P&C Principles
What Insurance Is All About
Insurance companies are a vital part of society and the economy. Insurance companies are financial intermediaries which means that they obtain money from one source and redirect it to another. Banks, savings and loan associations as well as insurance companies, basically collect small sums of money from their clients and policyholders, pool the money, and then lend larger sums to and/or invest larger sums into other entities. Of course, not all financial intermediaries operate in this exact manner. Consumer and sales finance companies generally obtain large sums of money in the commercial paper market and then lend it in smaller sums to individuals and businesses. The basic formula is the same either way; there is merely a difference in the direction of the money.
The role of financial intermediaries is very important to the economic well-being of our country and its population. Fraud and abuse of the insurance system affect how the flow of money works. Too many consumers feel justified in filing false or overvalued claims because they think insurance companies are "rich" and they want to get "their fair share." It is necessary to educate our clients on how the money is used. Many large insurance companies are attempting education already. Consumers need to know that their insurance companies provide benefits beyond the insurance policy that they bought. If banks, savings and loans, savings banks, pension funds, and, yes, insurance companies did not pool money for use by other segments of the business community, the entire economy would be affected. The economy would, in fact, slow down dramatically and that affects everyone in nearly all job lines.
There is a need for efficient collectors and distributors of capital because there is a demand for business capital. That capital is in short supply as any small businessman or woman knows.
There are many economic aspects of insurance involving our society. Many areas of business, besides available capital, could not exist as it is today without the aid of insurance. Therefore, the benefits of insurance for society outweigh any cost involved.
Even so, the effects of insurance do exist. Perhaps one of the most obvious Social costs involves irresponsibility on the part of the insureds. Some businesses and individuals may tend to be careless about potential dangers simply because they know they are insured. This is an example of a morale hazard. Refer to this text or to the glossary at the end of it for a definition of morale hazard.
There are also moral hazard losses (no "e" at the end of this type of moral. Again, refer to this text or to the glossary at the end of it for a definition of moral hazard). As you know, these losses occur because insurance exists. Such things as arson for profit would not occur if no insurance existed. Of course, some types of arson have nothing to do with insurance; arson for profit is specifically aimed at collecting insurance funds.
Another social cost has to do with the human and material resources used to operate the insurance business. This involves the use of paper products, land for buildings, and so forth. It is possible that some of the resources could be used elsewhere with other goals in mind. Insurance companies are well aware of these costs to society. Many companies direct funds to reduce this type of social cost. Their efforts often include reducing paperwork, careful underwriting to attempt to uncover moral and morale hazards, policy design, and loss adjustment in conjunction with underwriting. In addition, the insurance industry puts forth extensive educational efforts aimed at businesses and the general consumer.
Many industries take more than one form. This is also true for insurers. In the United States insurers are either owned privately or by a government unit.
Insurers:
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Government |
Private |
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State Government: |
Federal Government: |
Proprietary: |
Cooperative: |
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Worker's Compensation |
Old-Age Survivors Disability |
Capital-Stock Company |
Mutual Insurance Company |
The old-age survivors disability health program under the government unit is handled by the Social Security Administration under the United States Department of Health, Education, and Welfare.
There are several reasons why private insurance companies might be formed to:
1. Earn profits for the owners,
2. Accomplish gains for its promoters,
3. Earn fees and commissions for those who market its products,
4. Lower insurance costs for its owners,
5. Provide its owners with a type of insurance protection not available to them in the marketplace and
6. Sell services only on a prepaid basis.
There is a general difference between a proprietary and cooperative company. A proprietary insurer is organized and operated for profit. A cooperative insurer is formed and operated to furnish insurance at cost to its members.
This is an oversimplification to some degree. For example, a proprietary insurer may be formed and operated by another business to obtain their insurance at cost. In this situation, the subsidiary insurance company is called a captive insurer. They may be formed as an alternative to self-insurance.
In the United States, consumers have spent nearly $100-billion per year to insure their cars and homes. In many states, various types of property and casualty insurance are required by law. Loaning institutions require that insurance is in place for their protection against default. Agents complain that consumers give all the signs of understanding what they are buying when, in fact, they do not understand most of it. Everyone advocates consumer education, but it has proven more difficult than expected. It is understandably hard for many people to admit that they do not understand what they are buying. It is the job of every insurance agent to use terms that are on a lay person's level.
Insurance, as we all know, is bought to offset the risk which exposes a person or persons to losses resulting from perils. The term "risk" is often interchanged with the terms hazard and loss. Risk is generally considered to be the uncertain potential for loss. There are varying degrees of risk; risk is usually not desired.
The words, "chance of loss," are often used in place of the word or term "risk." However, they may not always mean exactly the same thing. "Chance of loss is the long-run relative frequency of a loss" states the textbook Principles of Insurance written by Robert Mehr and Emerson Cammack. The chance of loss is often stated as a percentage since it often expresses mathematical probabilities of probable numbers and severity of losses out of a given number of exposures. To put this in simpler terms, if a person flips a coin, there is a 50/50 chance that heads will land face-up. This may be stated as 50/50, 1/2, or 50%. So it is with chance of loss. The probable number of losses is the numerator, and the number of exposures is the denominator.
When insurance companies figure their chances of loss, it is a serious venture. To miscalculate such chances could cause the company serious financial losses. This is true regardless of the type of policy involved.
Chance of loss is also the basis upon which rates or premiums are established by the insurance companies. A degree of accuracy is absolutely necessary.
An insurance policy is a contract between the insured and the insurance company. The insured pays a "premium," which is the price or cost of the policy. The insurance company agrees to pay for the insured’s losses resulting from events which the policy covers. Fire, burglary, or a car collision would be examples that would be covered under a property and casualty policy. Policies typically have what is called a "policy limit." That means there is a limit to the amount of money the insurance policy will pay on a loss.
Property Insurance covers damage to or theft of the insured’s possessions. Casualty insurance (also called Liability insurance) pays for the insured’s legal responsibility to other people for property damage or bodily injury losses. Automobile and homeowner's policies typically cover BOTH property and liability coverage.
Whether the policy is for property and casualty or life and health, insurance policies seldom (if ever) covers every possible kind of loss. If an insured is concerned about a specific cause of a loss, questions should be asked to be sure it is covered under their policy.
Often consumers believe that an item mentioned in their policy receives complete coverage. This is not necessarily the case. For example, if a diamond ring is covered against theft in a homeowner’s policy, that does not necessarily mean it will also be covered should the diamond drop out of its setting and become lost. These are the types of things that need to be fully explained to the insured. A "floater" may possibly be added to the homeowner's policy to include the loss of the stone. A floater is a separate policy or addition which may be added to the original policy. It is often called an "endorsement." Floaters may also be used to raise the dollar limits in policies. Many homeowner policies would cover the theft of a ring only up to $1,000 or $2,000. An endorsement or floater could increase the amount of coverage.
Often floaters or endorsements provide "all-risk" coverage. In other words, they insure against all risks, except for specific exclusions which are listed in the policy.
Many insurance contracts or policies contain "deductibles." A deductible is a specified amount of money that the insured must pay on a claim before the insurance company will pay anything. The deductible is usually per claim or per accident, so it may apply as often as a claim or accident occurs. Any losses under the deductible amount simply come out of the insured’s pocket. The higher the deductible, the lower the premium cost for the policy.
It is human nature to want an insurance policy to return the premiums paid in. As a result, a common complaint of consumers involves high deductibles. However, the sensible way to buy insurance is to construct the policy so that large losses are covered. Most people can handle the smaller ones themselves. Of course, the term, "smaller claims," may mean different figures to different people. It is necessary to understand that one household may be able to handle a $500 loss themselves while another household may have difficulty coming up with $200.
There are about 3,500 insurance companies selling property and casualty home and auto insurance in the United States. While the type of insurance company may vary, they all sell in two basic ways:
1. Directly to the general population through the mail or
2. Indirectly using a middleman (insurance agent).
The Effects of Fraud and/or Theft
Fraud and theft definitely play a role in the insurance market. Fraud raises rates for all consumers of insurance.
Insurance fraud stats reveal that, in 2021, some form of fraud was suspected in 20 percent of claims.
Fraud is the deliberate attempt to steal money, in this case, through the insurance system. Who is the money stolen from? Other insurance consumers (policyholders). Insurance fraud affects all types of insurance including Medicare and Medicaid, which are government social insurance programs. The Insurance Committee for Arson Control estimates that approximately 14 percent of all structural fires are caused by arson. This is likely a conservative figure since there often is not enough evidence to prove arson. Cars are often the target of arsons as well as buildings.
The National Automobile Theft Bureau estimates that about 15 percent of the vehicles reported stolen each year are fraudulent claims. In some large cities, it may be as high as 25 percent.
Any person in any walk of life may be involved in insurance fraud. All too often they fail to realize who the victims of such fraud are. Many people do not even consider insurance fraud as stealing.
The bill for insurance fraud is estimated to cost businesses and consumers $308.6 billion each year. The cost, of course, is passed on to the consumers of insurance in the form of higher premiums. Who are the consumers of insurance? There are many types, but the main type is the policyholders themselves. Claims represent a type of loss to the insurance company. Losses drive up premiums. When insurance premiums for businesses go up, that increased cost is passed on through their goods and services. As a result, even those who do not buy insurance still help to pay the cost of fraud. So, the general public, in an indirect way, is also a type of consumer who is affected by fraud.
In the case of insurance fraud, time and frustration are also involved. That is because legitimate claims go through the same multiple delays for verification as do fraudulent claims.
Fraud against insurance companies is not limited to individuals. In August of 1988, Hertz Corporation pleaded guilty to defrauding 110,000 of its own customers along with other motorists and insurance companies. Hertz submitted millions of dollars in inflated and fictitious claims.
Scams come in many variations. The most common are staged accidents by con artists. Typically, these con artists look for women or older people. The con artist purposely causes an accident to happen in a way that makes the woman or older person feel that the accident is their fault.
