Property and Casualty Insurance Basics – Flashcards

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INSURABLE INTEREST
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an economic interest in a property that must exist at the time of loss (you can insure the equity interest in your own home)
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UNDERWRITING
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classifies the applicant based upon the underwriting requirements of the insurer; matches the risk presented with the premium charged by the insurer
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LOSS RATIO
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percentage of claims paid in comparison to total premiums collected during a particular period of time
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RATES
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set by the insurer at a level sufficient to pay claims and company expenses; in most states must be filed with Dept of Insurance
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JUDGMENT RATING
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underwriter uses intuition and experience instead of a manual to determine rates
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MANUAL RATING
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underwriter refers to rates determined by the insurer's actuaries based on the "law of large numbers"
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MERIT RATING
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"manual" rates are modified by underwriter based on past loss experience or other factors unique to the risk involved (lower premiums are given to those clients who have few prior losses)
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RETROSPECTIVE RATING
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the final premium is not determined until the end of the policy period and is based on the insured's own prior loss experience (subject to minimum and maximun premiums); often these are used with Workers comp and Commercial General Liability plans written for large clients, where the final premium is determined by an audit of the insured's books at expiration of policy; initial premiums are considered to be deposits only
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EXPERIENCE RATING
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often used to calculate premiums on large group life or health insurance plans; a form of merit rating that modifies the manual premium based on the insured's own loss experience
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LOSS COST RATING
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used by insurers who utilize rating plans developed by the Insurance Services Office (ISO), leaving insurers free to add in their own factors relating to expense and profit
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INSURANCE SERVICES OFFICE (ISO)
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a "rating bureau"; develops and files rates and policy forms with the various states on behalf of their insurance co. membersd; members may choose to adopt ISO filings or not
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ISO HOMEOWNERS POLICY 2000 EDITION
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current industry standard
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RATE
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cost per unit;
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PREMIUM
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number of units multiplied by the rate; e.g. if rate is .25 per unit, and one unit of fire insurance is $100 of coverage, then the premium for $100,000 coverage is $250 per year
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COMPONENTS OF RATE FILING
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cost of claims + cost of admin. expenses - interest the insurer makes by investing pre-paid premiums
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RISK
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chance of loss
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HAZARDS (3)
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Physical; Moral; Morale
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PHYSICAL HAZARD
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e.g. dead tree that could fall on your house and cause roof damage
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MORAL HAZARD
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one presented by a dishonest person who might try to over-insure in order to profit
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MORALE HAZARD
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one a careless person presents who does not take care of their property
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FRONT-LINE UNDERWRITERS
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are agents; called this because they are usually the first to recognize a hazard
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NEGLIGENCE
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failure to act as a reasonable person would in the same circumstances
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NEGLIGENCE
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is a civil injury; considered a "tort" and the burden of proof in a negligence lawsuit (tort) rests with the party bringing the lawsuit
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PLAINTIFF
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injured party
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STANDARD OF CARE
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what a reasonable person would do to maintain their legal duty to protect others
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NEGLIGENCE LAWSUIT
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plaintiff (injured party) must prove the defendant violated a legal duty or generally accepted standard of care and that the injury was the direct result of the defendant's negligent act; if no direct chain of evidence exists, negligence is not established
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PROXIMATE CAUSE
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must be a direct chain of events proven to determine proximate cause
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NEGLIGENCE LAWSUIT AWARDS
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plaintiff must prove actual loss or damages to recover, even if negligence is proved (exception is sometimes awards for pain and suffering)
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NEGLIGENCE DEFENSES
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generally accepted defenses in negligence lawsuits are 1: intervening causes (for example, kids were teasing the dog and therefore negligence not proven) 2: assumption of risk (means you agreed going in to take the risk of participating in certain activities and therefore cannot sue)
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TORT THRESHOLD
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you assume the risk up to a certain level, such as driving a car (if the claim is not above a certain threshold, you must make a claim on your own insurance instead of suing the other party)
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DOCTRINE OF CONTRIBUTORY NEGLIGENCE (THIS IS NOW OBSOLETE)
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states if you are partly at fault, you cannot recover from the other party at all, even if your fault was minor
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COMPARATIVE NEGLIGENCE (HAS REPLACED CONTRIBUTORY NEG)
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a degree of fault is assigned to both parties; degree of fault is allocated on a proportionate basis to both parties; YOU CANNOT RECOVER FROM THE OTHER PARTY UNLESS THEY ARE 50% OR MORE AT FAULT
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STATUTES OF LIMITATIONS
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time limits during which a lawsuit may be filed after the occurrence of a claim; vary by state, but mostly range from 2-7 years
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COMPENSATORY DAMAGES
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what most jurisdictions permit courts to award; may be 1: special 2: general 3: punitive
