaster. In addition, loss caused by nuclear reaction or radioactive contamination, whether controlled or uncontrolled, is excluded from the underlying property and casualty policies. There are specific policies to cover nuclear risk under various pooling arrangements.
Nuclear Energy Liability policies, issued by nuclear insurance pools, cover firms that own or operate nuclear reactors and provide proof of a company's financial responsibility if a nuclear accident should occur.
Policies are issued by any of the following or their successors:
American Nuclear Insurers; Mutual Atomic Energy Liability Underwriters; Nuclear Insurance Association of Canada.
These insurers issue policies that cover virtually everyone against liability for causing a nuclear incident. Therefore, liability coverage will not be duplicated under the personal umbrella policy.
WAR RISKS
Insurance companies only cover risks that they consider being insurable. Generally, personal umbrella policies have specific wording to eliminate liability coverage for large loss exposures that are considered uninsurable by most insurers.
For example, personal umbrella policies usually contain War Risk Exclusion for losses from war, civil war, insurrection, rebellion or revolution. The insurer is not liable for loss by fire or other perils caused, directly or indirectly, by enemy attack by armed forces, including action taken by military, naval or air forces in resisting an actual or an immediately impending enemy attack.
134 Likewise, damage caused by internal rebellion or other warlike acts is excluded.
INTENTIONAL ACTS
Any intentional acts of the insured that can be directly attributed to the insured are considered moral hazards and are excluded under most liability contracts. However, in most cases, coverage is provided for unintentional torts caused by the insured's negligence or for the acts of others for which the insured is vicariously liable.
FOR EXAMPLE:
If the insured's friend borrows a covered auto and intentionally runs over a mutual acquaintance, the insured would be vicariously liable if the driver was acting as an agent of the insured at the time of the injury.
In essence, the driver while driving the insured vehicle with the permission of the insured is also an insured. However, in this situation, if the insured were driving and the injury was caused by the intentional act of the insured, coverage would be excluded.
AIRCRAFT
Many policies define the term aircraft as a plane, seaplane, amphibian or helicopter, including operating and navigational instruments; radio equipment and other equipment attached to or carried on the aircraft.
Aircraft may also be defined as a heavier-than-air or lighter-than-air vehicle designed to transport persons or property through the air.
The definition usually excludes coverage for a hovercraft, which is considered to be a recreational vehicle.
Aircraft liability insurance is similar in design to an automobile liability policy and provides coverage for losses arising out of the ownership, maintenance or use of aircraft for which the insured is liable.
Under this coverage, two types of bodily injury may be covered: Bodily Injury Liability, excluding passengers, and Passenger Bodily Injury Liability. Typically, Property Damage and Medical Payments are also covered.
Although some personal umbrella policies provide aircraft liability coverage, most exclude coverage for any personal injury or property damage due to the ownership, maintenance, use, loading or unloading of aircraft owned or chartered by the insured.
135 However, if the insured has an underlying aircraft liability policy and it is listed on the personal umbrella Declarations page, some coverage may be provided by the umbrella. In most cases, the insurer will pay the difference between what is payable under the aircraft liability policy and the total legal liability of the insured, up to the liability limit of the umbrella.
WATERCRAFT
Many liability policies, including the Commercial General Liability policy, contain an exclusion for "bodily injury" or "property damage" that arises from the ownership, maintenance, operation, use, loading or unloading of any owned or non-owned watercraft. The personal umbrella liability policy will also typically exclude this coverage.
There is an exception, however, in that this exclusion does not apply to any injury or damage arising from owned or non-owned watercraft while they are ashore and on premises owned, rented or controlled by the insured.
It should be noted that the homeowner’s policy provides some liability coverage for certain types of watercraft owned or operated by the insured. For example, liability coverage is provided for non-owned watercraft that are not sailing vessels and are powered by an inboard or inboard-outboard engine or motor power of 50 horsepower or less.
When there is underlying coverage, most umbrellas provide excess coverage in the same way that the primary policy covers the insured. For example, if the primary policy covers "property damage" due to the ownership, maintenance, use, loading or unloading of any watercraft under 25 feet in overall length, the umbrella policy will normally pick up the excess liability coverage.
RECREATIONAL VEHICLES
For insurance purposes, the definition of a recreational vehicle includes vehicles such as snowmobiles, mini-bikes, all-terrain vehicles (Tvs) and any similar vehicles designed principally for use off public roads, whether or not the vehicles are subject to motor vehicle registration. The definition does not include motorcycles.
Some personal umbrella policies exclude liability arising out of the ownership, maintenance or use of recreational vehicles unless the insured carries underlying limits of liability for these vehicles. For example, an insured may add snowmobile liability coverage for $100,000 to a homeowner’s policy by endorsement.
If the insured also purchases a personal umbrella policy, that policy typically provides excess liability protection for the insured as long as the underlying limits remain in force.
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BUSINESS PURSUITS
Many umbrella policies exclude coverage for liability arising out of a business activity or business property unless the liability results from the named insured's or a family member's use of a private passenger vehicle. The insurer's intention is to limit coverage for any trade, profession or occupation in which the insured is engaged and which might increase the chance of loss.
The definition of business pursuits usually applies to any type of usual or ongoing business, ranging from a professional office in the home to weekly garage sales. In many cases, the umbrella insurer will provide coverage for incidental business pursuits if this loss exposure is covered by an underlying insurance policy, but coverage will be no broader than the underlying insurance coverage.
PROFESSIONAL LIABILITY INSURANCE
Personal umbrella policies contain exclusions for all claims arising out of a professional person's errors or mistakes made in the performance of the duties of that profession. When a professional fails to meet the standards of skill and care generally accepted for that profession or occupation and causes injury or damage to a client, however, that professional may be held liable and may be required to pay money damages to the injured party.
There are two types of professional liability insurance that have been developed to cover this type of legal liability. One is malpractice insurance where the negligent act causes direct injury or harm to a human being. The other is error and omissions insurance where the negligent act causes losses involving physical things, which in turn may cause damage or injury to both people and property.
DIRECTORS AND OFFICERS LIABILITY The personal umbrella policy typically excludes coverage for liability due to the insured's activity as a member of a board of directors or as an officer of an organization other than a charitable, religious or civic nonprofit organization. This exclusion is in keeping with the personal umbrella policy's intention not to provide coverage for business activities that may be covered by another type of policy.
For example, Directors and Officers Liability Insurance (D & 0 Insurance) has been developed to cover the director or officer for liability claims resulting from poor judgment and wrongful acts.
D & O Insurance pays on behalf of directors and officers (or reimburses their corporation if the executive receives indemnification) for claims arising out of error,
137 neglect, and breach of duty or misleading statement. The policy also provides for legal defense. It will not cover any active or deliberate fraud.
Although the personal umbrella policy excludes liability for business activities, it typically covers liability due to the insured's civic activities. For example, assume that a teacher for defamation of character sues the insured and other members of a school board collectively and individually.
Most personal umbrella policies would determine that service on a school board is not a "business activity" and would, therefore, provide a legal defense for the personal actions of the insured. (It is also possible that the school board could provide defense for individuals in such a matter and that the board would pay any judgment.)
In addition, the personal umbrella usually provides legal defense when an insured is allegedly slandered or slanders someone else. For example, assume the insured runs for a public office and, during the course of the campaign, he or she accuses an opponent of corruption in several newspaper ads and radio spots. I f the insured is later sued for libel or slander, the cost of the legal defense and any judgment against the insured will usually be paid by the personal umbrella carrier.
Focus Points
o Personal umbrella policies provide broader coverage than any underlying liability policy.
o The personal umbrella includes a number of provisions and exclusions.
o Exclusions are intended to prevent the insured from profiting from non-fortuitous losses.
o Exclusions are specific perils, property, locations or losses that the insurance company will not cover.
o Insurance companies are not required to give reasons for any policy exclusion.
o Exclusions help insurance companies avoid potential financial disaster by limiting loss exposure.
o Personal umbrella policies exclude coverage for injuries that are covered by workers' compensation.
o Workers' compensation insurance covers loss of income, medical and rehabilitation expenses.
o Standard liability policies contain a Care, Custody or Control Exclusion.
138 o There are two types of professional liability insurance. o Malpractice insurance covers a negligent act that causes direct injury or harm. o Errors and Omissions Insurance covers negligent acts causing losses involving physical things. o D &O Liability Insurance covers the director or officer for claims resulting from poor judgment and wrongful acts.
139 CHAPER 12: THE UNDERWRITING PROCESS
As part of their duties, underwriters identify and evaluate loss exposures, price the insurance product, determine policy terms and conditions, make the final risk selection and monitor and service the account. The series of steps that underwriters use to select evaluate and approve (or reject) applicants for insurance is called the underwriting process. An underwriter who understands and observes each step in this process is likely to achieve a profitable book of business for the insurer.
IDENTIFYING AND SELECTING A RISK
The personal umbrella underwriting process begins with the identification and selection of a particular risk. In most cases, it is the property-casualty insurance producer who initially determines whether a risk will be acceptable to the company. In essence, the producer is a field underwriter for the company who often selects the umbrella risk from his or her existing book of business.
The producer typically has had personal or business dealings with the applicant and may attest to his or her personal reputation, background and loss experience over a long period. In fact, the insured's long-term relationship with the insurance producer is often the primary reason that a personal umbrella policy is issued.
In many cases, the prospect for umbrella coverage will be an affluent client, although this is not a requirement for umbrella coverage. As we have stated, anyone who has loss exposures that could result in large liability claims is a candidate for personal umbrella coverage.
However, the producer should be careful not to select applicants who present loss exposures greater than those assumed by the insurer in its rates or premiums. Risks should be in the good to above-average range to assure that they may be profitability underwritten.
140 GATHERING, ORGANIZING AND ANALYZING
UNDERWRITING INFORMATION The insured is usually asked to answer a series of questions on a detailed application for insurance. Although the producer may complete the application, the named insured is usually asked to verify the information and then sign the application.
The application requests information about the risk being considered for insurance coverage, and in some cases, the completed application will be attached to and become part of the umbrella policy.
The questions on the application will vary by insurer, but most applications will ask for information in three specific categories:
Personal information about the named insured and other members of the household;
Information about real and personal property owned, leased or the insured that might present a liability exposure;
General insurance information that can be used to assist the underwriter in determining a premium to be charged for the umbrella coverage.
In the following sections, the information from these three categories will be used to show how to determine whether a risk is acceptable.
After the application has been completed and signed by the applicant, the insurance producer forwards the information to the line underwriter (usually located in the home office) who makes the final determination about whether the risk can be written and at what premium.
The home office underwriter analyzes the information provided on the application and measures it against a theoretically ideal risk to judge whether the applicant is a good candidate for insurance.
PERSONAL INFORMATION
The underwriter needs personal information about the insurance applicant to determine whether the risk presents any unwanted hazards for the company. The underwriter looks for specific warning signs of potential moral or morale hazard. For example, assume that during the ten years the insured has carried homeowners and auto insurance with a particular insurer he or she has maintained extremely low limits of liability.
141 The applicant's sudden interest in increasing the underlying limits and obtaining an umbrella may indicate that this is a poor umbrella risk. The underwriter should question what has happened to make the applicant now interested in increased limits.
The application provides the underwriter with basic information about the individual applying for insurance (the named insured) and members of the named insured's household. The information is used to give the underwriter a feeling for the loss exposures faced by the entire household.
The application typically asks for the following details:
Name, mailing address and residence address of the applicant;
Marital status; age (or birth date) of the applicant and spouse, in states where such questions are permitted;
Occupation and employer of applicant and spouse (if any);
Information about stability factors, such as ownership of home, years at present address, previous residence address and length of time at that address; and
Information about any liability claims made against the insured during a specified period (usually three to five years).
Such information is intended to assist the underwriter in deciding whether the applicant has any unusual exposures to loss. For example, many insurers will decline coverage for people, such as actors, professional athletes and politicians, whose professions or activities expose them to extraordinary publicity and potentially large lawsuits.
PROPERTY LOSS EXPOSURES
The personal umbrella liability application asks the applicant to describe any residence or other real property owned by the insured that could generate a liability claim. The underwriter is specifically looking for clues about the property, such as inferior construction or poor housekeeping, which might increase the chance of loss.
Because the personal umbrella typically provides coverage on a worldwide basis, the underwriter needs information about all the property at risk.