Another scam involves filing multiple claims for the same accident. Sometimes claims are filed for accidents that never happened at all. A person may buy a car that is already damaged and then file a claim with their insurance company. That is why so many insurance companies now require that the vehicle be inspected before insurance can be issued.
Those who try to scam insurance companies do often get caught. This also costs consumers money in the form of investigation, legal prosecutions, and other associated costs.
Facts and Theories
of Risk and Insurance
Insurance, as we know, is purchased to offset the risks we are exposed to, whether that risk involves our homes, cars, health, or lives.
Insurance underwriters and analysts rely on specific risk numbers to offset their chance of loss. To use a gambling term, one might say that insurance companies "play the numbers." It has often been said that insurance companies are the best scorekeepers there are. They are more likely to know the possibilities of either loss or gain than anyone else.
The "law of large numbers" is related to the degree of risk. Of course, insurance agents and insurance agencies also play the "numbers" game. Most professionals are well aware of how many times they must hear "no" before the "yes" comes along. Without becoming involved in the complicated mathematics, the law of large numbers basically states: the greater the number of similar units exposed to a similar loss, the more accurate the loss predictions based on that data will be. The law of large numbers may also be called the "law of probability." Of course, the law of large numbers is not really a "law" at all. It is an entire branch of mathematics.
With life insurance, for example, statistics are readily available to the insurance companies. The statistics show the probability of death according to sex, ages, and even professions.
In the 17th century, European mathematicians were putting together crude mortality tables. They discovered that the percentage of female and male deaths among each year's births tended toward a constant if sufficient numbers of births were tabulated. It was not until the 19th century that Simeon Denis Poisson named this principle the "law of large numbers." While risk, in its simplest form (exposure to danger or adversity) is easy enough to understand, when risk is applied to the insurance field, it becomes more complex.
The insurance industry tends to tie risk and the possibility of financial loss together. The chances and types of risk may be divided into categories. There are basically two types of risk:
1. Fundamental risk and particular risk and
2. Pure and speculative risk.
While fundamental and particular risks are linked together as are pure and speculative risk, each one is specific and separate. A fundamental risk is a type of risk to which societies in general (or at least a large number of people) are exposed to in a single occurrence. A particular risk is one to which relatively few people are exposed to in a single occurrence. Sometimes it can be very difficult to make a distinction between the two types of risk. A recession is a risk to a large portion of society, so that would be a fundamental risk, whereas investors who contribute to a specific project are involved in a particular risk because only those investors are exposed to a loss.
Some types of risk seem to have properties of both fundamental and particular risk. This may especially be true when it comes to disability insurance. Particular risks, since they involve small numbers of people, are easier to insure.
Pure risk is a chance of financial loss that does not offer a chance of financial gain simultaneously. A speculative risk, on the other hand, does offer the chance of both financial loss and financial gain at the same time.
These tend to be logical. If a person's car is damaged in an accident, that is a financial loss. If no accident occurs, the owner of the car does not receive any financial gain. Pure loss is sometimes described as a loss or no loss situation. There is never any gain with pure losses.
With speculative risks, the person involved is taking some type of action that purposely exposes them to the possibility of a loss. There are two elements involved in speculative risks:
1. There is a chance for gain as well as loss,
2. The individual usually creates a speculative risk for themselves by their own actions.
There are many types of speculative risks including such things as gambling and some forms of investing. Between pure and speculative risks, pure risks are more easily insurable. In most insurance matters, those risks with a low frequency and high severity lend themselves best to insurance coverage.
When it comes to insurance policies, many people have heard the saying "What the big print giveth, the little print taketh away." In actuality, this saying is not true. Most states have laws requiring that "conditions" and/or "exclusions" be in type at least as large and clear as the statements of coverage. In some cases, the type must be larger or in boldface.
Unfortunately, an agent would have a difficult time convincing a policyholder whose claim has been denied that this is true. Few policyholders ever actually read their policies. The insured often first realizes that their policy does not cover everything when a claim is denied. It is at that point that an insurance agent or an insurance company is typically accused of "hiding the details."
All coverage under any insurance contract is subject to some types of limitations. It is very important that insurance agents outline those limitations (of course, we have all had the occasion where, after fully covering the limitations in a policy, the client says, "so this covers everything?").
The term "risk" may be used in many different ways. Simply put, risk means exposure to danger or adversity. When investments are involved, risk is generally defined as uncertainly concerning loss. The two key words here are "uncertainty" and "loss." It is important to understand that risk is connected to the uncertainty, not to the loss.
The basic function of insurance, as we know, is to handle risk. The accuracy with which losses may be predicted is the measure of degree of risk.
There is a social cost of risk as well as a financial cost. Most people try to avoid risk. As a result, the social cost of this risk avoidance is a slowing of economic growth. Risk discourages investors and can affect the allocation of resources. The effects of risk may be compared to socially undesirable monopolies since both affect production and prices by discouraging production, restricting supply, and, as a result, leading to higher prices. Simply stated, it may be said that the social cost of risk is its effects on the allocation of resources.
Insurance is a common method of handling risk. A "transfer of risk" is often given as a definition of insurance. Actually, such a definition is too vague. If insurance was merely risk transfer, then insurance regulation would extend to a host of commercial promises for which insurance regulations are not designed.
To some people, it might seem possible to combine all uncertainties in one big pool and thereby get rid of most of the risk in the world. If only it were that easy!
In order to operate insurance successfully, several broad criteria must be looked at:
1. A large group of homogeneous (alike; not varied in content) exposure units must be involved,
2. The loss produced by the peril must be definite,
3. The occurrence of the loss in the individual cases must be accidental,
4. The potential loss must be large enough to cause hardship,
5. The cost must be able to be calculated, and
6. The peril must be unlikely to produce loss to a great many people at one time.
Some of these listed features are essential, others merely requisite or necessary. Those features that are essential are generally very strict meaning that insurance is impossible if the requirement is not met. A requisite, on the other hand, provides one means to an end, but there may be other solutions as well. When an insurance company considers one criterion of insurability to be a requisite, insurance may be possible without it by substituting another characteristic of some sort.
It would make issuing insurance easier if it were possible to label the previous items listed as either essential or requisite. Unfortunately, that is not possible since it will vary from company to company.
It has been said that an insurable exposure is one for which insurance can be purchased. That determination is the function of the analysts and underwriters of the various insurance companies.
The two criteria most likely to be considered essential are numbers one and six from the previous list. That is because the ability to predict probabilities requires the use of the "law of large numbers." No insurance company can afford to insure a type of loss that will likely happen to large numbers of people in a single occurrence.
Risk Analysis - Liability Exposures
To some extent, individuals have always utilized some form of risk management. Some historians claim that early man had his mate sleep nearer the mouth of their cave. If she were attacked by an animal, he would hear the commotion and as a result, have time to escape. One would have to say that he was certainly utilizing risk management! The mate sleeping nearest the cave entrance might call it (and him) something else!
Insurance does not completely eliminate risk because achieving an infinite number of exposure units is not possible. One may always expect some deviation of actual results from expected results. Certainly, statistics, upon which the predictions are based, can never be perfect either. Even if the statistics used for predictions were absolutely accurate, there is no reason to believe that tomorrow's losses will exactly duplicate yesterday’s losses. Therefore, there will always be uncertainties in predicting insurance losses.
Risk analysis is a complex matter. Generally, risk analysis involves three (3) basic questions:
1. What could cause a loss?
2. What post-loss resources will be needed to continue effective operation?
3. What are the most effective methods of obtaining or reducing the amount of needed post-loss resources?
Locating and measuring loss exposures requires detailed information searches which must be done in an organized manner. Many sources are utilized. Financial records are one important source. The balance sheet of a business is always an excellent source of information, as well. A systematic study of each asset will often help to locate loss exposures. Such things as asset location, replacement costs, utility values, and the perils and hazards to which they are exposed are all considered.
Also involved in any risk analysis is the process of setting premium rates. An insurance rate is the cost for one unit of insurance. The premium is basically the rate multiplied by the number of units purchased. It is similar in concept to unit pricing at the local grocery store. A box of food may be priced at $4.25 for the total package, but the unit price is what the cost is for a given measure whether that unit of measure happens to be an ounce or a pound or whatever. By comparing the "unit price," the consumer may determine the best buy. A box of rice costing $4.25 may actually be the best buy over a box costing $3.00 if the unit price is less per pound. In other words, $1.50 per pound is always less than $1.75 per pound no matter what size or shape the package may be.
A unit of insurance is generally $1,000 of coverage. As with the package of rice, the cost of one's insurance is based upon the rate, not the size of the policy. Rates are given for every type of car and driver and for each geographical area of each state.
The rate for any given policyholder depends upon numerous factors. Surcharges and discounts may be considered penalties and rewards given by the insurance company to their policyholders. These penalties and rewards are based upon the kind of risk which the policyholder represents.
Typically, rates are set along three basic guidelines:
1. To make enough money to cover all their policyholders claims and pay the company's overhead expenses. If a company is publicly held, it must also pay a profit (hopefully) to its shareholders.
2. To charge higher rates to drivers who file more costly claims and lower rates to drivers whose claims occur less often and/or who have smaller claims.
3. To stay competitive with other insurers in the markets they think will be most profitable.
Another factor in rates will be based, to some degree, on which state they are set in. The insurer must follow the regulations of each individual state. The rate for a particular car and driver could change from state to state.
When determining a driver's rate, one of the first things which will be considered is the amount of risk the driver represents. Such things as age are considered as well as factors such as the type of car driven, the number of miles driven and so forth. Although an underwriter (who determines the rate) may have some prejudices, statistical experience is primarily used. Many years of record-keeping support their judgments in establishing rates. A 21-year-old with a sports car will pay a higher rate than will a 50-year-old person who drives an economy car. The underwriter will feel the risk imposed by the 21-year-old driver is much higher than the risk imposed by the 50-year-old driver.