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SPECIAL DAMAGES
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consist of medical expenses and lost wages; sometimes called out-of-pocket expenses; an exact and verifiable figure
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GENERAL DAMAGES
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attempt to compensate the injured party for mental and physical distress, including pain and suffering, disfigurement and loss of consortium
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PUNITIVE DAMAGES
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awarded when the injury was caused by gross negligence; often are triple the amount of general damages awarded and are sometimes not covered by insurance
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GROSS NEGLIGENCE
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willful and wanton negligence (defendant knew product was faulty but continued to sell it anyway)
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ABSOLUTE OR STRICT LIABILITY
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some things are inherently so dangerous that liability is absolute or statutory, as in keeping a tiger as a pet, or keeping explosives in the home
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VICARIOUS LIABILITY
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one party may be responsible for negligent activities of another party; e.g. bar owners liable for actions of customers to whom they have served too much alcohol
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DOCTRINE OF AGENCY
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insurers are vicariously liable for acts of their agents
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PERIL (CAUSE OF LOSS)
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a cause of loss; if a peril is not named in a contract, it is not covered (for example, in fire policies, fire due to war is usually named and not covered therefore)
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OPEN PERILS POLICY (ALL-RISK POLICY)
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covers all perils unless excluded; perils can be sudden and unforeseen (accident) or occur over a period of time (an occurrence)
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DIRECT LOSS
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one that happens suddently due to a covered peril (fire, lightning, hail, wind)
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INDIRECT LOSS (consequential loss)
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occurs as a consequence of the direct loss; fire would be a direct loss; loss of rental dollars due to fire would be the indirect loss
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INDIRECT LOSS COVERAGE
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there is no coverage for an indirect loss unless the direct loss is covered first; e.g. if flood is not covered, then there is no coverage for loss of rental dollars
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BLANKET PROPERTY INSURANCE
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provides a single amount of insurance that may apply to different types of property or to different locations
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SINGLE LIMIT OF INSURANCE
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(blanket prop coverage); client may select a single limit that may apply to all types of prop at a single location, or to one type of property at multiple locations; may even select this coverage for all types of property at all locations
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SPECIFIC PROPERTY INSURANCE
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provides a specific amount of insurance for specific types of prop at a specific location
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REAL PROPERTY
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may be constructed as frame (wood), masonry (brick) or block (today some frame construction is steel and concrete, and known as fire resistive) ; generally masonry and block construction would result in lower premiums that wood framing
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ACTUAL CASH VALUE
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determined by finding replacement cost of the property at todays prices (not counting the land) and subtracting out any depreciation, which is based on the age of the property
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ACV FORMULA
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Replacement cost (RC) minus Depreciation = ACV
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POLICIES THAT PAY ON AN ACV BASIS
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Basic Dwelling Fire Policies always pay on this basis; contents coverage on property policies also, although replacemetn cost coverage is available for an additional premium
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REPLACEMENT COST BASIS
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claims are paid in full without any depreciation up to the policy limits less the deductible
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POLICIES THAT PAY ON A REPL COST BASIS
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(better policies); all Homeowner policies; Broad and Special Form Dwelling Fire
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REPLACEMENT COST POLICIES
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dwelling policies that contain replacement cost coverage require the insured insure for at least 80% of the replacement cost value in order for repl. cost coverage to apply
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ACV VS REPLACEMENT COST
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most clients prefer to have replacement cost coverage instead of ACV
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FUNCTIONAL REPLACEMENT COST COVERAGE
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in the event of a loss the insurer agrees to replace the building utilizing simpler construction methods and modern building materials instead of the original; used for older buildings or homes where the cost of replacement far exceeds the actual cash value or market value
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AGREED VALUATION CLAUSE
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optional clause; insurer will cover losses in full while this clause is in effect
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FINE ARTS FLOATER
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clause to cover paintings, etc, which will pay the face amount or policy limit, regardless of ACV
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DECLARATIONS
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declarations page is 1st page of policy, includes name of insured, location of property, premium and eff. date of coverage
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DEFINITIONS
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state who is covered as an insured on the policy other than the insured (in an auto policy, defines what is a covered auto)
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INSURING AGREEMENT OR CLAUSE
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states that coverage is provided in accordance with the terms and conditions of policy; contains perils to be covered as well as insurer's promise to pay covered claims
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ADDITIONAL/SUPPLEMENTARY COVERAGE
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debris removal, coverage for trees, fire dept service charges; on auto policy might be bail bonds coverage
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CONDITIONS
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provisions in the policy that apply to both insured and insurer, such as notice of claim and proof of loss
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EXCLUSIONS
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provisions taking coverage away for certain claims, e.g. flood , war, nuclear hazards
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ENDORSEMENTS