The application seeks:
Information about all residences occupied by the applicant, type of interest (owned or rented), description of any other buildings on the residence premises, the number of swimming pools at each location;
142 Information about any farms owned or rented by the applicant, including the acreage and value of any leased property;
Information about all automobiles owned or leased by the applicant, including the type and principal operator of each, where it is garaged and the rate class used for each vehicle;
Information about watercraft owned or leased by the applicant, including manufacturer, model year, type, length, horsepower, location of operation and whether any underlying policy has restrictions on water-skiing;
Information about any aircraft owned or used by the applicant with descriptions of each aircraft and additional information about the pilot;
A description of employer's liability or workers, compensation exposures, including number and type of domestic and/or farm employees;
A description of all business pursuits and business properties of the applicant;
A description of any unusual hazards, such as dangerous animals on the premises, water-skiing activities by any member of the family, child care duties (such as babysitting) by any member of the family, plans to enter a race, contest or exhibition, etc.
GENERAL INSURANCE INFORMATION
An underwriter needs as much general information about the risk as possible to properly quote the risk. Rating is based in part on an underwriter's experience and judgment and without fairly complete knowledge of the risk; an underwriter cannot provide a competitive quotation.
At the very least, an underwriter will request the following:
The policy limits desired and the requested effective date;
A schedule of all applicable underlying policies: automobile, homeowners, boat, recreational vehicles, aircraft, employer's liability or workers, compensation insurance (information typically includes the name of the insurer, policy number, effective dates, limits of liability and the premium per policy;
Information about other insurance policies in force, such as those providing coverage for business pursuits or business properties (any exclusions or limitations of liability coverage must be noted on the application for the personal umbrella policy;
143 Information about any previous personal umbrella insurer, including name of the insurer, policy number, effective dates and reason for changing insurers;
An explanation of the circumstances if any insurer has ever canceled, refused or denied renewal of a personal umbrella policy for the applicant.
ACCEPTING OR REJECTING THE RISK
Based on the personal, property and general information received on the application and an analysis of that information, the underwriter will make a decision about whether to accept or reject the risk. Many underwriters will not go to great lengths to secure information other than that on an application.
They assume that if another insurer willingly provided underlying insurance, the risk should be acceptable for umbrella insurance. However, some insurance companies will write umbrella coverage only if they also write the required underlying coverage.
Other insurers write stand-alone policies and do not require that they issue the underlying policies but only that the coverage’s are in place with some insurance company.
The underwriter determines the acceptability of a particular risk by checking it against a large number of factors related to loss potential. Some underwriters feel that if a property is eligible for a homeowner’s policy under another insurer's underwriting guidelines, it is also eligible for umbrella coverage.
Most underwriters would agree, however, that even though a risk is eligible for insurance coverage, it might be declined for any number of reasons. For example, the applicant may have an attractive nuisance, such as a swimming pool or a vicious dog, which is not properly safeguarded.
Although the primary insurer may consider this an acceptable risk, the umbrella underwriter may be concerned about the likelihood of a multimillion-dollar lawsuit if a child drowns in the insured's pool or is killed by the insured's dog.
It is likely that an umbrella underwriter would decline such a risk or require additional safeguards before the umbrella policy is issued. The underwriter may also charge an additional premium for certain hazardous exposure.
Most insurers refuse to issue coverage for persons who are engaged in illegal activities, who have unusual exposures to libel or slander suits, such as broadcasters and newspaper reporters, or whose activities cause them to face significant publicity, such as actors, professional athletes, public lecturers and politicians. The general feeling among insurers is that such persons offer substantial exposure to lawsuits and large liability settlements.
144 PRICING THE RISK
One of the most important parts of a personal line underwriter's job is to determine the proper pricing for various insurance products. The policy premium is determined by multiplying an insurance rate, the dollar amount charged per a particular amount of insurance coverage, by the amount of insurance needed.
Actuaries who collect data and analyze the many factors that determine the relative hazards of different risks usually accomplish the highly technical procedure of establishing rates. The costs of establishing rates would be prohibitive if each insurance company were to maintain its own rating bureaus.
A practical method of solving this problem is for groups of insurers to act together to set up a central body to promulgate proper rates. In addition, the pooling of various insurers, experience makes more accurate results possible.
Strictly speaking, no two personal umbrella risks present exactly the same hazards. Even if two applicants have identical dwellings, the structures will differ as to their contents, maintenance, number of occupants and so forth.
The applicants will have different types and numbers of automobiles, insurance requirements, loss histories, etc. Because these applicants have different loss exposures, an underwriter will use specific (or schedule) premium rates.
The rate is determined by an analysis of the insured's application, which is compared in terms of the relative loss exposures against a theoretical average risk. Using a predetermined average price as a base, the risk being considered is given credit for superior elements, such as fire-resistive construction, loss control devices and high-level maintenance. Risks with hazardous exposures, such as swimming pools, are often surcharged if the underwriter wishes to cover those types of risk.
ISSUING THE POLICY
After the underwriter has analyzed and priced the risk, he or she will usually forward a written premium quotation to the producer. The underwriter will note the general terms of the policy, such as the required underlying limits of liability, the amount of the self- insured retention, the proposed effective date of the policy and so forth. The producer then forwards the information to the insured that accepts or declines the quote.
If the insured accepts, the underwriter proceeds with the issuance of the actual policy. In almost all cases, the producer cannot bind or issue personal umbrella liability coverage.
Although the basic coverage’s do not vary greatly, the policy appearance and format will be quite different. In addition, the underwriter may change the coverage’s and modify the basic policy by endorsement.
145 The underwriter may wish to amend the general policy provisions to comply with the special needs of the applicant, to cover unique situations also covered by the underlying policies or to restrict certain risks that the underwriter does not wish to cover.
MONITORING THE RISK
The final step of the underwriting process is monitoring the risk throughout the policy term to confirm that the decision to write the risk was a good one. The underwriter often works with other departments, such as the accounting and claims departments, to be certain that the premiums are paid in a timely manner and that the insured's loss experience is not excessive.
As part of the monitoring step, the underwriter will often follow up with the producer about three months before the umbrella's expiration date to offer a renewal policy. Although most umbrella policies are annual policies without a guaranteed renewal provision, some underwriters will send a notice of non-renewal if the company does not want to reissue the coverage.
Sending a notice of non-renewal informs the producer and the insured that umbrella coverage will have to be placed with another insurer and also protects the insurer if there is some dispute about whether coverage should have been in force after a specific date. In some states, this notice may be required by statute.
Focus Points
o Underwriting starts with identification and selection of risk.
o Producers act as field underwriters for the company.
o Risks in the good to above-average range may be profitability underwritten.
o After the application has been completed applicant, the producer forwards it to the line underwriter.
o Underwriters use applicants’ personal information to determine the risk hazards to the company.
o The underwriter will make a decision whether to accept or reject the risk.
o Underwriters determine the acceptability of a risk by checking it against a number of factors related to loss potential.
o Personal line underwriters determine the proper pricing for various insurance products.
146 o Premiums are determined by multiplying an insurance rate by the amount of insurance needed. o Actuaries collect data and analyze factors that determine hazards of different risks. o No two personal umbrella risks present exactly the same hazards. o The final step of the underwriting process is monitoring of the risk.
147 CHAPTER 13: THE LAUNAGE OF P&C
This chapter outlines and defines the most commonly used terminology of Property and Casualty Insurance.
Abandonment
Giving the Insurer undamaged or partially damaged property for the purpose of claiming a total loss. Insurance policies prohibit the Insured from doing this unless agreed to by the Insurer.
Actual Cash Value: Actual Cash Value is the amount of money needed to repair or replace damaged property less allowance for depreciation, obsolescence, or general wear and tear. Actual Cash Value is not the same as market value.
Additional Coverage: The Additional Coverage provided are determined by the policy purchased. Additional Coverage common to many policies are: Debris Removal, Reasonable Repairs, Fire Department Service Charge, and Property Removed. Read your policy for details.
Additional Insured: An individual or organization with a financial interest in the real property that is named on the policy.
Additional Living Expense: This is found in the Farm Fire and Homeowners policies under Loss of Use, Coverage D. Additional Living Expense is coverage for the increase in living expenses that arise when an Insured must live away from the insured location due to a covered loss. Additional Living Expense Coverage covers only expenses actually paid by the Insured. This coverage does not pay all living expenses, only the increase in living expense that results directly from the covered loss, and having to live away from the insured location. If the covered loss does not make the residence unlivable, there will be no Additional Living Expense to claim. Coverage is provided for the shortest time required to repair the covered damage. Each policy should be read for details.
Adjuster: An adjuster is a person who settles claims.
Independent Adjusters work for Insurers.
A Public Adjuster is an individual hired by Insureds to represent them in handling their claim with the Insurer. Public Adjusters are normally paid a percentage of the final settlement amount, agreed to by both parties in advance. Public
148 Adjusters usually require the Insured to sign a binding legal contract before beginning work on the Insured’s behalf. As with all contracts, the Insured retains the right to cancel the contract within 72 hours of its creation.
Agent: Agents are persons trained and licensed to sell insurance products. Agents are normally considered to be representatives of Private Insurers. In the case of the FAIR Plan however, the Agent represents the Insured, and not the FAIR Plan. Agents do not have the power to bind FAIR Plan coverage. State Insurance Departments license and regulate Insurance Agents. Agents must pass an examination to receive their license, and are required to take continuing education to maintain their license. FAIR Plan employees are not allowed to have a valid Agent’s License.
Appraisal: If the Insurer and Insured are unable to reach an agreement as to the amount of a loss, the Appraisal clause of a policy outlines how the dispute will be resolved. The Conditions section of a policy must be read for details.
Applicant: A person or organization that applies for insurance coverage.
Application: The form used to apply for insurance. There is a different application for each line of business. The application must be completed truthfully, and all questions must be answered. The application must include photos of the front and back of each building and structure you want to insure. Finally, the application must include the initial premium payment.
Arson: The willful and malicious burning of property. Arson is sometimes committed with the intent of defrauding an Insurer. Both arson and fraud are considered crimes.
Assigned Risk Pool: An assigned risk pool is one form of Residual Market Mechanism. The Some forms of Automobile Insurance Plans are an example of an Assigned Risk Pool. The Plan accepts applications from persons who cannot find auto insurance and assigns the risk to Private Insurers.
Assignment: Assignment of a policy is the legal transfer of a policy to another person or organization.
Bodily Injury
Injury to a person’s body including sickness and death. Personal Liability Coverage provides coverage for bodily injury resulting from an Insured’s negligence.
Broad Evidence Rule: A rule that has developed through court decisions. The rule states that all factors that could affect the value of an item must be considered, not just the age of the item and its rate of depreciation. This principle is used to determine the coverage limit for a policy, as well as to determine the amount of a loss.
149 Building Valuation Worksheet: Any valuation system used to determine insurable value by private insurers.
Business Interruption Coverage: A policy that provides coverage for losses that result if a business is forced to shut down as a result of a covered loss.
Cancellation: Cancellation is the termination of a policy. Non-payment of premium is a common reason for cancellation. There are three types of cancellation: flat, pro-rata, and short rate.
Causes of Loss: Causes of Loss is the name given to the Commercial Fire form that outlines the covered causes of loss under the policy.
Civil Authority: Police and other Law Enforcement, Fire Marshals, Housing or Building Inspectors, are all considered Civil Authorities.
Claim: A claim is a request for coverage. To be payable, the claim must be covered under the policy, and the Insured must meet the Conditions of the policy.
Claims Experience: Claims experience is a term used in the industry to describe how many claims an Insured has made. Private Insurers will cancel or non-renew a policy if the Insured has had too many claims. This term can also refer to an Insurer’s overall claims history for the entire company.
Claim Guidelines: The Claim Guidelines explain the procedures used for handling claims.
Coinsurance: A provision in some policies that allows an Insured to carry lower coverage limits in return for a lower premium. In effect, the Insured is agreeing to pay some of a potential loss out of their own pocket, if that loss exceeds their limit of coverage.
Commercial Fire Policy: Commercial Fire Policies cover business properties.
Commercial Lines: Insurance coverage designed for businesses, organizations, and institutions.
Commission: Commission is paid to the Agent for policies they have sold. The commission paid to the Agent does not increase the premium paid by the Insured.
Comprehensive General Liability Policy: A broad liability policy covering businesses.