Risks are usually stated in one of three ways:
1. Preferred which is low risk,
2. Standard which is average risk, and
3. Nonstandard which is high risk.
No section on risk analysis would be complete without an adequate definition of insurance. As previously stated, the often-used definition, the transfer of risk, is not totally accurate. A more fully expanded definition would be either the accumulation of a fund OR a transfer of risk, though not necessarily both. In addition, it must include a combination of a large number of separate, independent exposure units to make somewhat predictable the possible individual losses. The predictable loss is then shared proportionately by all units involved. This definition of insurance makes the point that both uncertainties are reduced, and losses are shared. Both are important aspects of insurance.
Insurance policies allow an individual or a business to substitute a relatively small, defined premium cost for a possibly large, though uncertain, loss. The fortunate many that do not experience a loss will help to compensate the unfortunate few who do suffer a loss.
It is the "cookie jar" classic. Many people put cookies into the jar, but only a few will find themselves in need of removing cookies. A policyholder puts one cookie in but may find themselves (due to a major loss of cookies at home) needing to replace the dozen lost. Having put one cookie into the jar enables the person to take out the dozen needed to replace their loss. The extra 11 cookies taken out came from others who also placed one cookie into the jar.
The Insurance Policy & Analysis
- Perils & Property
Terms often vary in their intent in all fields, but this may especially be true in the insurance field. We are using the term "policy analysis" as the process of determining if, and to what extent, a specific loss is covered under a specific policy. It is necessary to have an organized approach to policy analysis. The agent must be able to answer the client's questions to a reasonable degree, so responding authoritatively depends upon a "feel" for the important issues and a sense of order in relation to the policy. It is necessary to be able to explain contract provisions to the insured in an organized manner.
As an agent, you probably try to sell quality more than price. As the old saying goes "I would rather explain price one time than poor service a dozen times." Another issue involves company stability since not all companies survive year after year.
When a policy, of any type, arrives the policyholder is wise to check it for errors. As the agent, you should mention this to your clients. If the policy goes to the agent first, that agent would certainly want to do the same. When an agent delivers a policy that contains errors, it makes the agent look as bad as the insurance company.
Insurance products of all kinds have developed a reputation (not always deserved) of being easily misunderstood. There are several factors involved in this concept. Certainly, it is a field with a variety of products, each often having their own methods or ways of laying out a policy. Some insurance fields, such as Medicare supplements, have attempted to standardize the product brochures. Other types of policies allow great variations. Often confusion arises from a lack of understanding or knowledge of insurance terms. However, many analysts feel a major problem is simply the preconceived idea of the consumer that an insurance contract is unreadable. It is unfortunate that so many consumers believe, without ever trying, that they will not be able to read and understand their insurance policies.
The producer (the insurance agent selling the product) is in an ideal position to dispel some of those outdated beliefs. The producer is usually the first, and perhaps the only person, who can act as an educator. Of course, to do so would require the agent to be educated himself or herself. To be a successful educator, the agent must have a grasp of the basics of insurance principles and guidelines.
An insurance policy is a document containing the contract between the insured and the insurer (the policy owner and the insurance company). The length and complexity will vary with the type of contract and the complexity of coverage. Regardless of the length or complexity of the document, the policy will define the rights and duties of the contracting parties.
Insurance policies generally follow the same basic format which includes:
1. Declarations,
2. Insuring agreements,
3. Exclusions,
4. Conditions and miscellaneous provisions and
5. Definitions.
Some types of policies will follow this format precisely while others may consist of multiple parts that must be combined to make a complete contract.
An automobile policy will tend to follow this format with easily recognizable parts. On the other hand, a homeowner’s policy will consist of two parts which must be combined to make the complete contract.
DECLARATIONS: these are descriptive phrases within the policy that describe the subjects covered, persons insured, premiums to be paid, period of coverage, policy limits, and warranties made by the insured (the policyholder) regarding the nature of a hazard. The declarations usually appear as a separate form or as the first page of the policy. This section personalizes the policy to the specific policyholder.
WARRANTIES: A warranty in an insurance policy is a promise by the policyholder that statements affecting the correctness of the contract are true. Most insurance contracts require the policyholder to make certain warranties. For example, to get a health insurance policy, a policyholder may have to warrant, or promise, that he or she does not suffer from a terminal disease. If a warranty made by a policyholder party turns out to be untrue, the insurer may cancel the policy and refuse to cover claims.
Warranties in insurance contracts can be divided into two types:
1. Affirmative or
2. Promissory.
An affirmative warranty is about the quality of the item under warranty and may be verified before the warranty goes into effect. An untruthful affirmative warranty makes an insurance contract void at its inception.
A promissory warranty is a statement about future facts or about facts that will continue to be true throughout the term of the policy. If a promissory warranty becomes true, the insurer may cancel coverage at such time as the warranty becomes untrue. Warranty provisions should contain language indicating whether they are affirmative or promissory.
INSURING AGREEMENTS: are the coverages in an insurance policy that are broadly defined in the insuring agreements. Insuring agreements may sometimes also define important terms in the contract. In most policies, the insuring agreements appear immediately after the declarations.
EXCLUSIONS: eliminate specific coverages. Exclusions may also be referred to as limitations in some types of policies. There may be many reasons why the insurer (insurance company) may use exclusions in a contract. They may wish to:
1. Maintain management of physical and/or moral hazards,
2. Eliminate duplicate coverage,
3. Eliminate coverage not generally needed,
4. Eliminate or minimize uninsurable perils, and
5. Eliminate specialized coverage that the insurer is not qualified, for whatever reason, to offer.
CONDITIONS AND MISCELLANEOUS PROVISIONS: these may be seen as the ground rules under which the contract operates. From a legal standpoint, "Conditions" and "Miscellaneous Provisions" are distinct from one another. Even so, they usually appear together. Since insurance policies are conditional contracts, the conditions with which the insured must comply are listed here. They control the insurer’s liability for covered losses by imposing obligations on both the insured and the insurer (the policy owner and the insurance company respectively). They may include such things as time limits for paying claims, alterations of the policy, assignment, cancellation, fraud, or optional settlements, to name just a few of the possible conditions.
DEFINITIONS: are simply a list of terms and phrases with their fully defined meanings stated. Wherever those words or phrases appear in the policy, they are printed in boldface type to remind the reader that a specifically listed definition applies. Often endorsements and riders will appear in the same section as definitions. Any endorsements or riders or other forms supersede those of the preprinted policy to which they are attached.
Since endorsements and riders have been mentioned here, it should be noted how they are used:
ENDORSEMENTS AND RIDERS: are often used when standards or preprinted policies do not entirely meet a specific situation. Modification of the standard or mass-printed policy is obtained by adding special provisions to the basic contract. The term "endorsement" is used in property and liability insurance. The term "rider" is used in life insurance contracts.
Endorsements and riders are used to complete a contract, alter coverage or change a policy that is in effect. For example, a standard fire policy is not considered complete until the endorsement is added which describes the property which is to be covered.
A "peril" is defined as a cause of a potential loss. That loss may be due to multiple causes such as an accident, fire, explosion, flood, negligence, or theft.
A peril is different than a hazard. A "hazard" is anything that increases the seriousness of a loss or increases the chances that a loss may occur. There are four types of recognized hazards:
1. Physical Hazards which come from material, structural or operational features. A physical hazard is, as the name implies, something that exists physically.
2. Moral Hazards involve people and their actions. Arson is a moral hazard because it involves the actions of a person or persons.
3. Morale Hazards are different than moral hazards (note the difference in the spelling of #2 and #3. Morale (with an 'e' on the end) involves human carelessness or irresponsibility rather than an intentional act.
4. Legal Hazards come as a result of court actions that increase the likelihood of a loss or increase the size of the loss itself. We live in an age of increasing lawsuits and this is a legal hazard.
We recognize that authorities do not always use the same definitions for any given term. The terms perils and hazards, for example, are often interchanged from one policy to another and from one text to another. Even with these variations, most authorities consider:
1. Perils to be the things that cause losses and
2. Hazards to be the catalysts that bring about or increase perils.
The Insurance Policy Layout
Reading a policy is a difficult thing for the average consumer. Terms, such as "replacement value" and "actual cash value," may not be understood. What is not covered may not be fully explained or not fully understood, if explained.
Many homeowners, for example, do not realize the limits within their policies even though it may have been explained to them by their agents. While policies certainly do vary, most companies have set limits on certain types of property:
1. Money, gold, silver, platinum, coins, banknotes, and medals.
2. Securities, deeds, manuscripts, tickets, stamps, and valuable financial papers (like letters of credit or evidence of debt).
3. Watercraft including their trailers, furnishings, equipment, and outboard motors.
4. Trailers not used with watercraft.
5. Grave markers.
6. Jewelry, watches, furs, and precious or semiprecious stones.
7. Silverware, goldware, silver-plated or gold-plated ware, and pewterware.
8. Firearms.
The limits listed apply to each category of items, not to each item within a category.
This list is not necessarily comprehensive. Many policies offer limited coverage for art, antiques, and collectibles. Also, one must consider the general limits of the homeowner’s policy. The limits set on the total contents of the house may be much too low for the value of those contents if not properly assessed.
Many homeowner policies do carry endorsements to cover the additional value of the insureds possessions. An endorsement is a form attached to an insurance policy to add to or change its normal provisions. Floaters may also be used. Whereas an endorsement is an addition to a policy, a floater is a separate policy that will provide more insurance and can cover possessions against perils not listed in the homeowner’s policy. Generally, floaters are "all-risk" policies. They will cover against all perils, except those specifically excluded in the policy.
The Homeowner Series
Homeowner policies are designed to protect owners and tenants from loss or damage to their property and also to provide protection against liability claims. The point of homeowner insurance is to protect an individual's home and the contents within it. Some people are natural gamblers willing to play the odds that their home will never be damaged or destroyed and that their belongings will never experience a loss. The problem is, should they lose that bet, it could wipe out everything they own. It makes more sense to spend a few dollars for the sake of safety.
