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Chapter 1 Recap

Complete Summary of Insurance Terms & Concepts

Part 1 General Insurance Principles

Law of Large Numbers

The larger number of people with similar exposure to loss, the more predictable the actual losses will be.

Insurable Interest

  • • Must exist at time of loss
  • • 3 elements: Financial, Blood, Business

Risk

  • • Uncertainty regarding financial loss
  • • Pure - insurable (loss only)
  • • Speculative - NOT insurable (gain possible)

Hazard

  • • Conditions that increase probability of loss
  • • Physical - physical condition
  • • Moral - tendency toward fraud
  • • Morale - indifference to loss

Indemnity

  • • Also called reimbursement
  • • Collect to extent of financial loss only
  • • No financial gain from insurance

Subrogation

  • • Insurer's right to seek damages from third parties
  • • Occurs after insurer reimburses insured
  • • Prevents insured from collecting twice

Part 2 Property and Casualty Terms

Accident vs. Occurrence

  • • Accident - sudden, unplanned, unexpected
  • • Occurrence - includes continuous/repeated exposure

Damages

  • • Special - out-of-pocket (medical, wages)
  • • General - pain and suffering, mental anguish
  • • Punitive - punishment for extreme behavior

Negligence

Failure to use reasonable and prudent care. 4 elements required:

1. Legal Duty

2. Standard of Care

3. Unbroken Chain

4. Actual Loss

Part 3 Loss Valuation

Actual Cash Value

Replacement Cost − Depreciation

Replacement Cost

Cost to replace today, no depreciation

Market Value

What buyer would pay (seldom used)

Agreed Value

Pre-agreed amount between parties

Stated Value

Scheduled amount, no coinsurance

Salvage Value

Value of damaged property remains

Part 4 Liability

Types of Liability

  • • Strict - product liability (prove defect)
  • • Vicarious - master liable for servant's acts
  • • Absolute - dangerous activities

Limits of Liability

  • • Per occurrence - max for one accident
  • • Per person - max for one individual
  • • Aggregate - max for policy year
  • • Split - separate limits (25/50/25)
  • • Combined - one limit for BI + PD

Part 5 Other Related Concepts

Proximate Cause

  • • Natural and reasonably foreseeable cause
  • • For injured party to collect, negligence must be proximate cause

Deductible

  • • Dollar amount insured pays before coverage
  • • Higher deductible = Lower premium

Coinsurance and Insurance to Value

  • • Insured maintains minimum amount of insurance on property
  • • Partial loss paid in full if minimum is met
  • • Coinsurance clause NOT affected in total loss

Formula: (Insurance Carried ÷ Insurance Required) × Loss Amount = Loss Payment

Deposit Premium and Audit

  • • Deposit premium - estimated premium paid in advance
  • • Audit - insurer may audit to verify adequate premium

Certificate of Insurance

  • • Written evidence showing policy has been issued
  • • Lists amounts and types of insurance provided

Key Formulas to Remember

Actual Cash Value

ACV = Replacement Cost − Depreciation

Coinsurance Payment

(Carried ÷ Required) × Loss = Payment

Chapter 1 Complete!

You've mastered the foundation concepts for Property Insurance. Ready to continue?

Continue to Chapter 2 →