Comprehensive Personal Liability Policy: A broad liability policy-covering individuals.
Concealment: Failure to disclose material facts on an application for insurance, or in the presentation of a claim. Concealment on the application can result in rejection of the application, or cancellation of your policy. Concealment in the presentation of a
150 claim can result in denial of the claim, as well as cancellation of the policy. Concealment with intent to defraud is a crime.
Conditions: Provisions of the policy that place requirements on both the Insurer and the Insured.
Consequential Loss: An indirect loss resulting from direct loss to the covered property. Generally speaking, policies do not cover indirect or consequential losses, although Additional Living Expense (Homeowner and Farm Fire) and Fair Rental Value (Dwelling Fire), Homeowner, and Farm Fire) are common exceptions.
Construction Class: Construction class is one of several factors that determine the premium. The two most common construction classes are Frame (Wood) and Masonry (Brick, Stone, Concrete).
Contract: A legally binding agreement between two competent parties. A policy is a legal contract between the Insured and the Insurer.
Contract for Deed Holder: A Contract for Deed Holder is someone that has sold property to a Contract Purchaser on a Land Contract. If someone pays their monthly house payments to an individual, they are most likely a Contract Purchaser. The person they pay is the Contract for Deed Holder. They have a financial interest in the property, and for this reason must be listed on the policy. They must also be named as a payee on any payment for damage to the real property.
Contract Purchaser: A person who buys a property on a Land Contract.
Coverage A: The coverage provided for the primary building or residence. Also known as the real property.
Coverage B: The coverage provided for ‘Other Structures’ such as sheds, garages, and other real property, like a fence, or flagpole.
Coverage C: This is the coverage provided for personal property. Coverage C: Personal Property covers items owned or used by an Insured that are not real property.
Coverage D: In Homeowner and Farm Fire policies Coverage D is called Loss of Use. In Dwelling Fire policies it is called Fair Rental Value. Coverage D is a consequential loss coverage that begins when the insured location is made unlivable due to a covered loss. Coverage is provided for the shortest time required to repair the covered damage.
Coverage E: Personal Liability coverage provided in Homeowner Policies, or Scheduled Farm Personal Property provided by the Farm Fire Policy. These two coverage’s are very different. Dwelling Fire policies do not contain this section.
Coverage F: Medical Payments to Others coverage provided in Homeowners policies.
151 This also refers to Unscheduled Farm Personal Property Coverage provided by the Farm Fire Policy. These two coverage’s are very different.
Coverage G: Other Farm Structures, found in the Farm Fire Policy.
Coverage’s: The section of the policy that outlines the types of coverage provided for different categories of property, and types of losses. It includes exclusions, restrictions or limitations on the coverage provided. It also includes the Additional Coverages provided for certain property.
Covered Damage: Damage caused by a covered loss.
Covered Loss: A loss covered under the terms and Conditions of the policy.
Covered Peril: The perils for which coverage is provided by the policy.
Covered Property: Property covered under the policy.
Debris Removal Coverage
Coverage for the expense to remove debris of covered property resulting from a covered loss. Debris Removal is one of the Additional Coverage’s.
Declaration Page: The part of the policy that contains information about the Insured, the insured location, the coverage limits provided, the term of the contract, the deductible, the premium charged, and the other parties to the contract such as a Mortgagee or Contract for Deed Holder. A new Declaration Page is sent each year when the policy renews.
Deductible: The part of a covered loss that the Insured is required to pay. This is also a factor that determines the premium. The insured can reduce their premium by selecting a higher deductible amount.
Definitions: The section of the policy contract that explains the meaning of the terms used in the policy.
Denial: The refusal of an Insurer to provide coverage for a loss, for reasons supported by the circumstances of the loss, and the terms and Conditions of the policy.
Depreciation: The decrease in the value of property over a period of time due to obsolescence.
Direct Loss: Actual physical damage or destruction of real property or personal property.
152 Dwelling Fire Policy: The DP-1 Policy is the only Dwelling Fire Policy sold by the FAIR Plan. It is used for residential properties that do not qualify for Homeowner coverage. Non- owner occupied property, vacant property and cabins are some examples of property that are insured under a DP-1 Policy. The premium for the FAIR Plan DP-1 Policy will be higher than a Private Insurer would charge. The DP-1 Policy does not provide coverage for theft or liability losses.
Premium Earned: The amount of the premium that has been ‘used up’ during the time that the policy has been in force. For example, if a one-year policy were cancelled after six months, half of the premium would be earned.
Effective Date: The starting date of a policy.
Endorsement: An attachment to a policy that changes, broadens or restricts coverage.
Evaluator: An individual trained to perform inspections to determine the Actual Cash Value of a property, as well as provide other information about the property.
Examination Under Oath: The Examination Under Oath (EUO) is used by an Insurer to investigate a claim. Claim investigations rarely include an EUO. If the Insurer requests an EUO however, the Insured is required by the Conditions section of the policy to cooperate.
Excess Insurance: A policy or endorsement that provides coverage once all other similar coverage has been paid in full.
Exclusions: Perils, causes of loss, property, or conditions listed in the policy that are not covered. Read your policy for details.
Expiration Date: The day that coverage under the policy ends.
Extended Coverage: Sold as an optional part of the Dwelling Fire Policy (DP-1). The additional perils covered under Extended Coverage are: Wind and Hail, Explosion, Riot or Civil Commotion, Aircraft, Vehicles, Smoke, and Volcanic Action. Under the DP-1 Policy, the Extended Coverage perils can also include Vandalism and Malicious Mischief, for an additional premium. The Declaration Page will show whether the policy includes Extended Coverage, as well as Vandalism coverage. Each peril can have special provisions.
Extra Expense Coverage: A commercial coverage that provides for the extra expense a business incurs to continue in operation after a covered loss.
FAIR Plan: FAIR Plans were created in response to federal legislation. FAIR stands for Fair Access to Insurance Requirements. FAIR Plans are a form of Residual Market Mechanism.
153 Fair Rental Value: The name used for Coverage D of the DP-1 Policy. This is also provided as part of Coverage D in the Homeowner and Farm Fire Policies. This is a consequential loss coverage that begins when the insured location is made unlivable due to a covered loss. Coverage is provided for the shortest time required to repair covered damage.
Farm Fire Policy: The Farm Fire Policy sold by the FAIR Plan is the FP0010. The Farm Fire Policy provides coverage very similar to the DP-1. For an additional premium, the Farm Fire Policy can also provide coverage for Scheduled Farm Personal Property (Coverage E) and Other Farm Structures (Coverage G). The Farm Fire Policy does not provide coverage for liability losses. The Declaration Page will list the property and/or structures included under the policy.
Farm Scheduled Personal Property: Found in the Farm Fire Policy, Farm Scheduled Personal Property itemizes the property covered with a description and a limit for each item. Go to: Coverage E.
Fire Coverage: This is the minimum coverage available under the DP-1 Policy. Fire coverage includes the perils of Lightning and Internal Explosion. Each peril can have special provisions.
Fire Department Service Charge Coverage: Found in the Additional Coverage’s section of the policy. This coverage will reimburse up to the specified limit, if the insured is charged by the Fire Department to protect their property from damage by a covered peril. Read your policy for details.
Flat Cancellation: Cancellation of insurance coverage as of the Effective Date, with a refund of all premiums paid.
Fraud: Intentionally misleading someone to part with or pay for something through false representations. Fraud on the application can result in rejection of the application or cancellation of the policy. Fraud in the presentation of a claim can result in denial of the claim, as well as cancellation of the policy. Fraud is a crime.
Hazard
Something that increases the possibility of a loss.
Homeowner Policy: A policy that provides homeowners, condominium owners, and renters with real property, personal property, and liability coverage. The property must be owner occupied to qualify for Homeowner coverage. The Homeowner policies sold by the FAIR Plan are the HO-4, HO-6, and HO-8. Homeowner coverage sold by Private Insurers normally provides Replacement Cost coverage. All Homeowner coverage sold by the FAIR Plan, however, is non-replacement or Actual Cash Value coverage.
154 Indemnification: Restoring the victim of a loss by payment, repair, or replacement, to the same financial condition that existed immediately before the loss (no better, no worse). Indemnification under your policy is subject to the terms, Conditions, and limitations of the contract.
Independent Adjuster: A person or organization hired by an Insurer to represent them in the settlement of a claim.
Initial Premium Payment: A payment that must be sent with the application for coverage If an application is received without this payment, it will be returned, and coverage will not be placed in force.
Insurable Interest: If someone suffers a loss when covered property is damaged, they have an insurable interest in that property. If someone does not have an insurable interest in something, they cannot insure it against loss. Ownership is an example of insurable interest. Insurable interest can also be created as the result of a contract, such as a rental agreement or a mortgage agreement.
Insurable Value: Determined by the coverage provided under the contract. Private insurers generally provide coverage for the Replacement Cost Value of the property insured. Insurable Value however, can also equal the Repair Cost Value of the property, or the Actual Cash Value of the property.
Insurable Value Worksheet: Any valuation system used to determine insurable value by private insurers.
Insured: The person or organization shown on the Declaration Page, and covered by the policy. 'Insured' can include others not named on the Declaration Page.
Insured Location: The premises or property described in the policy. Also known as the insured premises.
Insurer: The person or organization that agrees to indemnify the Insured (provide coverage) for losses covered under the policy. Also known as an Insurance Carrier.
Insuring Agreement: The section of the policy that contains the Insurer's agreement to indemnify the Insured in the event of a covered loss, in return for the Insured's premium payment, and their compliance with the provisions of the policy.
ISO: A company organized for the purpose of aiding Insurers by providing rating data, policy forms, manuals, and other related services in exchange for a participation fee.
Land Contract An agreement between two individuals for the sale of real property. The Contract for Deed Holder remains named on the title deed for the property until the terms of the Land Contract are satisfied. The Contract Purchaser is also named on the deed, and is
155 allowed possession and control of the property as long as the Contract Purchaser meets the terms of the Contract.
Land Value: Part of the purchase price paid for a property is the value of the land. The value of the land is not included in the limit of coverage for the property because land is excluded from coverage. The amount of a person’s Mortgage frequently includes the value of the land. For this reason, it is not always possible to provide coverage limits equal to the amount of the Mortgage on the property.
Liability Coverage: Coverage offered under the Homeowners Policy (Coverage E and F) for losses that arise out of ownership or occupancy of the insured location, or out of the negligence of the Insured.
Limit: The maximum payable under the policy for a type of property, or type of loss. Also known as the limit of liability.
Line of Business: A term used in the insurance industry to describe different types of policies. Homeowner coverage is a line of business. Dwelling Fire coverage is a different line of business. Farm Fire is yet another line of business. Lines of business are further divided into commercial lines (for businesses) and personal lines (for individuals).
Loss of Use: Also known as Coverage D under the Homeowners and Farm Fire policies. In addition to Additional Living Expense, this coverage also provides for Fair Rental Value, and losses that arise if a Civil Authority prohibits the owner from using their premises due to a covered loss.
Market Value: Market value refers to the value of the property on the open market. Many different factors can influence the market value of a property such as: location, the income the property will generate, the supply of existing residences, the current mortgage interest rates, as well as other factors. Although some Private Insurers offer coverage for the market value of a property, the FAIR Plan does not.
Material Fact: Information that is needed to make a claims or underwriting decision that directly effects the decision.
Medical Payments to Others Coverage: Medical Payments to Others provides coverage for medical expenses of a third party (someone who is not an Insured under the policy) who is injured at the insured location regardless of whether it is the result of the Insured’s negligence.
Misrepresentation: The use of written or oral statements that do not reflect the true facts. Stating that a property is owner occupied when it is actually vacant is an example of misrepresentation. Misrepresentation on the application can result in rejection of the application, or cancellation of the policy. Misrepresentation in the presentation of a claim can result in a denial of coverage for the loss, as well as cancellation of the policy. Misrepresentation with intent to defraud is a crime.
156 Mobile Home Fire Policy: This is a Dwelling Fire Policy DP-1 sold to owners of mobile homes. Mobile homes require different rates than a standard dwelling. This policy does not provide coverage for theft or liability losses.
Mortgagee: The financial institution that has granted a mortgage on a property. The Mortgagee has a financial interest in the property, and must be named on the policy. The Mortgagee must also be named as a payee on any payment for damage to the real property.