The policies generally have two sections:
1. Property exposures and
2. Liability exposures.
The first section, property exposures, may cover such things as the structure or dwelling itself, other structures on the property, personal property, and loss of their use during repair. In addition, there may be coverage for such things as debris removal, fire department charges, trees, shrubs, and other plants, theft of credit cards, property removal, and reasonable repairs following a loss.
The second section, liability exposures, covers personal liability and medical payments to others. It may also include coverage for claim expenses, damage to the property of others, and first-aid expenses.
Homeowner's insurance is often the broadest coverage most people will ever buy. It literally covers the roof over their heads and the shirts on their backs, yet the average consumer generally never even attempts to understand what they are buying. In addition, it covers their legal liability to others.
A standard homeowner’s policy does not cover many types of natural disasters. Separate coverage is needed for floods and earthquakes. In many cases, a separate policy will also be needed for those who wish to be covered for hurricane damage.
For the consumer to keep up with changing times and values, it is necessary to constantly update their coverage. It is generally considered unnecessary to insure the actual value of the land since it cannot be stolen or damaged in the same way that the structures upon it may be.
Most professionals recommend that "replacement value" be the determining factor in the amount of coverage needed. Replacement value is often different than "market value". Market value is the amount the homeowner could sell their home for. Replacement value is the amount of money it would take to rebuild the home should that be necessary. In areas where the housing market is depressed, for example, a home may only sell for $150,000 but rebuilding it could easily cost $200,000. Determining the cost of rebuilding often requires an appraisal.
Some insurance companies calculate replacement cost by multiplying the square footage of a house by the square foot construction costs for new homes in the homeowner's area. By doing so, an appraisal probably would not be necessary. The construction cost is often supplied by the local builders association. Most property and casualty agents can supply this information.
Once the replacement cost is known, the policy should cover no less than 80 percent of the total replacement value.
As a recap:
Replacement Value is what it would cost to replace a structure with a building of like kind and quality.
Actual Cash Value is replacement value less depreciation for its use and age.
Market Value is the dollar amount that the homeowners could sell their home for.
While the standard homeowner’s policy may automatically put replacement value on the structure, it is not unusual for it to put only actual cash value on its contents. Therefore, your clients will appreciate an exact explanation of which they have in advance of a claim.
Insurance companies typically will not pay replacement value on claims unless coverage for at least 80 percent of the total replacement value of the home is carried. If 80 percent of the total replacement value is in place, that usually qualifies as full replacement value. The reason that 80 percent would be considered full replacement is simply that few homes totally burn down. Generally, 80 percent would be more than enough to rebuild the home.
When a homeowner carries less than 80 percent of the total replacement value on their home, this will affect other claims. When a loss occurs, the insurer will likely give the greater of two amounts:
1. A percentage of the total loss based on the percentage amount of coverage carried. For example, if 60 percent of replacement value is in place, then 60 percent of the loss would be covered for things such as storm damage, theft, and so forth.
2. The actual cash value, which would be its replacement value minus depreciation for age and wear.
Either way, the actual replacement value will not be paid, if less than 80 percent of the total replacement value was carried.
Inflation is part of our lives and this is also true when it comes to our homes. As inflation rises, so should the amount of coverage carried on our homes. Labor costs are often one of the largest factors to be considered. A homeowner’s policy should be reviewed yearly and updated, if necessary.
Many insurers now offer policies that include an inflation guard clause. These policies automatically increase their coverage by a specified percentage amount at specified time intervals. Of course, the premiums increase as well.
Even if an inflation guard is included in the policy, it still should be reviewed yearly. The percentage increase in the inflation guard may not equal the percentage rate of inflation. In other words, inflation may be taking away more than the inflation guard is adding. The opposite could also happen, of course. The inflation guard could be adding more than inflation is taking away. In that case, the homeowner would be paying for more coverage than is actually needed.
Another thing to remember is that an inflation guard will not reflect any improvements made. The only way to make sure that the amount of insurance carried reflects current values is to have yearly reviews.
The amount of insurance the lien holder (usually a bank) requires is not an accurate indicator of current values. The institution that holds the mortgage is only concerned with protecting their own interests (the loan). Therefore, as the mortgage is paid down, the bank's interest decreases, and the homeowner’s interest increases. Eventually, the mortgage would be paid off. At that point, the loaning institution has no further interest at all, but the homeowner has a very large stake in continuing to keep the property insured.
The mortgage lender usually requires that the home be covered by "fire and allied coverage" insurance. This means that the structures would be insured against just about anything that might damage it. That might include such risks as windstorms, tornadoes, and even riots.
Homeowners insurance is a combination or package policy. What it contains depends upon the needs and desires of the homeowner.
Each insurance company may have slightly different policies, but they all follow the same broad outline.
The homeowner’s series consists of several forms which are numbered in sequence.
Section 1 of Form #1 (HO-1)
This type is called HO-1, Form 1, or the "basic form." This coverage is the cheapest to buy.
The basic policy is usually called an HO-1. It generally covers the house and its contents against eleven different perils which range from fire to broken glass. Since there are so many flaws in such limited coverage, many companies have quit offering the HO-1 as a "stand-alone" policy.
The basic form lists four coverages:
ü Coverage A - the dwelling
ü Coverage B - appurtenant structures
ü Coverage C - unscheduled personal property
ü Coverage D - additional living expense.
The basic form also lists four supplementary coverages which includes coverage for debris removal and fire department service charges.
The HO-1 insures against direct loss to the property and interests covered if caused by any of the groups of listed perils.
Covered perils may vary, but the eleven common ones include:
1. fire and lightning,
2. removal,
3. windstorm or hail,
4. explosion,
5. riot or civil commotion,
6. vehicles,
7. aircraft,
8. smoke,
9. vandalism or malicious mischief,
10. breakage of glass, and
11. theft.
It is sometimes possible to have as little as eight or nine risks covered (rather than eleven). Generally, such things as vandalism or glass breakage are left out.
The form will also list the exclusions and conditions which apply to Form #1.
Section II of Form #1 consists of:
1. Coverage E which is personal liability and
2. Coverage F which is medical payments to others.
Also, in Section II of Form #1 will be exclusions that apply only to this section along with five supplementary coverages including damage to property of others.
Form #2 (HO-2)
This type of coverage is called HO-2, Form 2, or the "broad form." This coverage costs a little more than the HO-1 plan because it gives more benefits.
The broad homeowner’s policy is typically called an HO-2. It covers the house and its contents against specific losses. Coverage often included in the HO-2 includes freezing of plumbing, heating, and air-conditioning systems, and domestic appliances.
Section I of HO-2 contains the basic coverages, supplementary coverages, additional exclusions, and conditions that are identical to those found in Section I of HO-1. The difference between HO-1 and HO-2 lies in the perils listed. HO-2 insures against loss resulting from 18 listed perils rather than 11 listed perils as in HO-1. The first 11 of the 18 are the same as in HO-1. The additional perils include:
12. falling objects,
13. weight of ice, snow, or sleet,
14. collapse of buildings,
15. damage resulting from steam or hot water heating systems,
16. accidental discharge or overflow of water or steam,
17. freezing of plumbing, heating and air-conditioning systems and domestic appliances, and
18. accidental injury from electrical currents artificially generated to electrical appliances.
Section II OF HO-2 is identical to Section II of HO-1.
FORM #3 (HO-3):
Called the HO-3, Form 3, or the "Special Form", this plan offers still more coverage than either the HO-1 or the HO-2 does.
The special homeowner's policy is called an HO-3. It covers the house for all perils except those explicitly excluded by the policy. On personal property such as clothing and household furniture, it covers loss or damage from the same risks as listed in HO-2.
On the house itself, however, the policyowner is protected from all risks except, as mentioned, those which are specifically excluded. Some companies do offer similar coverage for specified personal property. The HO-3 is identical to the HO-2 except that coverages A, B, and D are insured against all risks or perils. Coverage C, which is unscheduled personal property, is insured against all 18 listed perils in HO-2 with the exception of breakage of glass.
Under HO-2, in order to receive compensation for loss under coverages A, B, and D, the insured (policyholder) must prove that the loss was the result of a listed peril. Under HO-3, the insurer (insurance company) must prove that a certain peril is specifically excluded in order to deny payment.
HO-3 also provides the insured with coverage against a wider variety of perils than does HO-2. In other words, if something causes damage, the policy will cover unless the peril is specifically excluded. If a homeowner spills paint in their house, the HO-3 would cover the loss (if not specifically excluded), but the loss would not be covered under the HO-2 because it is not one of the listed perils. Of course, the HO-3 is more expensive than the HO-2. A person pays more if more benefits are received.
FORM #4 (HO-4):
Called HO-4, Form 4, or "renters insurance," this type generally covers around 17 or 18 risks to personal property.
The HO-4 may be known as renters or tenants coverage. It may also be called the Contents Broad Form. It applies only to the contents of the house. It is identical to the HO-2 except that losses to the structure itself are not covered. The perils would include fire and lightning, windstorm or hail, explosion, riot or civil commotion, vehicles, aircraft, smoke, vandalism or malicious mischief, glass breakage that is part of a building, storm doors or windows, and theft.
FORM #5 (HO-5):
Form #5 is The Comprehensive Form or the HO-5. The HO-5 is identical to the HO-3 except that all risk protection is extended to coverage C (unscheduled personal property). This form provides broader coverage than does the HO-3 and, therefore, is more expensive than the HO-3.
FORM #6 (HO-6):
This form is usually referred to simply as The Condominium Unit Owners Form.
The HO-6 was introduced in 1974 expressly for the unique needs of condominium unit owners who were exposed to risks similar to those of renters. HO-6 is a reproduction of HO-4 except for two changes that were necessary for the policies to be appropriate for condominium owners.
1. One change allows additional coverage for damage to additions and alterations made by the unit owners within the unit.
