Chapter Summary
This chapter covered the fundamental terminology and concepts found in casualty insurance. Below is a complete recap of all key terms organized by topic. Use this as your quick reference guide for exam review.
1 General Insurance Principles
Law of Large Numbers
The larger the number of people with similar exposure to loss, the more predictable the actual losses will be.
Insurable Interest
Must exist at the time of loss. Remember FBB:
- Financial - you'd suffer financial loss
- Blood (family) - family relationships
- Business - business partnerships, creditor/debtor
Risk
Uncertainty regarding financial loss. Two types:
Pure Risk (Insurable)
Chance of loss ONLY - no possibility of gain
Speculative Risk (NOT Insurable)
Chance of loss OR gain (gambling, investing)
Peril
The cause of loss (fire, theft, windstorm, collision, etc.)
Hazard
Conditions that increase the probability of loss. Three types:
Physical Hazard
Physical condition (icy sidewalk, old wiring)
Moral Hazard
Tendency toward dishonesty (arson for profit)
Morale Hazard
Indifference/carelessness ("insurance will pay")
Indemnity
Reimbursement principle - insureds can collect only to the extent of their financial loss. No financial gain allowed from insurance.
Subrogation
Insurer's legal right to seek damages from third parties after paying the insured. Occurs AFTER reimbursement. Prevents insured from collecting twice.
2 Property and Casualty Terms
Accident vs Occurrence
Accident
Sudden, unplanned, unexpected event (car crash, fall)
Occurrence
Includes continuous/repeated exposure (mold, pollution)
Types of Damages
Special Damages
Out-of-pocket: medical bills, lost wages
General Damages
Pain and suffering, mental anguish
Punitive Damages
Punishment for extreme/willful conduct
Negligence
Failure to use reasonable and prudent care. 4 Elements Required:
- Legal duty owed
- Breach of standard of care
- Unbroken chain of events (proximate cause)
- Actual loss or damage
Burglary vs Robbery vs Theft
Burglary
Forcible entry with visible marks
Robbery
Taking by force or threat (person present)
Theft
Broadest - any unlawful taking
Medical Payments (MedPay)
First-party coverage that pays regardless of fault. Quick payment for medical expenses without proving negligence.
Salvage
Remaining value of damaged property. After paying a total loss, the insurer owns the salvage and can sell it to recover some costs.
3 Loss Valuation
Actual Cash Value (ACV)
Replacement Cost - Depreciation = ACV
Today's value, accounting for age and wear
Replacement Cost
Cost to replace with new, like-kind item
Market Value
Price a willing buyer would pay
Agreed Value
Pre-determined value in policy
Stated Value
Maximum the insurer will pay
Salvage Value
Remaining value after total loss
4 Liability
Types of Liability
Absolute Liability
Liable regardless of fault (ultrahazardous activities)
Strict Liability
Product liability - manufacturer responsible
Vicarious Liability
Liable for another's actions (employer for employee)
Limits of Liability
Per Person
Max for one person's injury
Per Occurrence
Max for one accident/event
Aggregate
Max for policy period
Split Limits
Separate BI/PD limits (25/50/25)
Combined Single Limit (CSL)
One limit for all damages
Coverage Types
Bodily Injury (BI)
Physical harm to a person
Property Damage (PD)
Damage to tangible property
Personal Injury
Libel, slander, false arrest, etc.
5 Other Related Concepts
Deposit Premium and Audit
Estimated premium paid in advance. Insurer may audit books within 3 years to determine actual premium owed.
Certificate of Insurance
Written evidence showing insurance exists. Lists amounts and types. NOT the policy itself - just proof coverage exists.
Deductibles
Amount you pay before insurance pays. Higher deductible = Lower premium.
Binders
Temporary contract of insurance. Places insurance in effect BEFORE formal policy is issued. Can be oral or written. Only agents with binding authority can issue.
6 Warranties, Representations, and Concealment
Warranty
Absolutely true statement on which the insurance policy depends. Breach can void the policy even if unintentional.
Representation
Statement believed to be true to the best of one's knowledge. Application answers are representations. Material misrepresentations can void policy.
Concealment
Intentional withholding of material fact. May void the policy. Requires intent - forgetting isn't concealment.
Intentional + Material = FRAUD
7 Insured Contract
Insured Contract (Incidental Contract)
Definition in liability policies describing contracts where the insured assumes another's liability. Coverage extends to routine business agreements.
Examples: Leases, elevator maintenance agreements, easement agreements, sidetrack agreements, municipal permits.
8 Fair Credit Reporting Act
Fair Credit Reporting Act (FCRA)
Administered by the Federal Trade Commission (FTC). Protects consumers from the distribution of false or obsolete personal financial information.
Key Numbers to Remember
3
Years to audit premium
4
Elements of negligence
3
Types of hazards
30-90
Days for binder
Memory Aids
FBB for Insurable Interest
Financial, Blood, Business
ACV Formula
Replacement Cost - Depreciation = ACV
Hazard Types: Physical, Moral, Morale
Physical = condition, Moral = dishonesty, Morale = carelessness
Deductible/Premium Relationship
Higher deductible = Lower premium (inverse)