Mortgage Clause: A provision in the policy that grants certain rights to your Mortgagee. One of those rights is to be named as a payee on any payment for damage to the real property.
Mortgage Value: The outstanding balance on a mortgage or Contract for Deed. Mortgage value is not the same as Actual Cash Value. Mortgage value will sometimes include the value of the land, which is not covered by the policy. Sometimes, mortgage companies will loan an amount in excess of the value of the home. Your Insurer is under no obligation to provide coverage equal to the amount of your mortgage balance.
Named Insured: The person or organization named on the policy. Also known as the policyholder.
Negligence: The failure to show the appropriate degree of care expected from a reasonable person. Intentional acts are not negligent acts.
Non-Renewal: The refusal of an Insurer to renew a policy for another term. A common reason for non-renewal is claims experience. Failure to pay the renewal premium on time is another common reason for non-renewal.
Perils
Perils are things that cause losses, such as fire or windstorm.
Personal Liability Coverage: Personal Liability provides coverage in cases where the Insured’s negligence results in harm to a third party (someone who is not an Insured under the policy).
Personal Lines: Insurance coverage designed for individuals.
Personal Property: Personal property is defined by most policies as property that is not permanently attached to the land. Each policy has limitations and restrictions on personal property coverage.
Policy: A legal contract that includes a Declaration Page, Insuring Agreement, Definitions, Coverage’s, Perils or Causes of Loss, Exclusions, and Conditions. The policy
157 can also contain endorsements that further modify the terms of the contract. The policy contract sets forth the agreement between the Insurer and the Insured. The contract is legally binding on both parties.
Premium: The cost of coverage under a policy of insurance. The premium charged is determined by several factors including: the protection class, the construction class, the limit of coverage, the deductible chosen, the type of policy, the occupancy (owner-occupied/tenant occupied/vacant), and sometimes the conditions found on the premises.
Private Insurer: A stock or mutual Insurance Company that sells to consumers, organizations, businesses and farms.
Producer: A person who sells insurance, also known as an Agent.
Proof of Loss: Information needed by the Insurer to establish the circumstances and amount of a claim.
Proof of Loss Form: A formal notarized statement, made by an Insured as to the circumstances and amount of a claim. The Proof of Loss Form is completed at the request of the Insurer.
Property Damage: Physical injury to, destruction of, or loss of use of tangible property.
Property Insurance: Insurance which protects the physical (tangible) property of an individual. Fire insurance is one example.
Property Removed: A coverage found in the Additional Coverage’s section of the policy. This provides coverage for property that has been removed from the insured location to protect it from damage due to a covered peril.
Pro-Rata Cancellation: Pro-Rata cancellation provides a refund of the entire unearned premium, as of the date of cancellation.
Protection Class: A factor used in determining the premium to charge for coverage. The protection class reflects the level of fire protection present. Better fire service means a lower rate for coverage.
Public Adjuster: A person or organization hired by an Insured to represent them in the presentation of a claim.
Rate: The charge per $1 of coverage that makes up the premium charged for the policy. The rate is determined by factors other than the limit of coverage. The rate is then multiplied by the limit of coverage to determine the premium. Selecting a higher deductible will result in a lower rate per $1 of coverage. An occupied structure has a lower rate for Vandalism coverage than a vacant structure. A brick building has a lower rate than a wood building.
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Real Property: Real property is defined by most policies as the structures and buildings that are permanent additions to the land.
Reasonable Repairs: This coverage is found in the Additional Coverage’s section of the policy. It provides reimbursement for temporary repairs done by the Insured to protect covered property from damage by a covered peril.
Rejection: The act of refusing an application for coverage. Private Insurers have many reasons why an Applicant does not qualify to purchase their insurance. Claims experience, poor credit, excessive distance from the Fire Department, the condition of the property, is some of the reasons given by Private Insurers for rejection of an application.
Renewal: Continuation of a policy beyond the original expiration date.
Repair Cost Coverage: Defined in the Homeowners 8 policy as: the necessary amount actually spent to repair or replace the loss to the building structure but no more than the cost of using common construction materials and methods where functionally equivalent to and less costly than obsolete, antique or custom construction materials and methods. Repair cost is not the same as Replacement cost. Repair cost does not require replacement with property of like kind and quality. Repair cost only provides coverage for a functionally equivalent replacement for covered property. Repair Cost Value is not the same as Market Value.
Replacement Cost Coverage: Property insurance that provides coverage up to the current cost to replace damaged property with property of like kind and quality, without a reduction for depreciation.
Representation: A statement made by an Applicant for insurance, or an Insured presenting a claim. False representation on the application can result in rejection of the application or cancellation of the policy. False representation in the presentation of a claim can result in the denial of coverage, as well as the cancellation of the policy. False representation with intent to defraud is a crime.
Residual Market Mechanism: The term used within the Insurance Industry to describe organizations such as the FAIR Plan or the Automobile Insurance Plan, that provide insurance to persons and organizations that do not qualify for insurance with Private Insurers.
It is the right of the Insurer to take possession of property (salvage) for which it has paid. Some Insurers, if agreed to by the Insured, will ‘sell the salvage back' by deducting the salvage value from their settlement amount, and allowing the Insured to keep the property.
Section I Coverage: The Homeowner forms have two sections. Section I provides coverage for direct loss to the covered property. (Coverage A, B, C, and D)
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Section II Coverage: The Homeowner forms have two sections. Section II provides coverage for Personal Liability (Coverage E) and Medical Payments to Others. (Coverage F)
Scheduled Property Coverage: Scheduled Property coverage is provided as an endorsement to the policy. It describes each item of covered property, with a specific limit of liability for each item, and the covered perils. The most common Scheduled Property Coverage is that purchased to cover jewelry, furs, artwork, and other high value personal property. Scheduled Property coverage can take other forms however, such as policies that cover specific locations (Commercial Lines). Although Scheduled Property Coverage is available through Private Insurers, the only Scheduled Property coverage sold by the FAIR Plan is Farm Scheduled Personal Property. The FAIR Plan does not sell Scheduled Property Coverage under Homeowners, Dwelling Fire or Commercial policies.
Short Rate Cancellation: Short rate cancellation is the refund of unearned premium less the cost of handling the request. Private Insurers use this method when the Insured requests the cancellation.
Special/Open Peril Coverage: Commonly sold by Private Insurers. Special or Open Peril Coverage provides payment for any loss that is not excluded. It is most commonly available for real property, although there are some open peril coverage’s sold for personal property.
Subrogation: If an Insurer provides payment to the Insured for a covered loss caused by the negligence of another, the Insurer can pursue the negligent party for repayment of the loss. Subrogation is the act of exercising this right. The right of subrogation is a transfer of the Insured's right to sue the guilty party to their Insurer. The Insurer in return, is required to demand repayment of the Insured's deductible and any other losses not covered under the policy. The Insured has the right to any proceeds the Insurer receives up to the amount of their uninsured loss.
Surplus Lines: Can be described as the ‘non-standard’ insurance market, although Surplus Lines Carriers are Private Insurers. Products not commonly sold in the standard market can sometimes be obtained through a Surplus Lines Carrier. Surplus Lines Carriers will also accept higher risk Insureds just as the FAIR Plan does. Sometimes a better product than that offered by the FAIR Plan can be purchased from a Surplus Lines Carrier.
Term: The length of time that the policy remains in force.
Theft: Theft is stealing, or taking the property of another without permission.
Umbrella Liability Insurance: Liability policies that provide high limits of coverage, as excess insurance.
160 Underwriting: The process of classifying properties according to the probability of having a loss, so that appropriate rates can be applied. The process also includes rejecting risks that do not meet the minimum Underwriting Guidelines of the organization.
Unearned Premium: The amount of premium that has not been ‘used up’ during the time that the policy has been in force. For example, if a one-year policy were cancelled after six months, half of the premium would be unearned.
Unscheduled Farm Personal Property: Available from Private Insurers. Unscheduled Farm Personal Property covers types or classes of property such as ‘tools’ for an overall limit. This coverage does not require the itemization of each item of covered property as Scheduled Farm Personal Property does.
Vacant: Vacant means that no one is residing at the insured location, and the personal property has been removed to the point that the property is not habitable in the normal sense.
Vandalism: Vandalism is the intentional destruction of property. Also known as malicious mischief.
Workman’s Compensation Insurance: Commercial coverage required by law, that provides coverage for on-the-job injuries, regardless of whether the employer is negligent.
161 CHAPTER 14: LLOYDS OF LONDON
Lloyd’s is an insurance market unique in the world. Almost anything can be insured at Lloyd’s: fleets of ships and aircraft, civil engineering projects, factories, oil rigs and refineries, personal lines risks as well as liability policies for most commercial eventualities, to name but a few of the thousand-and-one risks which are placed at Lloyd’s each year.
The business flows from all parts of the world and represents an income of millions of pounds in premiums each working day.
Lloyd’s is not a company. It has no shareholders and accepts no liability centrally for risks insured in the market. Lloyd’s is a society of individual and corporate members each of whom accepts insurance risks as members of one or more underwriting syndicates.
Individual members are liable to the full extent of their private wealth to meet their insurance commitments, while the corporate entities trade with limited liability.
AN INTRODUCTION TO LLOYD’S
A proper understanding of the present-day Lloyd’s, how it works, why it exists, is impossible to review without a brief glimpse of the past.
The origins of marine insurance are barely discernible in the mists of time although the practice is known to have been introduced to England by the Lombards in the sixteenth century.
The growing importance of London as a center of trade after the English Civil War led to a steady increase in the demand for insurance of ships and cargoes.
This coincided with the rise in popularity of coffee drinking in England, a custom which had far-reaching effects upon the nation’s social and commercial life. The first London coffee house opened in 1652. From the time of King Charles’s restoration to the throne in 1660, coffee houses proliferated until by the end of the century they were numbered in hundreds.
In contrast to the inns and taverns which had always existed in profusion, coffee houses provided congenial meeting places for serious and clear-headed discussion. In the City their popularity as places for the transaction of business was quickly established. The
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Royal Exchange, the traditional meeting place of merchants, offered little in the way of comfort and convenience and must have been frequently deserted in favor of the coffee house.
Business in those days was conducted very informally and the insurance of ships and cargoes was a fairly simple matter of hawking a policy around the City for subscription by anyone with the private means to take a share of the risk in return for a portion of the premium.
A merchant with a ship to insure would request an ‘insurance office’ acted as a broker, taking the policy from one wealthy merchant to another until the risk was fully covered.
The broker’s skill lay chiefly in ensuring that policies were underwritten only by men of sufficient financial integrity to meet their share of a claim – to the full extent, if need be, of their personal fortunes.
It was against this background that Lloyd’s Coffee House made its appearance in Tower Street some time in 1688, the year that the ‘bloodless revolution’ brought William and Mary to the throne of England. Unfortunately very little is known either about Edward Lloyd or his coffee house.
It was one of many similar establishments and, apart from occasional references in contemporary newspapers, the record is blank. The first mention of Lloyd’s appears in the late 1680s when an advertisement in the London Gazette offers a reward of a guinea for information about stolen watches, claimable from ‘Mr Edward Lloyd’s Coffee House in Tower Street’.
It seems very likely that, from the first, Edward Lloyd encouraged a clientele of ships’ captains, merchants, ship owners and others with an interest in overseas trade. Coffee houses in general (and Lloyd’s was surely no exception) were centers of discussion where, in the days before newspapers, the latest gossip could be heard. More than this, at a time when communications were laborious and unreliable, Edward Lloyd gained an enviable reputation for trustworthy shipping news.
This was one of the basic ingredients of successful underwriting and perhaps more than any other factor, ensured that ‘Lloyd’s coffee house’, over and above its rivals, became the recognized place for obtaining marine insurance.
As far as is known, Edward Lloyd took no part in underwriting. He contented himself with providing congenial premises and the facilities for his patrons to do business, remaining a ‘coffee-man’ until his death in 1713.
Lloyd’s chief bequest to posterity was his name and the coffee house which bore it. Up to 1720 there is nothing to suggest that underwriting was carried on exclusively in any one place. But in that year a piece of legislation was enacted by Parliament,
163 which profoundly influenced the future of Lloyd’s Coffee House as a center of marine insurance.