2. The other change provides that the addition and alterations coverage will be excess insurance over any insurance owned by the condominium association that covers the same property.
The HO-6 may also have coverage for additional losses by use of endorsements.
Various endorsements are generally available (for an added cost, of course) which will extend the coverage of homeowner’s policies. For example, the "Inflation Guard Endorsement" increases on a quarterly basis the limits of liability of Section I of HO-1, HO-2, HO-3, and HO-5 by a fixed percentage amount. The idea is to guard against inflation.
Endorsements are also used to
cover valuable personal property for higher amounts than provided for in the
basic policy. An endorsement may be used to increase the limits of recovery for
money and securities. There is a credit card endorsement that protects the
insured from losses resulting from stolen or lost credit cards. Such
endorsements give flexibility to the homeowner forms and as stated, may also be
attached to the HO-6.
Form #8 (HO-8)
Coverage designed for older homes is called HO-8. It is identical to the HO-1 except losses under the 10 perils (fire and lightning, windstorm or hail, explosion, riot or civil commotion, vehicles, aircraft, smoke, vandalism or malicious mischief, break of glass) are settled on an ACV (Actual Cash Value) basis in contrast to a replacement cost basis.
Homeowner policies are designed to protect owners and renters from loss or damage to their property and to provide protection against liability claims.
Most homeowner policies have deductibles. The deductible in the policy will affect the premium. The higher the deductible, the lower the premium will be.
The homeowner policy is usually divided into four sections:
1. COVERAGE A covers the actual dwelling or house
2. COVERAGE B covers all other structures such as a detached garage
3. COVERAGE C covers all personal property and
4. COVERAGE D covers the loss of use
There are exceptions in the homeowner policy. Policies will vary from company to company and from state to state. However, there do tend to be similar types of non-covered or limited coverage clauses:
1. A separate structure on the property that is used for business purposes or that is rented out.
2. Losses due to a power failure from a source outside of the home.
3. Water damage, including floods, tides, sewer back-ups, and seepage from groundwater. However, water damage from firefighter's hoses or due to a leaking roof (which allows rain in) would generally be covered.
4. Losses due to neglect.
5. Damage deliberately caused by the owner(s).
6. Earthquake, except by special rider.
7. Ice or snow damage to such things as awnings, fences, patios, and swimming pools.
8. Vandalism to houses left empty for more than 30 days.
9. Frozen or burst pipes in a house left unoccupied without maintaining the heat or draining the pipes.
10. Damage from settling or cracking structures.
11. War.
12. Normal wear and tear.
13. Damage done by birds, rodents, insects, or the owner's pets. However, some types of damage may be covered to porches or other minor collapses.
14. Smoke damage from nearby factories or agricultural smudging.
15. Claims containing fraud or misrepresentation of the facts are never covered.
16. A continuous leak from plumbing, heating, or air conditioning systems. Only sudden leaks would be covered.
17. Nuclear explosions are not generally covered. It is hard to imagine anyone trying to put in a homeowner's claim following a nuclear explosion.
While liability coverage is recommended, it is important to understand what would not be covered:
1. Employees and clients if the homeowner is running a home-based business. This is true for childcare services also. Any type of a business ran out of the home needs separate business insurance to be fully protected.
2. Aircraft.
3. Injuries from boats and motor vehicles. Some types of small boats, golf carts, or dirt bikes might be covered. The homeowner should specifically check their individual policy to be sure.
4. Claims by one family member against another.
5. Damage against the policy owner's own property.
6. Any disease that someone catches from the policy owner or covered members.
7. Damage done by a leaking waterbed to rented property (unless a special rider was obtained to specifically cover it).
Natural Disasters
As previously stated, a standard homeowner’s policy does not cover many types of natural disasters. Separate coverage is needed for floods and earthquakes. In many cases, a separate policy will also be needed for those who wish to be covered for hurricane damage.
Under flooding comes many forms of water damage exclusions. Generally, it applies to tidal waves as well as such things as sewer water back-ups outside of the home. Water damage inside the home would be covered if it were due to a burst pipe or water tank.
Since most people do not need flood damage, it would be unnecessary to include the premiums for it in the standard policy. Since most people do not need such coverage, it stands to reason that only those who live in a high-risk area will choose to buy the benefits. The result is what is called "adverse selection." In other words, only a small number of policyholders will be sharing a large risk. Both the private and government insurance coverages are part of the National Flood Insurance Program which is administered by the Federal Emergency Management Agency (FEMA).
When a disaster occurs, typical behavior follows. When an earthquake occurs, insurance adjusters are en route almost immediately. They come equipped with cellular phones (since most lines are probably damaged and, therefore, not operating), laptop computers, and blank checks. Mobile homes and recreational vehicles are used as makeshift claims processing centers. Checks are issued on the spot to policyholders to cover immediate necessities such as food, shelter, and clothing. Of course, additional checks are written later on as damages are assessed.
Insurance companies that sell earthquake coverage have specialized teams with years of claims experience for responding to disasters. They take great pride in bringing immediate assistance to their policyholders.
Those who have earthquake insurance typically buy it in addition to their standard homeowner policies. For most, it is in the form of an endorsement. As stated, an endorsement is an addition to the regular policy.
In California, each company located there must offer to sell earthquake insurance to its homeowner policyholders. The key word here is "offer." It is up to the individual whether or not to purchase it.
Immediately following an earthquake, it is impossible to buy earthquake insurance. Generally, there is a moratorium on selling such coverage (ranging from 48 hours to 60 days) following the last aftershock that measures 5 points or more on the Richter Scale which is the standard measure of an earthquake's severity. A moratorium is the legal permission to delay action. In this case, the selling of a specific type of insurance.
There are a couple of reasons for this moratorium:
1. to allow insurance companies time to determine their exact losses before assuming new risks;
2. to acknowledge the possibility of damaging aftershocks.
In addition, it is felt that by delaying the availability of earthquake insurance following an earthquake, panic buying may be avoided. Usually, disaster-type policies (bought in a panic) do not stay on the books well. Panic buying is costly for insurance companies if the policies are dropped soon after purchase. Premium refunds generally do not cover the cost of underwriting and issuing the policy as well as the costs associated with processing a cancellation.
Earthquake insurance tends to be expensive. There are variables involved. Frame houses withstand an earthquake better than brick structures do. As a result, frame houses are much cheaper to insure. The location of the homeowner also has a great deal to do with the cost of the policy. In California, where risk is relatively high, premium costs are much greater than in New York where risk is relatively low.
Deductibles for earthquake insurance are often expressed as a percentage rather than a dollar amount. For instance, instead of a $250 deductible, such a policy may have a deductible of 10 percent on the total policy value.
The high premium costs and deductible amounts simply reflect the risk involved. Consumers must realize that a major earthquake could bankrupt some insurance companies. It has been estimated by industry experts that a major earthquake in a populated area could run up to $60 billion or more in damages. The cost is high because, even though only a small number of people carry earthquake insurance, the disaster affects nearly all types of insurance. Claims affect auto, fire, business interruption, worker's compensation, life, health, and disability.
For insurance companies to meet all the claims that would occur, they would need to sell hundreds of millions of dollars worth of stocks, bonds, real estate, and a multitude of other investments immediately. As a result, financial markets would also be heavily affected. It would also leave the insurance industry without the capital necessary to meet future claims.
Another reason that earthquake insurance is high will not surprise you: relatively few people buy it. Since a low number of policyholders are sharing the risk, the cost is high. If the cost were to be shared by many, then premiums would be lower. One of the underlying principles of insurance is the spreading out of risk among many.
Volcanoes
Washington State created a specified area of concern on May 18, 1980, when Mt. St. Helens erupted with a series of explosions. Previously, neither insurance companies nor consumers thought much about volcano insurance. Because nobody considered such coverage to be necessary in the United States, there was much confusion as to whether or not the disaster was covered in Washington resident's policies.
Traditional homeowner policies had specifically excluded "volcanic eruptions," but simplified versions of the homeowner policy did not list that exclusion. In the end, about $27-million was paid in claims for damage caused by the eruption of Mt. St. Helens. The claims were covered under "explosions" in most cases. Generally, standard policies now list volcanic eruptions as a covered peril.
Hurricanes and Tornadoes
Luckily, most people do not need to contend with hurricanes and tornadoes. Windstorms are covered in standard insurance contracts which is the only peril likely to hit the majority of homeowners. If, however, one lives in an area of the United States that is vulnerable to hurricanes or tornadoes, extra protection may be necessary.
Standard coverage is mostly unavailable to homeowners who live in a high-risk area. There are special coverages for people who are at risk for such hazards as floods and hurricanes. There are beach and windstorm insurance plans in seven states along the Atlantic and Gulf Coasts.
There have been many costly hurricanes and tornados. In fact, the majority of the costliest Atlantic hurricanes in history have peaked as major events. Both tropical storms Allison in 2001 and Matthew in 2010 caused over a billion dollars in damage. It is common for the names of hurricanes causing over a billion dollars to be retired although it does not always happen.
The first hurricane to cause more than $1 billion in damages was Hurricane Betsy in 1965, which also hit Louisiana. Many feel we are seeing rising damages because of our increased population. When there are more people in the way it is understandable that damages will be higher than if the hurricane hits an unpopulated area or an area with a small population.
Due to such occurrences, the insurance industry has pushed for stringent federal standards to protect property against hazards. The model is usually the National Flood Insurance Program.
Possessions
Most homeowners are aware that their belongings are also covered under most homeowner policies. What they often do not understand is just how they are covered. Usually, belongings are insured for up to 50 percent of the coverage of the house. In other words, if the house is insured for $100,000, the contents would be covered for up to $50,000. For additional premium, it is usually possible to increase the coverage on personal property to 75 percent of the amount covering the home.
Belongings (personal property) may be insured for either their "actual cash value" or for their "replacement value." As previously stated, actual cash value is the replacement cost of an item less depreciation for its age or use. Replacement value covers the current cost of replacing the item or items.
