Key Organization ISO - Insurance Services Office
Creates standardized property and casualty insurance policies which are approved by each state, then used as the base policy form for insurers. Policies are then modified to comply with each state's specific laws and regulations.
Example:
ISO creates a standard homeowners policy form (HO-3). State A approves it but requires additional flood disclosure. State B approves it with different liability minimums. Each insurer then uses these state-approved forms as their starting point.
Core Definitions
Depreciation
The decrease in an asset's value over time due to wear and tear, age, or obsolescence.
Example: A 5-year-old roof originally worth $15,000 may have depreciated to $10,000 due to weather exposure and normal aging.
Exposure
The degree to which someone or something is vulnerable to potential loss. Think of it as "how much risk are you exposed to?"
Example: A home in Florida has high exposure to hurricane damage. A business with 50 delivery trucks has more auto liability exposure than one with 5 trucks.
Implied Warranty
An unwritten, automatic legal guarantee that a product will work as intended and meet a reasonable buyer's expectations.
Example: When you buy a toaster, there's an implied warranty it will safely toast bread - even if the seller never explicitly promised this.
Insurance Policy
A legal contract between the policyowner and an insurance company. The insurer agrees to pay for covered losses in exchange for premium payments.
Insurer (Principal)
The insurance company that issues the policy and promises to pay claims.
Examples: State Farm, Progressive, Allstate, Geico are all insurers.
Obsolescence
Loss of value because something has become outdated or no longer useful, even if it still works.
Example: A building with outdated electrical systems or a factory with machinery that's no longer efficient has suffered obsolescence.
Premium
The amount of money you pay to the insurance company in exchange for coverage. Can be paid monthly, quarterly, or annually.
Tort
A civil wrong (not a crime) where someone's actions cause harm to another person, leading to legal liability for damages.
Example: Negligently causing a car accident is a tort. The injured party can sue you for damages in civil court.
Insurable Interest
You must have a legitimate stake in what you're insuring - a financial, family, or business connection. You can't insure something you have no interest in.
Key Rule: Must exist at the TIME OF LOSS for property insurance!
Example: You have insurable interest in your own car, your spouse's life, or your business partner's health. You CANNOT insure a stranger's property because you'd have no financial stake if it was damaged.
Types of Risk
Exam Tip: Only PURE RISK is insurable!
Speculative risk (where you could gain money) cannot be insured because it would encourage risky behavior.
Pure Risk (INSURABLE)
Only two possible outcomes: Loss or No Loss
- ✓ Natural Disasters: Flood, earthquake, tornado damaging your home
- ✓ Accidents: Car collision causing repairs or injury
- ✓ Theft/Vandalism: Property stolen or damaged
- ✓ Premature Death: Financial hardship from unexpected death
Speculative Risk (NOT INSURABLE)
Three outcomes: Loss, Gain, or Break-Even
- ✗ Investing: Buying stocks, real estate, commodities
- ✗ Business Ventures: Launching products that could fail or succeed
- ✗ Gambling: Sports betting, lottery, casinos
- ✗ Career Choices: Starting a business with higher risk/reward
Perils vs. Hazards
Remember the difference:
Peril = The actual CAUSE of loss (fire, theft, windstorm)
Hazard = A CONDITION that makes the loss more likely to happen
Peril = The CAUSE of Loss
What you are insured against - the event that triggers coverage.
Life Insurance
Peril: Premature death
Health Insurance
Peril: Sickness or injury
Property Insurance
Perils: Fire, theft, windstorm, lightning
Casualty Insurance
Perils: Events causing property damage or liability
Hazards = CONDITIONS that Increase Risk
Situations or factors that make a loss MORE LIKELY to occur.
Physical Hazards (Tangible - you can see/touch them)
Physical conditions that increase risk
Examples: Slippery wet floors, faulty electrical wiring, cracked sidewalks, icy roads, flammable materials stored improperly, broken locks
Moral Hazards (Dishonesty - INTENTIONAL bad behavior)
Character issues where someone deliberately causes or exaggerates a loss
Examples: Lying on insurance application, committing arson to collect insurance money, exaggerating damage on claims, staging fake accidents
Morale Hazards (Carelessness - NOT intentional)
Indifference or negligence because you're insured - "Why be careful? Insurance will pay!"
Examples: Leaving doors unlocked, not maintaining smoke detectors, texting while driving, skipping regular maintenance on your car
Memory Trick:
Moral = "I'm going to cheat" (intentional fraud)
Morale = "I don't care" (careless attitude)
Indemnity & Subrogation
Indemnity
The principle that insurance should restore you to your pre-loss financial position - no more, no less.