For some years previously there had been intermittent attempts to set up a securely based insurance corporation (or chartered company) that it was hoped would bring some regularity to the disorderly commercial world of the early Georgian period. At this time, too much wealth and too little employment for it had given rise to the wild investment speculation, which swept London and culminated in the collapse of the South Sea Company in 1720, ruining thousands of investors. The ‘South Sea Bubble’ was the most spectacular of many frauds and failures of corporate enterprises at a time when disreputable companies ballooned and burst overnight.
The ‘Bubble Act’ (so called because it was passed as the drama of the South Sea Company reached its climax) granted charters to the Royal Exchange Assurance and the London Assurance Companies, prohibiting marine insurance by any other corporation or business partnership.
The legislators had no intention, however, of curbing the underwriting activities of private individuals such as the respectable merchants who had traditionally subscribed their names to insurance policies.
Unlike companies and partnership groups, private underwriters on accepting a risk bound themselves ‘each for his own part not for one another and, by long standing custom, the whole of their private estate was pledged as security to meet a claim.
For these reasons the Act deliberately excluded ‘private and particular’ persons from its scope and Lloyd’s can be fairly said to owe its future existence to this omission.
The threat presented by the two un-enterprising insurance corporations did not prove to be serious, though it probably caused the merchant underwriters to concentrate in a community of interest at the place most frequented by them – Lloyd’s Coffee House, then located in Lombard Street.
BIRTH OF A SOCIETY OF UNDERWRITERS
As the eighteenth century drew on, the informal gathering of merchants at Lloyd’s gradually assumed a more cohesive identity. But there was little or no restriction of the activities of the patrons and we can assume that a very mixed bag gathered under its roof. In those times a thin line divided respectable marine underwriting from the sort of insurance that would be regarded even beyond the scope of a bookmaker.
Gambling was still the outlet of excess wealth as it had been in the years before the ‘South Sea Bubble’ burst. Side by side with the insurer of ships and cargoes there existed men who would make a book on any eventuality – against an ailing monarch, for example, dying within a certain time, or perhaps a highwayman being caught and hanged.
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In 1769, however, a number of Lloyd’s more reputable customers decided to break away and set up a rival establishment in nearby Popes Head Alley devoted strictly to marine insurance. This step was one of the first signs of any community of interest among underwriters at the coffee house. It led rapidly to the establishment of a properly constituted society out of which evolved the business institution of today.
‘New Lloyd’s Coffee House’ as it was called, soon proved to be too small. In 1771 a committee was elected to find new premises and 79 merchants, underwriters and brokers each paid £100 into the Bank of England for that purpose.
Three years the Committee in the Royal Exchange and ‘New Lloyd’s’ leased later rooms left the coffee house for good. Although everyone still referred to ‘Lloyd’s Coffee House’ for many years to come there is no doubt that it immediately took on the appearance of a place of business rather than one of refreshment. The modern Lloyd’s had been born.
For the next century the society of underwriters at Lloyd’s evolved step by step, gradually assuming its present day form. Membership was regulated and the elected Committee given increased authority.
This period of evolution culminated in 1871 with the incorporation of Lloyd’s by Act of Parliament. Up to then, Lloyd’s constitution had been based on the ‘Trust Deed’, a legal document drawn up in 1811 and signed voluntarily by all subscribers to Lloyd’s – or ‘members’ as they were called after 1843. Lloyd’s Act gave the Society a formal legal basis enabling it to acquire property and to make byelaws, which had the full authority of Parliament behind them. If the Trust Deed marked the end of the coffee house era, Lloyd’s Act confirmed the existence of the modern business institution seen at Lloyd’s today.
Lloyd’s Act 1982
Lloyd’s Act of 1871 has been followed by five further Acts to meet the Society’s changing needs. The most recent of these, Lloyd’s Act 1982, resulted from an inquiry into the society’s constitution and the effectiveness of its powers of self-regulation.
The inquiry, established by Lloyd’s in 1979 and chaired by a former High Court Judge, Sir Henry Fisher, recommended the formation of a new body, the Council of Lloyd’s, to assume the rule-making and disciplinary functions hitherto vested in Lloyd’s membership as a whole.
A Bill to give effect to this and other changes was overwhelmingly endorsed by the membership in November 1980 and enacted in July 1982 after lengthy debate and detailed scrutiny by committees of both Houses of Parliament.
165 The Homes of Lloyd’s
When Edward Lloyd’s business outgrew the original Tower Street coffee house he moved in 1691 to Lombard Street nearer to the heart of the City of London. By this time Lloyd’s Coffee House had become one of the principal commercial coffee houses in the City. Merchants, ship owners and captains, in fact everyone with an interest in maritime trade, were drawn to Lloyd’s by the enterprising proprietor’s extensive network of shipping information which was usually reliable in those less well informed times. Over the next 80 years, under various owners and managers, Lloyd’s Coffee House prospered and slowly evolved into a more formal society until in March 1774 the Subscribers to Lloyd’s occupied new premises over the Royal Exchange in Cornhill.
With some interruption Lloyd’s occupied premises there until 1928 when, having purchased the freehold of a site in Leadenhall Street, the market moved into a new building there, the first ever owned by the society.
By 1948 further expansion of Lloyd’s necessitated the purchase of an adjacent site and in 1958 underwriting activities moved across Lime Street into a second new building. In 1978 Lloyd’s again faced the prospect of unacceptable overcrowding and a decision was taken to redevelop the Leadenhall Street site of Lloyd’s old building.
A leading architect Richard Rogers (now Lord Rogers) was appointed to design a new home for Lloyd’s, which would enable the market to expand well into the first half of the 21st century and hopefully beyond. The new building, which is of advanced design and incorporates the latest developments in electronic technology, opened for business in May 1986. A formal opening ceremony was performed by HM The Queen the following November.
The Lloyd’s market now operates on the ground floor and a number of galleries. The total possible underwriting area is 200,000 square feet (19,000 square meters). The first six gallery floors are constructed round a central atrium which rises over 200 feet to a barrel-vaulted glass roof. The remaining six floors are stepped back and reveal the south window with its spectacular views across London.
The Governance Of Lloyd’s
Lloyd’s has a three-tier system of governance. The Council of Lloyd’s is a statutory body established under Lloyd’s Act 1982 comprising members elected from and by the working and external membership and individuals nominated by Lloyd’s and approved by the Governor of the Bank of England.
The nominated members have no business connections with the Lloyd’s market. The Council elects the Chairman and Deputy Chairmen from among their number.
166 Lloyd’s Market Board is concerned with developing the business of the Lloyd’s market, setting common standards for systems and ensuring that such processes as risk placing and claims settlement work efficiently and effectively.
Lloyd’s Regulatory Board is responsible for developing regulatory practice and procedures and ensuring compliance throughout the society. The separation of regulation from business development was a key recommendation of the Lloyd’s Task Force report published in 1992 and was directed at eliminating the perceived conflicts of interest made when both responsibilities were vested in the Council as a single body. Responsibility for regulation of the Lloyd’s market will in future reside with the Financial Services Authority (FSA).
LLOYD’S TODAY
Lloyd’s may be able to trace its roots to a 17th century coffee shop, but that has little bearing on the market’s current practices. Today, Lloyd’s is home to some of the most skilled and experienced specialist underwriters in the world, leading the industry in creating new areas of insurance, such as kidnap and ransom, space and aviation and cyber- liability, in addition to covering more standard classes of insurance.
In terms of how business actually works in the market, Lloyd’s utilizes a range of modern IT systems for processing the millions of risks it deals with every year. Certain classes of insurance can now be bought on- line from registered insurance professionals based at Lloyd’s, including fine art and cargo. And Lloyd’s own website, www. lloyds. com, allows insurance brokers and other professionals from all over the world to find information on available cover in the market.
LLOYD’S GLOBAL INSURANCE INDUSTRY
Any organization that has existed for over 300 years will have experienced many changes. Entire national economies and insurance industries have matured in the developing world, and new types of insurance have been invented, many by Lloyd’s itself.
Today, over 90% of FTSE 100 companies have policies with Lloyd’s (FTSE 100 and Dow Jones IA / Xchanging Ins- sure Services, as at Dec. 2002). The market also underwrites 29% of world aviation and 12% of world marine business (FTSE 100 and Dow Jones IA / Xchanging Ins- sure Services, as at Dec. 2002.)
The London market for insurance is the world’s leading center for international insurance and reinsurance, and Lloyd’s accounts for 52% of its gross premiums (International Financial Markets in the UK, as at May 2003 (pg. 9), Figure for 2001 est.)
In 2003, the Lloyd’s market has grown to record size in terms of its ability to accept insurance premiums, which have reached a new high of $23.2 billion (Lloyd’s Members’
167 Services Unit, as at Feb. 2003. Exchange rate: £1: $1.61), spread across 71 syndicates (Lloyd’s Members’ Services Unit, as at Jan. 2003.)
Lloyd’s share of the world’s largest insurance market, the United States, is continuing to increase, with Lloyd’s now the largest single insurer of ‘surplus lines’ business. This is insurance for which coverage is not available in the standard or ‘admitted’ U. S. market, generally because of the scale of risk to be covered or its specialized nature.
93% of companies in the Dow Jones Industrial Average have policies with Lloyd’s (FTSE 100 and Dow Jones IA / Xchanging Ins- sure Services, as at Dec. 2002.)
LLOYD’S IN THE U. S.
Lloyd’s relationship with the U. S. has been a long and innovative one. Today, Lloyd’s is known in the U. S. primarily as the largest surplus lines insurer and one of the largest reinsurers, but in reality, Lloyd’s is much more.
In the 1800’s Lloyd’s began by insuring ships and cargos, and over the next 100 years developed innovative cover such as kidnap and ransom insurance, bankers’ blanket bonds and workers compensation insurance.
Last century saw Lloyd’s provide insurance against natural catastrophes such as the 1906 San Francisco earthquake and more recently cover for classes of medical malpractice, directors and officers liability and terrorism insurance. Throughout this long relationship with the U. S., Lloyd’s has provided American businesses with creative solutions to their risk management needs.
U. S. buyers of insurance from Lloyd’s benefit from the added security of the U. S. Trust Funds, which at the end of 2002 totaled more than $16.5 billion (Lloyd’s Global Report 2002)
All surplus lines, reinsurance and licensed business written by Lloyd’s are supported by these static regulatory deposits, which are funds Lloyd’s maintains in trust for the benefit of the U. S. policyholder.
LLOYD’S FINANCIAL PERFORMANCE
In the past, financial analysts have commented that Lloyd’s tends to outperform the rest of the insurance industry, doing better during profitable periods and under performing during poorer market conditions. This is due, in part, to Lloyd’s willingness to underwrite new, difficult and complex risks, placing Lloyd’s at the leading edge of the insurance industry. Lloyd’s newly introduced franchise system and business planning aim to improve the market’s financial performance, giving more consistent results and long- term profitability.
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Financial ratings agencies A. M. Best and Standard & Poor’s certainly have sufficient confidence in Lloyd’s to rate it A- (Excellent) and A (Strong) respectively, offering its clients first-class security.
Lloyd’s traditional three- year accounting system had made it difficult to compare its financial report on an annual basis. In 2002 Lloyd’s published its results on an annual accounting basis, improving the transparency and comparability of Lloyd’s to its peers.
Lloyd’s combined ratio of 98.6% for 2002 (Lloyd’s Global Results 2002) is a significant achievement, and highlights the ability of Lloyd’s to outperform others in the industry.
AN INTERNATIONAL INSTITUTION
Although it is synonymous with the City of London, Lloyd’s is a truly global organization, attracting business and capital from around the world. The Lloyd’s market conducts business in over 120 countries and has its own offices and staff in 25 countries.
Lloyd’s largest single market is the United States, which accounted for 35% of its business or $8 billion in 2002, followed by the UK, Canada and Bermuda.
Of the capital that now supports Lloyd’s, over 45% comes from non- UK sources, primarily the U. S. and Bermuda. Insurers from all over the world operate businesses at Lloyd’s including Berkshire Hathaway (USA), Munich Re (Germany), Mitsui (Japan), AIG (USA) and ACE (Bermuda).
Lloyd’s underwrites a huge range of businesses and projects internationally including oil rigs, underground transport networks, airlines and the world’s top five manufacturers of personal computers.
LLOYD’S CAPITAL
When Lloyd’s was founded in the 17th century, its financial backers were wealthy private individuals who staked their entire fortunes by trading with unlimited liability. (Under UK law, any sole trader has unlimited liability.) Because these individuals signed their names on early insurance contracts called slips, they became known as ‘Names’.