Policies that pay "replacement value" do cost more. Usually, they run about 10 to 15 percent more than those which pay only "actual cash value." Should claims occur, however, replacement value more than pays for itself. Even when replacement value is in the policy, most insurers usually have the option of either repairing an item or replacing it rather than paying the insured the money (for the insured to replace it themselves).
When a home's contents are destroyed or stolen, one of the most difficult jobs can be making an inventory of what is missing or destroyed. Most insurance companies provide, upon request, inventory forms to their policyholders. It is not really necessary to use specific forms. Any type of list will be useful when claims occur. The list or inventory should be listed by rooms (of the house) and include each article and its description, when it was purchased, and what the purchase price was. Certainly, it is wise to also keep receipts of the purchase. Most insurers are going to request some type of proof that the item was owned in order to settle the claim. This list or inventory would also be helpful to the police should a burglary occur.
It is important to realize that such an inventory will be of little use should it be burned up in the fire that also destroyed the house. Therefore, once the list is made, a copy should be given to the insurance agent to be placed in the policyholder's files. Another copy should be placed in the insured’s safety deposit box. A third copy may be kept at home for reference. When changes are made, it is important to update all copies.
This type of inventory is an ongoing affair. As items are replaced, sold, or added to, changes in the list must be made. Many people make an initial list, but never think to update it as changes occur.
Many professionals recommend that pictures or a video be used rather than making a list. Actually, both are useful. Pictures are certainly better proof of ownership but do not give price and date information. A combination of the two works well.
The recommended procedures are:
1. Photograph or take a video of each room.
2. Take separate pictures (or videos) of important items within the room.
3. List the items within the room remembering such things as drapes, rugs and wall decorations.
4. List the contents of closets and drawers (12 pairs of slacks, etc.) Clothing can be very expensive to replace. Any item that is unusually expensive should probably be photographed. This might include such things as matched luggage or designer items.
5. The serial numbers on all electronic should be listed along with the purchase date and price paid. Take pictures of the serial numbers and receipts a load those to a file on the cloud.
6. On large items, such as major appliances and pieces of furniture, include any necessary details. A sofa that is an 1800's antique has much more value than a sofa made of pine last year.
7. As stated, when each item was purchased and how much was paid for it is very important. Obviously, this is not necessary for every single item, but certainly for all major items.
8. Keeping the list updated is simply a matter of adding in the receipts for new purchases and removing items no longer owned.
Automobile Coverage
Automobile coverage is actually six different coverages. Which components are required by law will vary from state to state. The six parts include:
1. Bodily injury liability insurance,
2. Property damage liability insurance,
3. Collision insurance,
4. Comprehensive insurance,
5. Medical payments insurance
6. Uninsured motorists’ coverage.
The first one, bodily injury liability insurance, covers someone else who is hurt or even killed.
The second one, property damage liability insurance, is usually the other driver's car that is damaged in an accident. It can, however, also include other types of property such as structures, fences, signposts, and so on.
Both bodily injury and property damage liability coverages will pay for legal defense if claims or lawsuits are brought against the policy owner. This is very important since a legal defense can be extremely expensive. Both of these components generally have policy limits for which damages will be paid.
The question that commonly comes up is what situations are covered and what situations are not covered? While state laws do vary, generally any situation in which the car is being driven by the policy owner, members of their family living in the same household, or anyone who has the owner's permission to drive the car would be covered. As well as variances in state laws, policies may also vary to some degree. In some policies, any person who has a "reasonable belief" that he or she has permission would be covered. This might involve the friend who drives the car because the owner is intoxicated. Certainly, a thief would not be covered. In some states, only the licensed owner of the vehicle and his or her spouse may give permission to others to drive the car while in other states, any driver listed on the policy may allow another to drive the car.
The third element of a policy, collision insurance, covers the car when it is damaged as a result of colliding with another car or object. This particular component applies only to the car itself. It does not cover whatever the car actually hit.
The fourth one, comprehensive insurance, gives coverage for damages that were not the result of a collision. That might include damages from a windstorm, theft, or fire to name a few.
The fifth one, medical payments insurance, pays (as the name implies) the doctor and hospital bills and, if necessary, funeral expenses for the policy owner and members of his or her family who live in the same household regardless of who caused the accident.
It is important to realize that liability insurance will not pay for injuries sustained by the policy owner and members of his or her family living in the same household. That is because liability coverage refers only to third party claims. The policyholder and family members are the first parties in the contract (policy). The insurer is the second party to the contract or policy.
TO RECAP: the first party is the policy owner, the second party is the insurance company, and the third party is the other driver.
This section, the medical payments insurance, also covers any passengers in the car being driven. That would include someone else's car being driven by the policy owner and covered family members as long as they had permission to drive the car. Medical payments insurance would also cover pedestrians that were injured.
Automobile insurance costs more in cities and suburbs. That is because that is where most of the cars are and, as a result, most of the accidents occur. However, rates are on the rise everywhere.
There are many reasons why auto insurance premiums are going up. For one thing, today's new cars are increasingly more complex and, therefore, more expensive to repair. Another factor, which any rush hour driver can verify, is the steadily increasing number of vehicles on our roads. As roads become more congested, more accidents are bound to happen. In rush hour traffic one accident often involves more than two cars as chain reactions occur.
Theft takes a heavy toll on automobile insurance as well. In cities such as Bakersfield, it is out of control. Los Angeles holds the title for fraud.
Medical costs also play a major role in the soaring costs of auto insurance. The cost of medical care can be extremely high - especially if someone else is paying for it.
Certainly, a factor in the rising premiums is the costs of litigation and settlements. There is more litigation now than ever before. Also, settlements in injury cases tend to be much higher these days. Sometimes, badly written no-fault laws actually encourage litigation rather than discourage it.
Also, a factor is the cars chosen. More and more buyers have gone to smaller cars and sports utility vehicles (SUVs). These types of cars are more likely to be involved in collision and injury claims than are larger cars.
Personal Injury Protection (PIP) is a broader form of medical payments and it may vary from state to state. PIP may cover, as well as medical payments, such things as lost wages and the cost of replacing services normally performed by the injured person (such as cooking). As stated, personal injury protection is sometimes called No-Fault Coverage because it is required in states that have no-fault laws. Such coverage is usually also available in states that do not have no-fault laws, however.
The sixth part, uninsured motorist’s coverage, pays for injuries caused by a driver who has no insurance coverage. In many states, this type of coverage is mandatory.
Each of these six automobile coverages has its own separate premium. The total cost of the policy is the sum of all the components. It is not always necessary to have all six components in the total auto package. Some of the parts are mandated by state law.
For many people, legal contracts can be intimidating. Breaking down a policy into its separate parts is often the first step to understanding the policy. As can be seen, by the previous six components, an automobile policy is not nearly as complicated as many believe.
The problem is simply that few people ever actually read the policy which they have purchased. This is true not only of auto policies but rather of insurance policies in general. Most consumers rely upon their agent to explain the policy which they have purchased. The agent must hope that his or her explanation was clearly understood and then remembered.
An automobile policy is not a difficult policy to read. There are typically three standard parts to it the:
1. Declarations page,
2. Insuring agreement, and
3. Conditions of the policy.
The declarations page is where the policy owner’s name will be stated along with the auto(s) covered, the time period of coverage (January first through April first, for example), and the premium amount. Also listed is the description of the coverage provided (from the six components previously reviewed) and the dollar limits.
The insuring agreement is the main part of the policy. Policy terms (or definitions) will be stated. Perhaps most importantly, the benefits given in exchange for the premium will be stated. Who is covered under the policy will also be stated. This can be important information if the policy owner is in the habit of loaning out his or her car. Sometimes this may tie into the listed definitions or policy terms. For example, a "relative" may be defined as any person who is related to those listed on the declarations page as named insureds and living in the same household.
Exclusions will also be listed. An exclusion is a provision in the policy that denies coverage for specified perils, persons, properties, or locations.
The third part in an auto policy, the conditions of the policy, describes the policy owner’s responsibilities when a claim occurs. It may state how much time is allowed to report the claim and the types of proof of loss that will be required by the insurance company.
This portion of the contract will also generally list the conditions under which a policy may be canceled. The policyholder may cancel their coverage at any time, but the insurer must follow set procedures. Certainly, nonpayment of premium is an obvious reason for which the insurance company may cancel the policy. They may generally also cancel the policy if the policyholder deliberately concealed or misrepresented any facts when applying for the coverage. If this were the case, the company could refuse to pay any losses that occurred.
It is probably not surprising that the most serious legal risk in driving is that of injuring or killing another person. Liability is, as a result, the most expensive type of coverage. Many states require by law that liability insurance be carried. Generally, it is considered wise to buy higher liability insurance limits than the law requires since state-mandated requirements are often too low to give adequate protection.
If the policy owner or any other driver covered under their policy, is found to be responsible for an accident that injures another person, they may be held liable for his or her medical bills (hospital and doctors), rehabilitative care and therapy, long-term nursing care and perhaps even the injured person's lost wages. Often there may be additional cash rewards given for pain and suffering. Consumer publications often recommend at least $100,000 of bodily injury protection per person and $300,000 per accident. The cost of such protection will depend upon the insurance company and the amount of risk the insured represents.
Many people purchase what is called umbrella policies. If a person has over $300,000 in assets, many professionals do recommend that such a liability policy be considered. As the name suggests, an umbrella policy is a policy that is carried over all other liability insurance. It comes into play only when other coverages are exhausted. Most standard policies go up to a $300,000 limit. It is possible, however, to purchase policies with limits as high as $400,000 or even $500,000. Generally, an umbrella policy can be bought from the same company that insures the policy owner’s home and automobiles.
Consumers look to their agents for suggestions when buying insurance. Recommending the proper coverage is often more a matter of "fact-finding" than anything else. As questions are asked and answers are given, the client will easily realize their needs as the facts are written down in front of their own eyes. The "fact finding" should always be written down and then filed with the client's files at the agency office for future reference.
