What You'll Learn in Chapter 3
In this section, you will learn about a wide variety of policies available in Casualty or Liability insurance:
- 1. Commercial General Liability (CGL) - Protection for businesses against third-party claims
- 2. Workers Compensation - Coverage for workplace injuries
- 3. Personal and Business Auto - Vehicle insurance for individuals and businesses
- 4. Professional Liability - Protection for professionals against malpractice claims
By the end of this chapter, you will be able to:
Explain each type of coverage in terms of its features and benefits, and suitability for different types of insureds.
Terms to Know
Master These Terms!
These definitions are essential for understanding casualty insurance. You'll see them throughout the exam.
Actual Cash Value (ACV)
A method of valuation that reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear.
The Formula:
ACV = Replacement Cost - Depreciation
Example:
You bought a laptop 5 years ago for $1,500. Today, a similar new laptop costs $1,200 (replacement cost). Due to 5 years of use, the depreciation is $800.
ACV = $1,200 - $800 = $400
If your laptop is stolen, you'd get $400, not what you paid or what a new one costs.
All Risk / Open Peril
A term used in property insurance that describes coverage that insures against "any risk of loss" that is NOT specifically excluded.
Think of it this way:
"We cover EVERYTHING... except what we list as excluded."
Example:
An open peril policy might exclude flood and earthquake, but covers fire, theft, vandalism, falling objects, and anything else not specifically excluded - even weird things like a meteor hitting your roof!
vs. Named Peril: Only covers what's specifically listed. If it's not on the list, it's not covered.
Aggregate
The maximum amount allowed for payment during a policy period.
Example:
Your CGL policy has a $1M per occurrence limit and a $2M aggregate limit for the year.
- Claim 1: $800,000 paid (aggregate remaining: $1.2M)
- Claim 2: $700,000 paid (aggregate remaining: $500K)
- Claim 3: $900,000 claim but only $500K paid (aggregate exhausted!)
Key Point: Once your aggregate is used up, you have NO MORE COVERAGE for the rest of the policy period!
Bailee
Someone who is entrusted with possession of another person's property but has no ownership of it.
Common Examples:
- • Auto repair shop - has your car for repairs
- • Dry cleaner - has your clothes for cleaning
- • Parking garage - has your car while you shop
- • Jewelry store - has your ring for resizing
Why It Matters:
The bailee has a legal responsibility to take reasonable care of your property. If they damage or lose it, they may be liable!
BAILEE IS LIABLE (COVERED)
Scenario: You take your car to an auto repair shop. An employee's negligence causes a fire that damages your car.
Result: The shop (bailee) is liable because their negligence caused the damage.
The shop's Garage Keeper's insurance pays for your car damage.
BAILEE NOT LIABLE (NOT COVERED)
Scenario: You leave your car at a friend's house. Lightning strikes and damages it.
Result: Your friend isn't liable - they weren't negligent, it was an act of nature.
Your own auto policy (comprehensive coverage) would pay, not your friend's liability.
Key Insurance Point:
The BAILEE's insurance (like Garage Keeper's Legal Liability) covers damage they cause through negligence. Your auto policy is for damage from other causes.
Financial Responsibility
Proof that one can pay for damages caused, often fulfilled by purchasing insurance.
Example:
Most states have Financial Responsibility Laws that require drivers to prove they can pay for damages if they cause an accident. The easiest way? Buy auto insurance!
Ways to Prove Financial Responsibility:
- 1. Auto liability insurance card (most common)
- 2. Surety bond
- 3. Cash deposit with the state
- 4. Self-insurance certificate (for large fleets)
What Happens If You Don't Have Insurance?
State consequences for failing to meet financial responsibility requirements:
- ! License suspension - Your driver's license will be suspended
- ! Vehicle registration revocation - Your car registration gets revoked
- ! Required SR-22 filing - You'll need to file an SR-22 (proof of insurance) with the state
- ! Cash deposit requirement - May need to deposit cash with the state (amount varies by state)
Real-World Example:
John caused an accident but had no insurance. The state suspended his license and required an SR-22 filing for 3 years. Now his insurance costs are much higher because he's considered high-risk.
Inception
The date at which the insurance policy goes into effect.
Example:
You buy a policy on January 15th with an inception date of January 20th. Coverage doesn't start until January 20th - if something happens on the 18th, you're NOT covered!
Related Term: The retroactive date in claims-made policies often equals the inception date of the first policy.
Insolvent
Unable to meet financial obligations - essentially, can't pay your debts.
Why It Matters in Insurance:
If an insurance company becomes insolvent, it can't pay claims. That's why states have guaranty associations to protect policyholders when insurers fail.
Example:
If the at-fault driver's insurance company goes bankrupt (insolvent), your Uninsured Motorist coverage may kick in to protect you!
Lessor
A person granting a lease of a motor vehicle - the one who owns the vehicle and leases it out.
Easy Memory Trick:
Lessor = The one with less use of the car (they own it but don't drive it)
Lessee = The one who leases and drives it
Example:
You lease a car from Toyota Financial. Toyota Financial = Lessor (owns the car). You = Lessee (drive the car).
Private Passenger Vehicle
An automobile used for private needs rather than for business uses.
Examples of Private Passenger Vehicles:
- Your Honda Accord for commuting and errands
- Family minivan for carpooling kids
- Weekend SUV for camping trips
NOT Private Passenger Vehicles:
- Taxi or Uber vehicle
- Delivery truck
- Company work van
Why It Matters: The Personal Auto Policy (PAP) is specifically for private passenger vehicles. Business vehicles need commercial auto insurance!
SIR (Self-Insured Retention)
Money YOU pay before your umbrella policy kicks in - but only when your underlying coverage is exhausted or doesn't apply to the claim.
Think of it this way:
SIR = The gap payment you make between when your underlying policy stops paying and your umbrella starts paying.
SIR TRIGGERED (YOU PAY IT)
Your Coverage:
- Auto liability: $300K limit
- Umbrella: $1M with $10K SIR
Claim: $500K lawsuit
Who Pays What:
- 1. Auto pays: $300K (its max)
- 2. Remaining: $200K
- 3. You pay SIR: $10K
- 4. Umbrella pays: $190K
Total paid: $500K (claim fully covered)
SIR NOT TRIGGERED (NO PAYMENT)
Your Coverage:
- Auto liability: $300K limit
- Umbrella: $1M with $10K SIR
Claim: $250K lawsuit
Who Pays What:
- 1. Auto pays: $250K (within limit)
- 2. Remaining: $0
- 3. Umbrella NEVER triggers
- 4. No SIR needed!
Underlying policy covered everything - umbrella stayed on the shelf.
Critical Insurance Concept:
The SIR only applies when:
- 1. Your underlying policy's limits are exhausted, OR
- 2. Your underlying policy excludes the claim
If your underlying policy covers the entire claim, you never pay the SIR because the umbrella never gets involved!
Statute
A written law passed by a legislative body.
Insurance-Related Examples:
- Financial Responsibility Statutes - Laws requiring drivers to prove they can pay for accidents
- Workers Compensation Statutes - Laws requiring employers to carry WC insurance
- Statute of Limitations - Time limit for filing a lawsuit
Quick Reference Card
Valuation Terms
- ACV = Replacement Cost - Depreciation
- Aggregate = Max total payout per policy period
Coverage Terms
- All Risk = Covers everything EXCEPT exclusions
- SIR = Your deductible for umbrella claims
People/Parties
- Bailee = Holds property, no ownership
- Lessor = Owner who leases out
Time/Status Terms
- Inception = Policy start date
- Insolvent = Can't pay debts