The Names were Lloyd’s sole backers until 1994 when the market voted to allow corporate capital into the market. Since then, the make- up of Lloyd’s capital base has gone through a major change.
Today, 87% of the capital backing at Lloyd’s comes from corporate bodies – primarily the international insurance industry. American and Bermudan companies supply 31% UK insurers 36% 14 and the remainder comes from other overseas companies and Names who have converted to limited liability by forming limited companies.
169 In 2003, the number of Names trading with unlimited liability has dropped to just over 2,000. It is no longer possible for any further unlimited liability Names to join the market.
The reality of Lloyd’s in 2003 is a bold and vibrant picture. A thriving international business with the ability to accept $23.2 billion in insurance premiums. A business that 96% of the FTSE 100 and 93% of the Dow Jones Industrial Average chose for their insurance. It is not without good reason that Lloyd’s has been the best known brand in global insurance – for over 300 years.
And as it trades into the 21st century, Lloyd’s continues to be at the forefront of world insurance. Lloyd’s premium income was $26.1 billion in 2002,
LLOYD’S BUSINESS BY CLASS
Accident & Health 4%; Motor and Third Party Liability2%; Motor and Other Classess7%; Marine, aviation & transport 14% ; Fire and other damage property 22% ; Third Party Liability 23%; Other 3%; Reinsurance Acceptance 25%.
LLOYD’S BUSINESS BY REGION
USA 35% UK 32% EUROPE 14% Other Americas 9% Asia/ Africa 7% Rest of World 3%
Source: Lloyd’s Market Reporting Figures as of 2002. Source: Lloyd’s Market Reporting
LLOYD’S U. S. BUSINESS BY CATEGORY 2002
Surplus lines 50% Reinsurance 37% Exempt lines 11% State licensed 2% Figures as at 31 December 2002. Source: Lloyd’s Worldwide Markets
Lloyd’s America, Inc. is not licensed as an insurer in any state. Underwriters at Lloyd’s are licensed only in Kentucky, Illinois and U. S. Virgin Islands, and are approved surplus lines insurers in all U. S. jurisdictions except Kentucky and U. S. Virgin Islands. Any surplus
170 linesbusiness transacted with Lloyd’s must be through a licensed surplus lines broker. Lloyd’s is regulated in the United Kingdom by the FSA. www. lloyds. com/ America
LLOYD’S OF CHAIN SECURITY
All premiums received are held in trust for the protection of policyholders. These liquid assets are available to meet claims and other underwriting liabilities of the member. This forms the first link in Lloyd’s chain of security. All members are required to hold additional capital at Lloyd’s as further security for their underwriting. This forms the second link. Members’ other assets are also available to meet claims, forming the third link.
Lloyd’s operates a central fund, which is available at the discretion of the Council of Lloyd’s, to meet any portion of any claim that is not met from the first three sources.
This, and other Lloyd’s central assets, constitutes the fourth link in Lloyd’s chain of security.
Security is of paramount importance to all policyholders.
The structure of security at Lloyd’s is determined by the way the Lloyd’s market is constituted. Lloyd’s is a society of members who underwrite insurance in groups, known as syndicates, but each member is liable for their own share of each policy and not for those of other members.
The reputation of Lloyd’s for two leading now recognizes first class security independent international ratings agencies, A. M. Best and Standard & Poor’s, who rate Lloyd’s A- (Excellent) and A (Strong) respectively. These ratings reflect the strength of the total resources of the Lloyd’s market of $43.5 billion.
Security is paramount
Premiums Trust Funds: $27,657m* Payment of claims takes precedence over distribution of profits.
All premiums and reserves at syndicate level are held in premiums trust funds or overseas regulatory deposits. Profits are distributed only when a year of account is closed, normally after three years.
Members’ premiums trust funds and overseas regulatory deposits held at syndicate level form the first link in the chain. This is where all the premium income and any additional reserves are held in trust for the benefit of policyholders. Monies are invested conservatively in order that they are available as soon as required.
171 Other than paying claims, these funds can be used only to meet permitted expenses and outgoings, for example, reinsurance premiums, underwriting expenses and to fund the overseas regulatory deposits, which also form part of the first link in the chain.
Members are unable to receive profits from the funds until the underwriting account has been closed, three years later, and all outstanding liabilities have been provided for.
*All figures correct as at 31 December 2002. Exchange rate = £1: $1.61
Members’ funds at Lloyd’s
Capital requirements are determined for each member by Lloyd’s risk- based capital methodology, subject to prescribed minimum levels.
Capital held at Lloyd’s: $14,438m* Additional funds are held in trust as security for members’ underwriting liabilities In case the resources in the premiums trust funds prove insufficient to meet obligations to policyholders, every member, both corporate and individual, is required to hold additional capital at Lloyd’s. This is also held in trust for the protection of policyholders.
To qualify for inclusion, these assets must be readily realizable. They include cash, securities, letters of credit, and bank and insurance company guarantees.
The amount of capital required is determined by the nature and amount of risk the member underwrites. Those underwriting riskier business are required to have more funds at Lloyd’s.
Other assets owned by individual members of Lloyd’s are also available to meet claims on the policies they have underwritten, should the funds in the first two links prove insufficient.
Individual members trade with unlimited liability and are liable to the full extent of their personal wealth. This is not shown in Lloyd’s accounts, which record only the wealth that has been declared to Lloyd’s.
Corporate members are liable to the extent of their resources. They are often the subsidiaries of leading insurance companies, formed specially to participate in the Lloyd’s market.
Although aggregate numbers are shown, the first three links each operate on a several basis. Each member’s resources are only available to meet their share of claims.
Members’ other Assets
172 Additional assets not necessarily held at Lloyd’s. Frequently members, both corporate and individual, have additional assets that are also available if required to meet claims.
Individual members underwrite with unlimited liability. A corporate member may also have assets beyond its funds at Lloyd’s, which can be called upon to meet its underwriting liabilities.
Members’ other declared assets: $452m* Members’ other resources are also available to meet claims.
Lloyd’s Central Assets
The Central Fund is available, at the discretion of the Council of Lloyd’s, in the event that a claim cannot be met from the premiums trust funds or members’ funds at Lloyd’s.
Resources available to the fund: • $766m* net assets, principally in cash and conservative investments • Up to 3% of a member’s premium limit from the premiums trust funds
The Central Fund is available to back Lloyd’s policies issued after 1993. Policies issued before that date have been reinsured by Equitas, an independent FSA- authorized insurance company.
Other assets of the Society of Lloyd’s are also available to meet members’ underwriting liabilities as a last resort.
*All figures correct as at 31 December 2002. Exchange rate = £1: $1.61
The Central Fund is available at the discretion of the Council of Lloyd’s to meet any portion of any member’s liabilities that they are unable to meet in full.
As at 31 December 2002 the Central Fund stood at $766m*
The Council is also able to call from members’ premiums trust funds an amount of up to 3% of a member’s premium limit in any one year. Other assets of the Corporation, totalling $140m*, are available to meet underwriting liabilities.
Lloyd’s net central assets: $906m*
• Lloyd’s American Trust Funds $780m • Lloyd’s Dollar Trust Funds $3,825m • Credit for Reinsurance and Surplus Lines Trust Funds $11,280m • Joint Asset Trust Funds $433m • Illinois Trust Fund $459m • Kentucky Trust Fund $72m
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Lloyd’s is required to maintain regulatory deposits in the U. S. to support its surplus lines and reinsurance business as well as its licensed business emanating from Illinois and Kentucky.
These U. S. site Trust Funds are static funds, not working funds. Lloyd’s maintains these funds in trust while simultaneously paying claims and expenses out of its working premiums trust funds.
The static funds are adjusted on a quarterly basis. The most significant regulatory deposits maintained by Lloyd’s in the U. S. are those supporting its surplus lines and reinsurance business. These deposits include the Surplus Lines Trust Funds, which are several deposits maintained by Lloyd’s syndicates, and are funded at a minimum of 30% of gross liabilities.
The Credit for Reinsurance Trust Funds are also several deposits maintained by Lloyd’s syndicates, and are funded at 100% of gross liabilities which includes IBNR.
In addition, separate Joint Asset Trust Funds are maintained for surplus lines business at a minimum of $250 million and for reinsurance at a minimum of $100 million.
A stringent system of solvency and control Lloyd’s operates a stringent system of solvency controls to ensure it meets its own high standards, those of the Financial Services Authority (FSA) and of other regulatory authorities.
All members have an obligation to maintain sufficient assets in trust to meet their underwriting liabilities. The annual solvency process requires the managing agent of each syndicate to estimate all current and future liabilities.
An actuary independently validates these estimates.
Lloyd’s unique system of security means that the total assets available to meet claims compares very favorably with conventional insurance companies and comparison is made easier by the Lloyd’s security ratings from A. M. Best and Standard & Poor’s.
These ratings apply to all syndicates, regardless of their individual performance.
THE ROAD TO GLOBALIZATION – THE INTERDEPENDENCY OF THE US AND EUROPEAN INSURANCE INDUSTRIES
This segment is taken from a speech by Lord Levene, Chairman of Lloyd's at a speech to the European Insurance Summit in October of 2003.
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“ A decade or so ago, a word emerged from the undergrowth of the English language. It was globalization. New, exciting, but at the same time rather disturbing, the g-word was on everyone’s lips.
Why was there this sudden interest in this new word? Maybe it was the realization that the world was becoming a much smaller place. Global businesses could sell global brands aided by global communications. We could communicate with the other side of the world at the touch of a button. Distance was dying, borders evaporating, the world was shrinking.
Or so we were told at the time. A decade on, the froth and the hype have gone and we can now take a cool, hard look at what globalization has meant for the insurance industry. This morning, I want to do just that. I want to begin by asking a question: just how interdependent is our industry in this global age?
Second, how have global links grown, and what does this mean for the different parties? What are the challenges for the industry? And, finally, what does the future hold? 1 Rather than talk about this in the abstract, I let us focus on the relationship between the European and North American industries. So I will do exactly that, speaking from the perspective of a European insurer and reinsurer.
The extent of inter-dependence
So, let us begin by answering that first question: to what extent are the US, European and global insurance industries interlinked?
Adjectives such as entwined, interdependent, enmeshed cannot reflect the real extent to which our industry is now truly global. So we have to resort to facts and figures.
Globalization does not simply mean that the world has become a smaller place: it means that our marketplace has, in some respects, shrunk.
There are fewer reinsurers doing more business. In 1990, the world’s largest five reinsurers accounted for 21% of global premium (*1). By 2001, the largest five accounted for some 57% - a huge jump in a decade. And the trend continues (*2). These reinsurers are truly global players.
The same thing has been happening in the broking sector. The pressures of globalisation have thrown old competitors together, as analysis of Lloyd’s brokers over the past decade or so show. Of the twenty largest firms in 1992, only six are left now after merging, consolidating, or taking each other over (*3). Of today’s largest firms, most have headquarters either in the US or London. Almost all operate on the global
175 stage, with strong worldwide reach. And we have seen the rise of the mega-brokers, such as Marsh and Aon, whose worldwide wave of acquisitions has helped them grow into insurance giants.
So much for the global strength and reach of the industry. But to what extent are they interdependent? Consider European and North American reinsurers. Are we two hermetically sealed industries, Europeans doing business here and Americans doing business there? The answer is “no, emphatically not”.
A recent report from the Reinsurance Association of America (*4) – the RAA – shows that, in 2002, over 4,000 foreign insurers from 96 different jurisdictions participated in the US market.
They accounted for $46.2 billion in premiums, nearly double the figure from two years before.
Most of that foreign reinsurance came from Bermuda, the United Kingdom, Ireland and Switzerland. The UK itself accounted for $3.9 billion of reinsurance premiums, much of which found their way to Lloyd’s of London.
Europe’s strength is also notable in direct insurance. Overseas insurers, or alien insurers as they are known under the US regulatory system, account for over a third of US specialist direct insurance.
Last year, the amount of surplus lines premium Lloyd’s wrote in the US rose to $8.2 billion, our largest figure ever, up 15 per cent on 2001 (*5). This makes the US Lloyd’s largest single market.
But what do all these facts means in practice? Let me give an example from Lloyd’s business, as it demonstrates the point well. 93% (*6) of companies listed in the Dow Jones Industrial Average have policies with Lloyd’s.
Now that is, as an American might say, one hell of a relationship.