Why This Matters:
- Prevents people from profiting off insurance claims
- Removes incentive to cause intentional losses
- Restores you to where you were, not better off
Example:
Your $20,000 car is totaled. Insurance pays you $20,000 (its actual value) - not $25,000 or $30,000. You're made whole, not enriched.
Subrogation
After your insurer pays your claim, they "step into your shoes" and gain the right to pursue the responsible third party for reimbursement.
How It Works:
- Another driver hits you (their fault)
- Your insurer (Progressive) pays for your damage
- Progressive "subrogate" - goes after the at-fault driver's insurance
- Progressive recovers what they paid you
Why It Exists:
Prevents the at-fault party from escaping financial responsibility just because you had good insurance. Also keeps your premiums lower.
Key Legal Terms
Accident
A sudden, unexpected, unplanned event that is NOT in the insured's control and results in injury or damage.
Example: You slip on ice and break your leg. It was sudden, unplanned, and you didn't intend for it to happen.
Occurrence
Broader than accident - includes gradual or continuous exposure to conditions that eventually cause harm. The injury/damage wasn't necessarily sudden.
Example: A factory worker develops lung disease after years of chemical exposure. Not sudden, but it's still an "occurrence" for insurance purposes because the exposure happened during the policy period.
Negligence
Failure to exercise the level of care that a reasonable, prudent person would use in the same situation. It's not intentional - just careless.
Example: A store owner doesn't clean up a spill for hours. A customer slips and falls. The owner was negligent because a reasonable person would have cleaned it up or put up a warning sign.
Crime-Related Definitions (Know the Differences!)
| Term | Definition | Key Requirement for Insurance |
|---|---|---|
| Burglary | Unlawful entry using force into or out of a premises with intent to commit a crime | Visible signs of FORCED ENTRY required! |
| Robbery | Taking property directly from a person using force or threat of harm | Violence or threat against a PERSON (not just property) |
| Theft | Broad term for any act of stealing - encompasses both burglary and robbery | Broadest category - covers all forms of stealing |
| Mysterious Disappearance | Property vanishes with no knowledge of where, when, or how it was lost | NOT COVERED by insurance! |
Why Mysterious Disappearance Isn't Covered:
If you can't explain what happened to your property, there's no way to verify a loss actually occurred. You might have just misplaced it, sold it, or given it away.
Medical Payments vs. Liability Coverage
Medical Payments (MedPay)
- ✓ Pays regardless of who caused the injury
- ✓ No lawsuit or fault determination needed
- ✓ Fast payment - just submit medical bills
- ✓ Lower limits: Usually $1,000 - $5,000
- ✓ Goodwill gesture - helps prevent lawsuits
Liability Coverage
- ✓ Only pays if YOU are found legally responsible
- ✓ Usually requires a claim or lawsuit against you
- ✓ Takes longer - must prove negligence first
- ✓ Higher limits: $100,000 - $1,000,000+
- ✓ Includes legal defense costs
Real-World Example: Customer Trips in Your Store
MedPay Response:
- • Immediately pays $2,000 ER bill
- • No questions about fault
- • No investigation needed
- • Customer doesn't have to prove anything
- • Purpose: Keep them happy, avoid lawsuit
Liability Response:
- • Only pays IF they sue AND prove negligence
- • Must show: "The rug was dangerous and you knew"
- • Covers $50,000+ for pain, suffering, lost wages
- • Pays your lawyer to defend you
- • Purpose: Protect from major lawsuits
Easy Memory Trick:
MedPay = "Here's money for your medical bills, no questions asked"
Liability = "Prove I was negligent, then I'll pay for damages"
Types of Liability
Absolute Liability (a.k.a. Strict Liability)
You're held legally responsible even WITHOUT negligence or intent to harm. Applies to ultra-hazardous activities where the activity itself is so dangerous that responsibility is automatic.
Example: A construction company uses dynamite to blast rock. Even with perfect safety precautions, if the blast damages a neighboring home, they're automatically liable. The activity itself creates automatic responsibility.
Vicarious Liability
Legal responsibility that shifts to someone in a supervisory or controlling position for the actions of another.
Examples: Parents may be vicariously liable for their minor child's actions. Employers are vicariously liable for employees' actions while on the job ("respondeat superior").
Bodily Injury (BI) Liability
Liability for physical harm to another person's body, including injury, sickness, disease, or death.
Example: You cause a car accident and the other driver breaks their arm. Your BI liability coverage pays for their medical bills, pain and suffering, and lost wages.
Property Damage (PD) Liability
Liability for physical damage to another person's tangible property.
Example: You drive into someone's fence and garage. Your PD liability coverage pays to repair or replace their damaged property.