The Family Automobile Policy (often simply referred to as a FAP) has several parts to it:
1. Part I consists of Coverage A, bodily injury liability, and Coverage B, property damage liability. Under these coverages, the insurer agrees to pay to third parties money to cover any damages for which the insured is legally obligated due to bodily injury or property damage arising out of the ownership, maintenance, or use of an automobile.
2. Under Part II, Coverage C, the insurer agrees to pay all reasonable and necessary medical expenses to the insured, their relatives, and other persons as a result of an accident involving an owned car or a non-owned car while being operated by the named insured, a resident of the household or any other licensed driver who was operating the vehicle with the permission of the insured.
3. Part III, which are Coverages D through I, provide protection against loss resulting from physical damage to an owned or non-owned automobile.
4. Part IV is Coverage K which is found in some policies. Under Part IV, the insurer agrees to pay a stated accidental death benefit in case of the death of the named insured resulting from bodily injury sustained while occupying or by being struck by a motor vehicle, providing that death occurs within 90 days of the accident.
Each part of the Family Automobile Policy (FAP) contains its own recovery limitations, definitions, and exclusions. Coverage under a FAP will vary from contract to contract and among insurers not using standard bureau forms. There are also generally limited policies available in the marketplace at a lower cost. As a result, the FAP owned by one person may differ from that owned by another.
No-Fault Policies
Some states have No-Fault laws. These states usually require that personal injury protection (often simply referred to as PIP) be purchased by car owners.
No-fault is a system in which the driver's own insurance coverage pays for the losses regardless of who caused the accident. It is due to this fact that the protection purchased is called No-Fault insurance. It is generally felt that such a system keeps down the cost of insurance premiums since it eliminates much of the legal costs associated with proving blame. Badly written no-fault laws actually do not keep the costs down, but this section will assume that the laws were well written and, therefore, are not actually encouraging such problems.
"Fault" states must establish blame, as the name implies. Whoever is at fault must pay for the damages or losses brought on by the accident. Of course, the driver at fault may not necessarily have insurance (even in states which require it). Even if the driver at fault does have insurance, the amount carried may not be adequate in all cases. The insured driver may, of course, sue for a larger amount.
In "No-Fault" states, each driver's own insurance company covers their losses. Even if the accident was totally the driver's fault, their insurance will still pay. No-Fault coverage does generally have a ceiling on their payments. If the limit is set too low, the injured driver may find the losses are far greater than the coverage provided by their policy. Even in a no-fault state, a driver may go to court and try for a pain-and-suffering award. In such a situation, fault must be proven.
In either type of state, the insurer will investigate the accident, handle the settlement negotiations, give legal counsel, and pay any judgments against the driver up to the limits within the policy.
In states that do not have No-Fault laws, the person who caused the accident (and his or her insurance company) is liable for the losses resulting from the accident. Sometimes, in order to collect from the person who was at fault (the person who caused the accident), it is necessary to sue and establish in court that the accident was their fault.
Lawsuits are usually time consuming. In California, for example, it takes an average of five years for a civil case to come to court. Obviously, medical care cannot be delayed for five years! Many families have suffered severe financial difficulty as a result of medical bills and loss of income.
Lawsuits are also expensive. As much as one third to one half (plus costs) may go to the attorney. The basic idea of no-fault laws is to get accident victims' bills paid promptly regardless of who caused the accident. Another benefit is lowered insurance premiums since the number of lawsuits is reduced dramatically which saves hundreds of dollars in legal fees. More of the premium dollars go towards losses instead of into litigation expenses.
Auto Liability Coverage
Auto liability coverage is for bodily injury. Many policyholders misjudge the amount of liability needed. It is common for too little to be carried. Liability for bodily injury is absolutely necessary. It covers losses incurred by pedestrians, passengers, and other drivers due to the negligence of the policy owner of those covered by his or her policy.
There are several ways by which to judge the amount of liability needed:
1. PROTECTING ONE'S ASSETS means buying enough insurance to cover the highest judgments that might be assessed. The richer a person is, the more liability is needed. A policyholder who owns substantial property or assets is much more likely to be sued than is a person who has nothing.
2. PROTECTING ONESELF is often a wise buy. By this, we mean carrying insurance to cover one’s own losses due to an uninsured motorist or an under-insured motorist. Generally, it is only possible to buy as much coverage for oneself as is purchased to cover the other person. If a $20,000 cap is on the policy for the other driver, there will also be a $20,000 cap on the policy owner.
3. PROTECTING THE INJURED is not only a legal requirement in some states but certainly a social and moral obligation as well. When a driver causes injury to another person, they have an obligation to pay for it. That requires an adequate amount of insurance even if the policy owner does not have assets to protect. Often, higher liability limits are not even very expensive.
It could be argued that all insurance is property insurance to some degree. The buyers wish to protect themselves against loss of property already accumulated or loss of property to be earned (as is the case for life insurance). Even so, the concept of property insurance is restricted to losses resulting from causes other than life, disability, or death.
Property Damage:
For property damage, liability coverage covers, as the name indicates, damage done to someone's property. While that is most often a car or other vehicle, it may be any type of property such as fences, a gasoline pump at a filling station, or even a building. The amount carried is usually figured on the cost of replacing a car, however. Since cars do vary greatly in price, the amount covered may vary greatly from policy to policy.
Medical Payments:
Medical payments pick up the tab for hospital and doctor bills of anyone injured in the policy owner’s car, without regard to who caused the accident. It also covers the policy owner's family if they are hurt as pedestrians or while riding in another vehicle. This would generally even include such things as a bus or taxi. Usually, this type of coverage would also cover a person who was injured while getting into or out of a stationary vehicle.
Sometimes medical coverage offers fewer benefits than the policy owner may realize. If regular major medical health insurance benefits exist medical bills are already covered. If the auto insurance will pay only those bills not covered by the regular major medical policy, the actual payments may be limited to deductibles and co-payments. In no-fault states, medical payments are typically a part of the basic auto insurance policy.
If the injured person is on Medicare due to age or disability, Medicare will require auto insurance to cover the bills. Generally, the bills are still sent to Medicare first, but reimbursement is expected from the auto insurance.
Personal-Injury Protection:
In No-Fault states, personal injury protection is required by law.
The policy owner is covered for:
1. their own medical bills up to a specified limit,
2. part of lost wages,
3. funeral expenses and,
4. in some states, replacement services (such as house cleaning when the wife is injured, for instance).
State laws vary so, of course, collectible amounts also vary. There may be no ceiling or there may be a relatively low ceiling for specific benefits. In New York, for example, medical bills under $50,000 must be paid only through their No-Fault auto policy (without using other medical policies). There are also definite limits set on what doctors and therapists may charge.
Collision:
Collision coverage is usually required by the lender for new (unpaid for) vehicles. The lender wants to be sure they will receive their money in the event that the car is totaled. The insurance money would be needed, in that case, to repay the loan.
Collision coverage covers repairs to the policy owner’s vehicle no matter who caused the accident. The price of this type of coverage will depend upon such factors as the size of the deductible and where the policy owner lives. If the accident is not the fault of the policy owner, the insurer may arrange for the deductible to be paid by the other driver or the other driver's insurance company.
Typically, collision insurance covers the fair market value of the vehicle which is usually determined by the book values, minus the cost of making repairs, minus a charge for unusually high mileage. As a result, this type of coverage is often not a good buy for old or already damaged cars.
Comprehensive Coverage:
Comprehensive coverage is considered to be essential for new cars and, often, even for older ones. This type of coverage pays for damage to the vehicle from such things as fire, flood, vandalism, theft, rocks thrown on the freeway, and so forth. This coverage does generally contain deductibles which might range from $50 to $500. Of course, the higher the deductible, the lower the insurance premiums.
Comprehensive insurance covers the vehicle's fair market value which normally declines with time. Comprehensive tends to be cheaper than collision insurance.
Uninsured & Under-Insured Motorists:
Uninsured motorist coverage is required by law in many states. This type of insurance pays the cost of the policy owner’s own injuries if they are hit by:
1. An uninsured driver who is at fault,
2. An at-fault driver whose small insurance policy won't cover all the damages, or
3. A hit and run accident.
Generally, this coverage also covers lost wages. In some states, the driver might even be reimbursed for damage to the vehicle.
Uninsured and underinsured motorist coverage covers more than the other types of coverage. It might even be possible to collect for pain-and-suffering. If the policy owner does not have disability insurance, for whatever reason, it may serve to fill this gap.
Many states allow an individual to buy as much insurance to protect themselves as they buy to protect the other guy. In No-Fault states, uninsured motorist coverage kicks in when the policy owner is injured badly enough to sue. The policy owner can collect from this policy on top of their No-Fault, personal injury protection.
Some people prefer to carry sound, adequate life, health, and disability insurance rather than uninsured motorist protection. In some situations, uninsured motorist coverage really isn't necessary. In Michigan, for example, No-Fault benefits are most generous. In addition, it is hard to sue for pain-and-suffering there. In such a case, uninsured motorist benefits are not financially worthwhile.
Towing and Service/Rental Car Reimbursement:
Most professionals feel towing and service/rental car reimbursement benefits are a matter of personal preference. The premium cost is generally affordable although sometimes coverage may be duplicated if the policy owner belongs to an auto club. Certainly, duplication of benefits should be avoided whenever possible.
Umbrella Insurance:
Umbrella policies are often needed by individuals with relatively large asset bases. An umbrella policy covers liability judgments that exceed the limits of the auto and homeowner's policies (usually $300,000). Umbrella policies are generally priced according to the number of cars owned.
Negligence Laws
All human activities can lead to situations where negligence is alleged against one party by another.
Negligence is the lack of proper care or attention to the matter at hand. It is the standard of the reasonable and prudent man rule, which was established as a criterion against which human activities are measured. This application applies equally to many things including the operation and/or ownership of a motor vehicle.