So the US-European relationship in the insurance industry is quite unique. I challenge you to think of another sector in which the US, the world’s greatest trading power, is so dependent on Europe.
Let us put the level of dependency into perspective. US imports for cross-border insurance services outpace exports by a factor of over three to one. The reverse is true for banking and securities, where exports outpace imports by the same factor. In fact, the World Trade Organization figures show that the US imports a huge 48 billion dollars of insurance services each year (*7).
Of course, there is one tragic, horrific event which illustrated the US’s dependence on the financial strength, security and resilience of European insurers and reinsurers: 9/11.
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Of the 10 insurers facing the highest gross losses from 9/11, only two are American (*8). Of the other eight, one is Bermudan, two are Japanese, and the remaining five are European – Lloyd’s included. In terms of the losses they sustained, the two US insurers net losses are 3.4 billion dollars; between them the European insurers have a net loss of over 10 billion dollars.
Lloyd’s has the single largest loss of any insurer and to date, have paid 4.2 billion dollars in claims, which I hope is helping to rebuild Manhattan (*9).
So, the conclusion could not be clearer: the two continents’ insurance industries are woven almost seamlessly together.
Drivers and significance of the relationship
But how have global links grown, and what does this mean for the different parties?
One factor that has led to the creation of the ‘global insurer’ is the changing nature of risk itself. 9/11 showed that today’s risks are greater and more complex than ever before.
Risks on this sort of scale require a global response, which a single economy cannot bear. So the advantages of sharing risk across worldwide markets are obvious. In the case of 9/11, the losses were very well spread.
Imagine if this had not been the case. The fallout would have been much worse for the US and perhaps the wider global insurance sector.
The domestic market could have collapsed as carriers failed and many more were impaired. Other financial markets, such as bond markets, would have been severely disrupted. And confidence in the insurance mechanism could ultimately have been lost.
Fortunately, this was not so. The US market was able to trade on, and the US and European industries banding together increased their ability to provide protection exponentially.
9/11 also provides a good example of the respective strengths of the US and European markets. In the dark days that followed, amid the confusion and grief and the emergence of what we might one day consider to be a new world order, terrorism cover was excluded from virtually every commercial policy.
Not only were businesses having to deal with their own personal shock – and in many cases tragic losses of life – they were grappling with a set of risks, aggregations and almost infinite possibilities that frankly made nonsense of much of what underwriters had been trained to believe and base their calculations upon.
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This episode highlighted how risk-hungry the European market is. On a daily basis it considers unique and specialized risks. This has bred a different type of underwriting – underwriting, which is prepared to think outside the box.
And in the case of London, the interplay of broker and underwriter – their face-to-face negotiations – leads to enhanced flexibility and a willingness to do business.
Does the American insurance industry lack that attitude? No, not entirely.
But it certainly does not have it in such abundance and in such a strong concentration as the square mile of the City of London.
Does it not have reinsurance expertise? Yes, it does, but not with the same depth of experience that the European markets can offer.
Why is this so? Probably because the American and European insurance markets have their roots in very different eras and different customer needs.
The London market first sprang up during the mid-1600s when the first coffee shops – early Starbucks, but not from Seattle – sprang up in our capital city and business was done on these premises.
But from those early days of writing policies to cover ships and their cargoes on epic voyages around the then sketchily mapped world, the European system of risk taking has led to a market able to write risks such as terrorism, war, kidnap & ransom, political risk, civil risk, cyber-liability – and even the odd TV game show.
The American industry, by contrast, lacked the geographical focus that could be achieved in the major European capital cities and tended to do more personal business – homeowners, farmsteads, ranches, small businesses. After all, why chance your luck on the high-risk business when the underwriters back in Europe could deal with that?
So, from these early foundations, our two markets have grown together and continued to focus on their own areas of expertise.
Third, today’s customer needs are different. Today’s commercial environment is an international one. Today’s companies are multi-nationals.
Some of the world’s most successful and most powerful companies are the result of cross-border mergers and acquisitions, and the most valuable brands have a world- wide reach we thought unimaginable even a decade ago.
Seven of the top ten Global 500 and five of the top ten Fortune 500 companies represent major cross-border activity (*10). Think of the Anglo-Dutch Royal Dutch/ Shell Group or acquisition of British retailer Asda by American Wal-Mart.
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These new, vast balance sheets create vast levels of risk, and these companies need insurers and reinsurers who have the scale, and the know-how to take it on.
Driven partly by this demand, and partly by the same economic imperatives, our industry has responded. The capital environment for the insurance sector is different.
The speed at which capital can move – and the distance that it is prepared to travel in search of a good return – has increased radically. We saw that in the aftermath of 9/11 when fresh capital was injected into our industry, often with amazing speed.
Where did the capital end up? I have no doubt that some of it was supplied to domestic US carriers. But much of it found a home for itself in other markets, most notably Bermuda and London.
At Lloyd’s alone, capital has increased by 20% in the last two years (*11). Today, North America provides the Lloyd’s market with a substantial amount of capital. Over 30 per cent of the capital backing Lloyd’s comes from the US and Bermuda (*12).
The common denominator here is that capital is no longer restricted by national boundaries, and travels to where it can most efficiently and most profitably be deployed.
The Challenges
What, then, are the challenges created by this level of interdependency between the North American and European markets?
Some people ask whether our increasingly interdependent nature – particularly within the reinsurance sector - could pose a serious systemic risk to our future. If one domino in the wall of insurance fell, would others soon follow?
9/11 helped to allay those fears. It reminded us that the leading reinsurers are geographically well spread. The top 25 reinsurance groups ranked by premium derive from nine countries.
Premiums written in 2001 amounted to $98 billion. Out of that total, German reinsurers wrote 29 percent, U.S. companies 27 percent and the Swiss and British wrote 9 percent each (*13).
Other studies support this evidence too. A recent AM Best study looked at the cause of nearly 700 US industry insolvencies between the late 1960s and late 90s (*14) . It found that there was no single cause of company failure.
Of course, Enron showed us that no one is “too big too fail” but there seems to be no evidence of reinsurer contagion. The financial collapse of even a 'Top 20' world
179 reinsurer probably poses no systemic threat to the UK, European or world insurance markets.
When the EU looked at solvency issues it identified a number of factors which had contributed to the collapse of insurance undertakings, but all but one were wholly unconnected with reinsurance (*15) .
That said, globalization has made communication more demanding. And adding fuel to this fire is the rise of e-commerce. What took weeks or days now takes seconds.
Brokers and clients communicate across different time zones. An insurer in the US can use the Internet to reinsure themselves with a reinsurer in Europe.
The result? A web of commercial transactions, which binds global industries together in a new and powerful way. It is a web that will only grow tighter and more all encompassing as the power of our technology grows stronger. Lloyd’s is taking this challenge very seriously. Kinnect is Lloyd’s-backed scheme to bring a previously unknown degree of interconnectivity between the IT systems of brokers and underwriters in the US and United Kingdom.
Interconnectivity means communicating with one another – what you and I are doing now, I hope. But that is not something that we have, as an industry, been very good at.
Kinnect will allow IT systems, which have never talked to each other to do exactly that.
The geographical emphasis is very much on the European and US markets.
And in talking to each other, risk data will be transferred easily and accurately, thus creating massive savings in time and resources.
Another challenge we need to confront is the need to share skills. On this, we have learnt a lot from the Americans. America has provided us with a style of doing business that is more in keeping with the 21st century.
So many of the management ideas and concepts we rely upon today come from the United States. Once upon a time, Europe was described as the workshop of the world.
Today, the United States is the think-tank of the world. The same applies to service standards. The US is rightly known as the country with the highest customer service standards in the world.
We in Europe have to play ‘catch up’. Once upon a time, poor service standards were not a matter of concern for us. After all, they needed us.
But some of those issues I mentioned earlier – globalization; e-commerce; the interdependency with the US – have made it an issue. We have to provide services standards that match those anywhere else in the world.
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But while we Europeans need to change how we work, America needs to change too.
For there are also difficulties for Europeans doing business with America.
Firstly, litigation. The Europeans may have invented it, but the Americans took it to a totally new level. Linked to this is the compensation culture.
Let me give you an example.
My home in London is over 200 years-old. Down in its basement, there is mould growing.
How do I deal with it?
Well, once every few years, I get it painted over. No more, no less. I do not sue anybody, nor do I seek compensation.
That approach is probably the norm in Europe, but it probably no longer is in the US.
On a more serious note, the US tort system now costs around 200 billion dollars a year. That’s equivalent to a 5% tax on wages and is forecast to rise to 250 billion dollars by 2005. That creates difficulty for those of us doing business with the United States.
Difficult because of its scale.
Difficult because of the uncertainty it creates (*16). if you don’t believe me, look at the fact that 23 billion dollars was added to US industry reserves alone last year because of adverse prior year loss development on casualty lines (*17) .
A fair proportion of it relates specifically to losses spiralling retrospectively because of asbestos, and the trend has continued into 2003.
Second, there remain barriers to trade when dealing with the US.
These are barriers, which do not exist in our own markets. Today, insurers and their intermediaries are generally free to trade across the European Union.
This system is not perfect. But, if you compare now with the past, when markets were segregated, when insurers had to comply with different laws and price controls in different member states; when there was a bewildering and diverse set of national and financial rules to be complied with… by comparison with that, today’s system does represent substantial progress towards a single market for insurers, and increasingly reinsurers and intermediaries too.
However, the system of regulation in the US causes some difficulty for foreign reinsurers.
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One of the major costs which we face there is the obligation to localize funds, whether for surplus lines business or in relation to reinsurance – where the frankly absurd American Credit for Reinsurance laws require foreign companies to over-fund by enormous amounts under a gross liability system even when they are placing retrocession back into the US market.
Such systems create complexity, and drive up the cost of doing business and that cost is ultimately passed onto the consumer, potentially limiting choice of markets for today’s multi-national clients.
The Future
So, finally, how will Europe’s relations with America change in the future?
First, Europe is changing rapidly. Europe’s influence will grow as we build a single market, in which insurers, reinsurers and brokers can trade throughout the economic region – the so-called passport system of trading.
Meanwhile, the EU itself is growing to be a union of 25 nations. I can’t begin to imagine what a GDP of $30 trillion (*18) actually feels like, but it means that Europe will soon represent the world’s largest commercial market (*19) - and its power can only increase.
Add to that the move towards the common currency of the euro, and it is clear that Europe has a key role at the center of the global insurance and reinsurance industry.
Meanwhile, we need to keep an eye on significant changes elsewhere in the world.
China is currently one of the world’s fastest growing economies. In ten years’ time, China’s insurance market is likely to be worth around 40 billion dollars (*20).
That’s why we at Lloyd’s have applied for a reinsurance license there.
Significant other markets in Asia too are deregulating and opening up, creating new opportunities for European insurers. Of course it takes time before markets march in step with the rest of the global sector. Deregulation cannot happen overnight.
Leaving aside the regulatory infrastructure, professionalism and skills take time to develop.
But consider Singapore. Its financial sector development has been a key factor in it impressive economic success over the past three decades, aided by a strategic location in a fast growing region, a skilled labour force, political and economic stability, and a strong commitment to openness.
182 Many of us would agree that the economics of insurance in a number of the developing markets must change before business becomes generally attractive to underwrite.
So, in the medium to longer term, markets in Asia will start to provide both opportunities to European insurers and reinsurers, and competition for our own industries.
Finally, all of these trends have important implications for insurance regulation. As the global market becomes forever more interdependent, regulators cannot hope to be familiar, in detail, with every carrier around the world. Reliance on high quality, home country supervision becomes a necessity if regulators are to allow their market the advantages of free access to offshore balance sheets.
Organizations such as the IAIS and OECD are now actively promoting greater co- operation between regulatory authorities, greater information sharing, and the setting of minimum standards for regulatory standards.
And of course, with another round of WTO discussions now under way, more countries will be entering the arena of liberalised trade in financial services, and more corporate balance sheets requiring access to global markets, this work must continue and gather momentum.
These are a few examples of the forces acting on the interdependency.
How they will change it overall, I cannot say for sure, but change it they will. Time will tell.
Just like its global customers, the insurance and reinsurance industry has become increasingly international, operating irrespective of national borders. If companies and nations are to manage and spread their risk effectively, they need access to global balance sheets and that same principle applies whether we are talking about terrorism, European flood risk, or Japanese earthquake risk.