Personal Injury Liability
Harm to a person's reputation, rights, or emotions - NOT physical bodily damage. Think of it as injury to someone's dignity or standing.
Examples: False arrest, invasion of privacy, wrongful eviction, defamation (libel/slander), malicious prosecution. These ruin someone's life without physically touching them.
Limits of Liability
The maximum dollar amount an insurer will pay under the policy. Coverage stops at the limit regardless of actual damages.
Example: With a $100,000 BI limit, if you're liable for $150,000 in injuries, insurance pays $100,000 and you're personally responsible for the remaining $50,000.
Policy Terms & Concepts
Deposit Premium
An estimated premium paid upfront, later adjusted based on actual exposure. Common in workers' compensation where payroll fluctuates.
Deposit Premium Audit
At policy end (up to 3 years back), insurer audits your books to verify actual exposure and adjust the premium accordingly.
Certificate of Insurance (COI)
A summary document proving insurance exists. Shows coverage types and amounts. NOT the actual policy contract!
Warning: A COI doesn't guarantee coverage for specific situations - always check the actual policy!
Deductible
Amount YOU pay out of pocket before insurance kicks in. Higher deductible = lower premium (you're taking on more risk).
Binder
Temporary proof of insurance that provides immediate coverage while the actual policy is being prepared.
Example: Buying a house today? Get a binder for homeowners insurance so you can close while waiting for the full policy.
Insured Contract
Certain contracts where you agree to take responsibility for another party's liability (like leases or maintenance agreements).
Law of Large Numbers
The statistical principle that the larger the sample size, the more accurately you can predict outcomes. Insurers use this to set premiums.
Example: Insuring 1,000,000 drivers allows much more accurate accident predictions than insuring only 100 drivers. The larger pool of data reveals reliable patterns.
Warranty vs. Representation vs. Concealment
Why This Matters:
These are three different types of statements/actions by the insured. The type determines how easy it is for the insurer to void your policy if something is wrong!
Warranty = STRICTEST Standard
A warranty is a guarantee that something is absolutely true or that you will do (or not do) something. It's a PROMISE built into the contract.
If You Breach a Warranty:
- • Policy is automatically voidable - no questions asked
- • Doesn't matter if the breach caused the loss
- • Doesn't matter if it was unintentional
- • Doesn't matter if it was minor
- • Insurer does NOT need to prove it was "material"
Example:
Your marine insurance has a warranty that the ship will never sail north of a certain latitude. You sail 1 mile north once during calm weather and return safely. Three months later, the ship sinks in a completely unrelated storm in safe waters. The insurer can STILL deny the claim because you breached the warranty - even though the breach had nothing to do with the loss!
Representation = More Forgiving Standard
A representation is a statement of fact you make when applying for insurance. It's information you provide that the insurer relies on to decide coverage and pricing.
To Void for Misrepresentation, Insurer Must Prove TWO Things:
- 1. The statement was FALSE - You said something that wasn't true
- 2. It was MATERIAL - Would have changed the insurer's decision to insure you or the premium they charged
Example:
You say you've never had a DUI when applying for auto insurance, but you actually had one 5 years ago. This is a misrepresentation. It's likely MATERIAL because the insurer would have charged higher rates or denied coverage. The policy could be voided.
But if you said your car was blue when it's actually green? Not material - the insurer wouldn't have done anything different. Can't void the policy for this.
Fraud (Intentional Misrepresentation):
If you KNOWINGLY lie on your application with intent to deceive, that's fraud. Fraud is always grounds to void the policy and may result in criminal charges.
Concealment = Hiding Important Information
Concealment is intentionally failing to disclose material information that the insurer would want to know. It's a lie by omission - you didn't say something false, you just didn't reveal something important.
Effect of Concealment:
- • If the hidden information is MATERIAL - policy can be voided
- • Must be intentional (you knew and deliberately hid it)
- • Can be discovered later during claims investigation
Example:
When applying for homeowners insurance, you don't mention that you run a daycare business from your home. You weren't asked directly, but you knew this would affect coverage. This is concealment. If there's later a claim related to the daycare, the insurer can deny it and potentially void the entire policy.
| Type | What Is It? | To Void Policy | Strictness |
|---|---|---|---|
| Warranty | A guarantee/promise in the contract | ANY breach - automatic | STRICTEST |
| Representation | Statement of fact on application | Must be false AND material | MODERATE |
| Concealment | Intentionally hiding info | Must be intentional AND material | MODERATE |
Memory Trick:
Warranty = "I PROMISE this is true" (strictest - any breach kills the contract)
Representation = "I'm TELLING you this is true" (must be false + important)
Concealment = "I'm NOT telling you something" (must be intentional + important)