In some states, laws, statutes, and ordinances have been enacted which may alter and/or modify some of the common law concepts of the application of negligence. It is necessary for each agent to be specifically familiar with his or her state's provisions since they do vary from state to state.
There are basically three types of negligence laws:
1. Pure comparative negligence,
2. Modified comparative negligence and
3. Contributory negligence.
With pure comparative negligence, the policy owner can collect damages based upon the percentage of fault: what percentage was their fault and what percentage was the fault of the other driver.
States that have modified comparative negligence laws allow the driver to collect from the other driver's insurance only if the policyholder's percentage of fault was less than a specified percentage (often under 50 percent). In other words, a driver who was 40 percent at fault could collect damages from the other driver, but a driver who was 55 percent at fault could not. As you can see, the percentage of fault must be proven. It is often stated that those who prefer this method most are attorneys.
States that have contributory negligence allows a policyholder to collect damages only if they had no fault at all in the accident. Of course, their own insurance company would pay for the losses, but the other driver's company would not pay.
In such a situation, the type of coverage carried becomes very important. If no medical coverage is carried (some states do not require it) there will not be any coverage for the physical injuries of the driver or passengers. Even in a No-Fault state, the driver could find themselves in court as a defendant. In most cases, No-Fault laws cover only personal injuries.
Policy Standardization
In the early days, the insurer and the insured had complete freedom in designing the policy. Since insurance tends to be highly technical, the varied styles were certainly a disadvantage to the policyholder (consumer). It was very easy for a policyholder to end up with overlapping and conflicting coverage if more than one policy was owned. The problems caused by the multiple policies generally were discovered only after a loss occurred. Comparing policies was also extremely difficult since so many varying formats were used. There was little doubt that policy standardization was necessary.
Policies were standardized in three ways:
1. by custom,
2. by statute, and
3. by intercompany agreements.
Custom:
As early as 1764, the underwriters at Lloyd's coffeehouse realized that it was in their best interests to adopt some type of standard form (policy). It could have been said that it would also have benefited those insured, as well.
In 1779, they agreed to use a standard marine form developed by the underwriters. It became known as "Lloyd's standard policy." Through the years a body of insurance law developed from many court decisions concerning the policy. Virtually every word has to be subjected, at one time or another, to court interpretations. This has generally been good for the consumer since, over the years, the meaning of insurance terms have become more or less uniform. In some types of policies, specific meanings have become uniform by law.
Statute:
Standardization by statute generally refers to standardization by state law. Standardization by state statute is accomplished either by prescribing a particular contract or minimum standard provisions.
State statutes may vary greatly. It would be difficult to go into any detail and have this section apply in all states. However, individual insurance companies do comply with individual state requirements.
Intercompany Agreements:
Insurance companies recognized the advantages of standard policy forms. Therefore, they often developed uniform contracts through intercompany agreements. Standard policies eliminate undesirable "fine print" competition among the various insurance companies. Many companies also recognized that standardization by intercompany agreement could eliminate the need for standard policy laws. Insurers prefer voluntary intercompany action to legislative compulsion.
Automobile insurance began to standardize their policies as early as 1936. The original standard policy was developed by a joint committee of mutual and stock companies working with the insurance committee of the American Bar Association. This first standardized form covered liability only. In 1956, a standard family automobile policy appeared which offered broader coverage for people with private passenger vehicles.
There have been other types of policies, such as inland marine business, that has been standardized through intercompany agreement.
These standard forms are generally known as "bureau forms." Of course, not all insurance companies use them. That is why legislation often forcibly standardizes insurance policies even when the majority of companies have already been using basically standard forms. The term often applied to nonstandard (non-bureau) forms is "bastard policies." Such policies should be carefully read. It must be noted that the term, bastard policy, is an industry term and not intended to be uncomplimentary. Some nonstandard or bastard forms offer more protection than do standard policies.
There may actually be some disadvantages to the standardization of policy forms, although it would probably be difficult, if not impossible, to convince some state officials of this. It is possible for standardization to impede progress by delaying the liberalization of contracts. Statutory standardization may eliminate the experimentation that would otherwise have occurred by insurance companies. As a result, innovation may not occur or take much longer to come forth. As long as insurance companies refused to join in group organizations, believing that their innovative efforts would therefore be restricted, innovation was always possible. The efforts (and successes) of these competitive companies put pressure on the other insurance companies and that pressure often brought about change that was most beneficial to consumers. Those innovative ideas that proved unsuccessful seldom affected consumers a great deal. More often, it affected the insurance company in a financial sense.
Of course, any time an insurer does not use standardized forms, it is necessary to closely read the policy. Just as nonstandard forms may give greater benefits, they may also give inferior benefits (and that, of course, is why state standardization is so often mandated).
Loss-Adjustment Provisions
Everyone would prefer that losses not occur. Safety should always be the aim of every business and individual. Some precautions may actually lower a person's insurance premiums. As you might guess, insurance companies strongly advocate safety measures.
There is no way to prevent all insurance claims, but some types of losses certainly can be reduced. Every homeowner should inspect their home from the viewpoint of a thief, for example. The more time consuming it is to break into a home, the more likely the thief is to pass up the house for an easier target.
Notice of Loss:
Unfortunately, no matter how careful an insured is, a loss may still occur.
When any loss is reported to an insurance company, it is important that well-organized records be kept. Only copies should be mailed to an insurance company. Few require that the originals be sent. Original copies should be kept by the insured or policy owner.
Most liability insurance policies provide legal defense for their policyholders. That means the company will represent the policyholder if a claim is brought against them. To adequately defend a policyholder, it is important that the insurance company be given all information pertaining to the case including copies of any communications received from the opposing side.
Property and liability insurance claims are usually settled in branch offices or by independent adjusters. Home-office claim departments are usually responsible for claims administration. They operate as a personnel and records office, responsible for the selection and supervision of adjusters and maintenance of adequate claims records. By keeping detailed records of the causes of each loss, underwriters and insurance engineers are able to develop loss prevention measures. Claims departments routinely work with police forces, detective agencies, special investigators, and physicians to recover losses or reduce their severity.
Processing an Auto Claim
When a claim is received, the first thing the company will do is to confirm that the policy was in effect at the time of loss. This is actually true for virtually all types of insurance policies. Secondly, the company will check to see if the issued policy covered the type of loss that occurred. Once these two things are confirmed, the company will assign the claim to a "Claims Adjuster." This person may work exclusively for one company or may work as an independent representing multiple companies. The job of the adjuster is to verify the loss and then determine the amount that the policyholder is entitled to claim under the policy.
Sometimes an adjuster may declare a vehicle a "total loss," in which case the insurance company will pay the policyholder its book value rather than the cost of repairs. A standard auto policy will not pay to repair a vehicle if the repairs would cost more than the cash value of the car. The value of a car may be determined by consulting standard reference guides such as the Blue Book published by the National Automobile Dealers Association and/or by consulting local used car dealers. The policyholder is entitled to the market price of their car. Sometimes it may be necessary to prove a higher value if the reference guides state a lower price. Records that might be useful in proving a higher value include mileage records, service history, and affidavits from mechanics.
Some states have No-Fault laws (refer to the section on no-fault laws). These states usually require that personal injury protection (PIP) be purchased by car owners.
No-fault is a system in which the driver's own coverage pays for the losses regardless of who caused the accident. It is due to this fact that the protection purchased is called "No-Fault insurance."
Of course, not all states have no-fault laws. In states that do not have no-fault laws, the person who caused the accident is liable for the losses resulting from the accident. Many states require that liability insurance be carried to protect drivers from the negligent acts of others. Sometimes, in order to collect from the person who was at fault, it becomes necessary to sue and establish in court who was negligent.
There are basically three types of negligence laws (please refer to the section on Negligence Laws):
1. Pure comparative negligence which bases what a policy owner can collect on the percentage of each person's (driver's) fault.
2. Modified comparative negligence which allows the driver to collect from the other driver's insurance only if the other driver's liability in the accident was more than a specified percentage. Usually, that percentage is 50 percent.
3. Contributory negligence which allows a policyholder to collect damages only if they had no fault at all in the accident. If the driver had any fault at all, then he or she must collect from their own insurance company.
If a policyholder is sued for more than their policy limits, the insurance company will still defend their client. The company may, however, suggest that the policyholder retain another attorney as well to protect the additional interests involved.
Losses of any kind should be reported immediately. This is true regardless of the type of policy.
Most people state that the speed of claim service is important to them. Often the policy owner can help the system by simply providing complete information to their insurance company. As agents, this is something that you probably tell your clients. The first step, of course, is the prompt reporting of any claim. Again, as the agent, this is something that needs to be stressed to your clients. It certainly helps if the insured also can provide the names, addresses, phone numbers, insurance companies, license numbers, and registrations of the other drivers involved.
When a claim occurs that does not involve bodily injury, the insurer will usually arrange to have an appraiser or adjuster examine the damaged vehicle. An appraiser estimates the cost to repair the car; an adjuster also estimates the repair cost, but usually also has the authority to settle the claim.
A large part of the insurance policy will deal with the procedures for loss adjustment. Although policies will vary, generally a policy will contain provisions relating to:
1. Notice of loss,
2. Protection of property,
3. Inventory,
4. Evidence,
5. Proof of loss,
6. Assistance and cooperation,
7. Appraisal,
8. Abandonment and salvage,
9. Settlement options,
10. Time limits for paying claims,
11. Time limits for bringing lawsuits, and
12. Miscellaneous clauses.
As stated, policies will vary; not all policies will contain provisions on all twelve items. Which provisions are used often depend upon the type of policy. Life insurance policies, for example, generally have just two: proof of loss and settlement options.
For those who pay out numerous premiums and never make a claim, insurance must seem very costly. After all, an insurance policy is most valuable after a loss. Since no one has access to a crystal ball, we must all simply make the best choices we can with the facts available to us.
End of reading material.