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something added to the policy to make it better; also called riders in life insurance
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PERSONAL ARTICLES FLOATER
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provides all risk coverage, including fire, theft, etc for certain types of personal property such as jewelry
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POLICY STRUCTURE
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so the above are the structure of the policy: Declarations, Definitions, Insuring Agreement, Additional/Supp Coverage, Conditions, Exclusions, Endorsements
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NAMED INSURED
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person listed on the Declarations Page, including spouse if they live together (so the spouse does not actually have to be named on the Declarations Page in order to be considered a named insured)
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FIRST NAMED INSURED
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the person named 1st on the Declarations Page; the insurer is only obligated to send notices to the first named insured on the declarations page
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ADDITIONAL INSURED
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another person listed on your policy (usually at no extra charge), eg workers at your home
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POLICY TERRITORY
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territory is usually restricted to USA, Puerto Rico, Canada, except on a CGL policy
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POLICY PERIOD
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coverage only exists during timeframe shown on Declarations page; in auto it is usually 6 months, in property 12 months
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COMMERCIAL GENERAL LIABILITY POLICY
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policy territory includes all parts of the world if injury or damage arises out of goods or products made or sold by the insured in the US, Puerto Rico or Canada
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CANCELLATION
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cancellation may be requested by either party
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WHEN THE INSURER CANCELS
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must specify the reason why as some states limit the reasons an insurer can cancel; must give insured advance written notice; timeframe varies by state
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PRO-RATA (PROPORTIONATE)
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when the insurer cancels, must refund unearned premiums to client within a specified number of days
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WHEN THE INSURED CANCELS
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insurer is required to process cancellation process, and permitted to apply a percentage penalty charge because of their administrative expense
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SHORT-RATE PENALTY
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penalty for insured cancelling policy
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NON-RENEWAL
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slightly different from cancellation; no refund required because insurer provided coverage for entire term of contract, just didn't renew contract
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DEDUCTIBLES
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higher the deductible is, lower the premium will be; property policies usually have $250 deductible for each and every claim
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POLICIES COMMONLY WRITTEN WITHOUT DEDUCTIBLES
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liability policies, personal auto liability and homeowners liability
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OTHER INSURANCE
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a clause designed to reinforce the Principal of Indemnity, keeping clients from collecting more than they actually lost
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PAP
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personal auto policy; the owner's policy is always considered to be the primary policy, regardless of who is driving the car
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LIMITS OF LIABILITY
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stated on the Declarations page; indicates the limit the insurer will pay for a single occurrence; e.g. if your dog bites repeatedly, the limit the insurer will pay per each occurrence
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AGGREGATE (TOTAL) LIMIT
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max the insurer will pay during the liability period; e.g. max insurer will pay out on total occurrences of dog bites
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RESTORATION
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coverage is restored (or starts over again) with new limits on anniv date
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SPLIT LIMITS
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most auto policies written with split limits; typically limits the a mount paid to any oneperson negligently injured with your car, then limits the amount for bodily injury you cause to others with your car, then limits the amount of property damage paid in any occurrence
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COINSURANCE
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usually 80% requirement on dwelling fire and HO policies
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VACANCY
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situtation where both the occupant and contents have been removed from premises; unoccupied means contents are still in the home,e.g. on an extended vacation
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ABANDONMENT OF PROPERTY
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expressly prohibited by terms of the policy; if you suffer a total loss, you must still sick around and assist the insurer in the claim settlement process
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LIBERALIZATION CLAUSE
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insurer is permitted to change the terms of the contract at any time as long as the change benefits the insured and no additional premium is charged
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SUBROGATION CLAUSE
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property policies; insurer may require from the insured an assignment of all rights of recovery against any negligent third party for loss to the extent that payment has been made by the company
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BEST INTERESTS
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the insurer has the right to settle a claim in their best interests; they can either pay the claim, repair the property, or replace the damaged property (regardless of your preference)
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LIABILITY COVERAGE
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insurer is obligated to defend all lawsuits filed against the insured, even if false, fraudulent or groundless; may settle the claim in any way they want
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ARBITRATION
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if insurer and insured do not agree whether insured is legally entitled to recover damages, goes to arbitration if both parties agree; each party selects an arbitrator, 2 arbitrators selected choose a 3rd, and mutual agreement of any 2 of the 3 parties is binding
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THIRD-PARTY PROVISIONS
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e.g. a mortgage company may be named on a homeowners policy
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BAILEE
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3rd party such as a parking lot attendant driving your car; has a legal responsibility to take care of the car while it is under their temporary control and is not covered under your policy
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