However, the interdependency between the North American insurance industry and its European counterpart will continue to be a rock at the very heart of the global industry.
It is a unique relationship that exists in few others sectors of the economy.
It is a relationship founded on mutual benefit and economic history.
Its practical nature is highlighted by the events of September 11.
Globalization and e-commerce will strengthen that interdependency.
The consolidation of Europe and the rise of European single currency will undoubtedly alter it (*21)
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But let me end with the following observation.
Yes, there was hype a decade ago about globalization. It was not a new trend. After all, the three hundred year history of Lloyd’s has been one in which a coffee shop has become a market for global insurance.
But although the trend was not new, the pace of change certainly was. In a matter of years, thanks to technology, and new markets opening up, global competition became more intense.
Today, no large company can shield itself from that competition. No large company can afford to pull up the drawbridge, and hide behind national boundaries, hoping the rest of the world will go away.
Our sector has been transformed over the last decade. That’s not really surprising. Insurance is a natural fit for globalization. Sharing risks that others face on the other side of the Channel, the Atlantic or the World has been our stock in trade for centuries. The difference today is the pace of trade, the size of the risk, and the complexity of the issues we face.
Some see globalization as a malevolent force. In insurance, that is far from the case. By strengthening the links between countries, our industry can help those whom it serves.
For proof, you only need to look at our ability to cover the losses of 9/11.
Insurance is an industry founded on the concept of the many banding together to provide protection for losses suffered by the few.
That is an idea that was born well before globalization was a word on people’s lips. And thanks to the forces of globalization, it has a new, stronger lease of life. “
REFERNCE SOURCES OF DISCUSSION:
*1 Insurance Information Institute “Opportunities in Global catastrophe Reinsurance”, Dec 2000 *2 Swiss re, Sigma Report 5/2003 *3 Lloyd’s Broker Services Department, analysis of Lloyd’s brokers at March 2002 *4 All figures in next three paras: Reinsurance Association of America “Alien Reinsurance in the US Market” 2001 and 2002 reports *5 Xchanging report LEG720 year end 2002 *6 Xhchanging, 2002 *7 World Trade Organization website, Special Report on Financial Services, viewed 10/03,
184 *8 All figures in this para: Aon WTC Bulletin, 2002, Benfield WTC Bulletin, November 2002, Morgan Stanley, September 2001 *9 Lloyd’s Office for September 11th, at 10/03 *10 Fortune website, viewed March 2003. *11 Lloyd’s Member Services Unit, at January 2003 *12 Lloyd’s Member Services Unit, at January 2003 *13All figures in this para: Insurance Information Institute website, Hot Topics: “Reinsurance” viewed 10/03 *14 AM Best “P/C Industry—2001 Insolvencies”, 06/02 *15 European Commission, 1997 *16 All figures this para: Insurance Information Institute, Jan 03 *17 Standard & Poor’s, 09/03 *18 Source: Charles Tannock, MEP, as quoted in press release “Enlargement will make Europe a better place” 09/04/03 *19 FCO website, viewed 16/05/03 *20 Lloyd’s estimate based on CIRC Chairman, National Insurance Working Conference 2003, Beijing ; *21 Emerging Markets online 2003; Axco Report on China 2002; Sigma World Insurance Report 200.
LLOYD’S MEMBERS Members of Lloyd’s of London provide the supporting capital on which the market is built. Corporate members include investment institutions and international insurance companies.
Individual members are known as “Names”. Capital provided by members of Lloyd’s is used to underwrite insurance risks.
Underwriting syndicates
An insurance syndicate is a group of Lloyd’s members, corporate or individual, who provide capital to back the liabilities they insure. Syndicates are annual ventures.
Syndicates operate as independent business units within the Lloyd’s market and are run by managing agents, who appoint the underwriting team which writes risk on behalf of the syndicate membership.
There were 71 insurance underwriting syndicates operating within the market, covering many specialty areas including:
Marine ; Aviation ; Catastrophe; Professional indemnity;
185 Motor.
Syndicates tailor solutions to respond to the specific risks of the client base, which in 2003 includes 96% of FTSE 100 companies and 93% of the Dow Jones Industrial Average companies. (Source: FTSE 100 and Dow Jones IA / Xchanging Ins-sure Services, December 2002)
Syndicates compete for business, thus offering unparalleled choice, flexibility and continuing innovation.
Syndicates cover either all or a portion of the risk and are staffed by underwriters, the insurance professionals on whose expertise and judgment the market depends.
Managing Agents
Syndicates are run by managing agents who are given a franchise to operate within the Lloyd’s market.
Some managing agents are quoted companies listed on the stock exchange, while others are private companies. In some instances, managing agents act as capital providers to the syndicates they manage and so have a multi-faceted role as corporate members of the market, agents and in due course, franchisees.
Lloyd’s Brokers
Accredited Lloyd’s brokers place risk in the Lloyd’s market on behalf of clients. These brokers use their specialist knowledge to negotiate competitive terms and conditions for clients.
There are over 150 firms of brokers (figures as at 1 November, 2002) working at Lloyd’s, all of whom have a good understanding of the Lloyd’s market and many of whom specialize in particular risk categories.
Lloyd’s operates an accreditation process for brokers seeking access to the Lloyd’s Market. All brokers must be GISC or equivalent registered.
To safeguard investors, Lloyd’s performs a careful assessment of all applicant brokers, affirming their reputation and financial standing and investigating the character and suitability of officers and employees before making the decision to accredit.
Firms receive provisional accreditation for three years before becoming entitled to use the term “Lloyd’s broker”.
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Any insurance broker can access the expertise and resources of Lloyd’s by making contact with an accredited Lloyd’s broker.
REGULATION OF LLOYD'S
Lloyd's of London is regulated by the UK Financial Services Authority (FSA), under the Financial Services and Markets Act 2000.
The FSA oversees Lloyd’s regulation to ensure consistency with general standards in financial services. In practical terms however, in order to avoid unnecessary duplication, the FSA delegates a substantial part of its regulatory activity to the Council of Lloyd’s and focuses on a supervisory role.
The Council of Lloyd’s is the governing body of the Society, under the Lloyd’s Act 1982.
Much of the market’s rule structure is embedded in a series of byelaws passed by the Council. In recent years however, these have been supplemented by the introduction of core principles for underwriting agents and a number of codes of conduct are published to the market in a Codes Handbook.
Changes to regulatory requirements are communicated to the market by means of regulatory bulletins.
Day to day supervision of the market is undertaken by the Risk Management Division of the Corporation of Lloyd’s.
PLACING RISK Before a risk can be placed in the market a number of interactions must take place.
The customer (which might be an individual, company or other Lloyd’s of London syndicate) approaches a Lloyd’s accredited broker with the details of a risk to be insured. The Lloyd’s broker approaches a specialist underwriter (a leader) in the relevant class of business to discuss premium, terms and conditions. If the underwriter is interested, a proposal will be made to accept a percentage of the total risk. A number of underwriters may accept portions of one risk. This is known as a subscription market.
The broker feeds back information to the customer to enable the customer to place an order.
187 The broker prepares a “slip” with the details of the insurance, which is signed by the lead underwriter. The broker then approaches the other (following) underwriters with a view to obtaining written lines of insurance, which will total 100% or more of the risk.
XIS processes the slip and the broker adjusts or “signs down” the lines if they have exceeded 100% of the risk.
The premium is paid by the insured to the broker, who deducts any agreed brokerage fee and submits the net amount to Lloyd’s Central Accounting (LCA) as part of a regular bulk settlement process.
LCA allocates the premium to the managing agent of the syndicates involved.
Overseas Clients
Lloyd’s is licensed to do business in certain countries.
All US business underwritten at Lloyd's must be placed in accordance with US regulatory requirements and coverage must comply with local law.
New insurance enquiries from US residents should be directed to an insurance agent or broker who is licensed to conduct business in the relevant state.
Who insures with Lloyd's?
Lloyd’s syndicates insure the world’s leading businesses:
Top 8 motor vehicle manufacturers; Top 10 global pharmaceutical companies; Top 7 airlines; Top 8 global banks; 78% of the top global electronics manufacturers; 71% of manufacturing businesses.
RISK MANAGEMENT
Risk Management identifies, monitors and addresses risks that could threaten the achievement of Lloyd's franchise objectives.
The Risk Management division reports to the Director of Finance, Risk Management and Operations and is structured as follows:
188 Admissions; Cover holders; Broker Services; Operational Risk; Risk Review; Risk Analysis; Loss Modeling.
Admissions
The Admissions department is responsible for identifying and managing the risks to Lloyd’s at the point at which firms and individuals are admitted to the market, or when they wish to make significant changes to the nature of their participation.
In accordance with Franchise Board standards, Admissions manages the process of admitting corporate members, syndicates, underwriting agents and underwriters and operates a system of individual registration for senior market personnel. The department also assesses and grants certain permissions, including those for mergers and increases in the fees and profit commissions charged by agents.
Cover holders
The cover holders department is responsible for identifying and managing the risks to Lloyd’s in relation to firms worldwide who wish to have the authority to accept insurance business or issue insurance documentation on behalf of Lloyd’s underwriters.
The department acts as a focal point for the market for any issues concerning cover holders and their binding authorities.
Broker Services
Broker Services is responsible for handling new applications for accreditation as a Lloyd's broker and the re-accreditation and annual review of existing Lloyd's brokers.
Operational Risk
This department identifies, monitors and works with market participants to address operational risks that threaten individual businesses within the market, and potentially Lloyd’s itself.
The department conducts reviews of agents and syndicates, focusing on the key risk areas. Review findings are reported back to those concerned and remedial measures
189 agreed where necessary.
Feedback is given to the market on widespread issues arising from reviews.
Risk Review
This department conducts specialized reviews of risk issues that may affect the whole of the Lloyd’s market or significant sections of it.
For example, the department might assess, across the market, the adequacy of arrangements for business continuity. The results are fed back to market participants with the intention of identifying and spreading good practice.
Risk Analysis and Loss Modeling
These areas work closely together to monitor systemic and aggregate risks across the whole or major parts of the Lloyd’s market.
The first step in this process is gathering comprehensive data from the market on business written and reinsurance arrangements. The data feeds into detailed modeling of various risk events and scenarios to detect areas of potential concern.
In the event of an actual catastrophe occurring, the information base and risk model facilitates timely and accurate estimates of Lloyd’s exposure.
CORE PRINCIPLES FOR UNDERWRITING AGENTS
Integrity
An agent should observe high standards or integrity and deal openly and fairly.
Skill, care and diligence
An agent should act with due skill, care and diligence.
Market conduct
An agent should observe high standards of conduct and should take all reasonable steps to avoid causing harm to the standing or reputation of Lloyd's.
Conduct towards Members
190 An agent should conduct the affairs of each of the members for whom it acts in a manner, which does not unfairly prejudice the interests of any such member.
Information
An agent should seek from members it advises any information about their circumstances and objectives which might reasonably be expected to be relevant in enabling it to fulfill its responsibilities to them.
An agent should also take all reasonable steps to give members it advises or for whom it exercises discretion, in a comprehensible and timely way, any information needed to enable them to make balanced and informed decisions. An agent should also be ready to provide members with a full and fair account of the fulfillment of its responsibilities to them. (This principle does not require an agent to give the member concerned greater rights of access to documents and information than that member has under any agreement with the agent.)
Conflicts of interest
An agent should seek to avoid any conflict of interest arising, but where a conflict does arise, should make comprehensible and timely disclosure of that conflict and of the steps to be taken to ensure the fair treatment of any members affected. An agent should not unfairly put its own interest above its duty to any members for whom it acts.
Assets
An agent should deal with assets and rights received or held on behalf of a member prudently and in accordance with the terms of any applicable trust deed or agreement with the member.
Financial resources
An agent should maintain adequate financial resources to meet its commitments and to withstand the normal risks to which it is subject.
Internal Organization
An agent should organize and control its internal affairs in a responsible manner, maintaining proper records and systems for the conduct of its business and the management of risk. It should have adequate arrangements to ensure that staff and others whom it employs are suitable, adequately trained and properly supervised and that it has well-defined compliance procedures.
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Relations with Lloyd's
An agent should deal with Lloyd's in an open and co-operative manner and keep Lloyd's promptly informed of anything concerning the agent which Lloyd's might reasonably be expect to be disclosed to it.
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