INTRODUCTION & INSURANCE FUNDAMENTALS
Chapters 1 & 2 (selected pages, see syllabus)
!
WHAT IS RISK MANAGEMENT?
From www.wordiq.com: the process of measuring, or assessing risk and then developing strategies to manage the
risk. In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the
greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are
handled later.
!
WHAT IS INSURANCE?
" arrangement that redistributes the costs of unexpected losses"
"
Buyers TRANSFER risk of loss to the insurer.
"
Insurer POOLS those having similar risks.
"
Insurer PREDICTS losses the pool will suffer.
"
Insurer REDISTRIBUTES the cost of the losses back to members of the pool.
Insurance allow groups of people in a similar situation to pool their resources. The pool that is
ultimately created takes care of the misfortunes suffered by a few.
If you have never heard about the Amish community, you should do some research on them to fully
understand insurance and what is it really designed to do—Imagine that you are an Amish person
who needs a barn. How will you get one?
"A barn-raising is indeed a community endeavor for the Amish. At daybreak, the Amish buggies arrive
at the farm where the barn is to be erected. An experienced Amish carpenter/contractor is in charge
and men are assigned to various areas of work. Often the framing is completed before the noon meal
and in the afternoon the roofing is installed. Meanwhile the women are preparing a delicious noon
meal, sometimes served outdoors.....The children play games and are available to run errands. But
they also have a most exciting day as spectators at a truly amazing project of brotherly love---building
a barn in one day." An Amish Barn Raising (source: http://www.800padutch.com/atafaq.shtml#rai)
When the Amish need a barn, the entire community “chips in” to help, and they accomplish the task
in one day. Suppose your house burned down today. How would you rebuild it? You would
ideally like all your friends to come and help, but, the modern society we live in does not allow that
to happen. Your friends have specialized jobs, and, most would not fully understand how to
construct a house, would they?
Instead of having all of them over to rebuild the house, you would instead prefer a check. And, at
the same time, your friends would prefer to WRITE a check, since their time is limited, but they
would like to help you.
When people need to rebuild a house, or repair a wrecked car, they need a pool of resources. The
Amish pool actual labor resources, but in modern society, we pool money. Those who ultimately
suffer a loss go to the pool and get assistance.
"A contract in which one party agrees to compensate another party for losses"
"
INSURER agrees to pay for losses of the INSURED.
"
INSURED pays a PREMIUM for this service
"
The contract is called the POLICY.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 1
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BASIC TERMINOLOGY
"
Two Major Types of Losses: DIRECT and INDIRECT
"
Direct Losses:
the DIRECT financial consequences of your loss. Repairing your car,
paying your medical bills, recovering lost wages because you missed
work as a result of a car accident)
"
Indirect Losses:
“inconvenience” losses that may or may not result from the direct
loss. Renting a car to replace your damaged car, paying for someone
to drive you to and from the hospital, paying for a taxi or bus to get
you to work while your car is being repaired, paying for an hotel room
for your family while your house is being repaired for fire damage,
kenneling your dogs while you are staying in a hotel after a tornado.
"
Examples
"
-
CAR WRECK: The direct loss is the cost of repairing your car. The indirect loss is
the cost or renting a car to use while you are waiting on your car to be repaired.
-
CAR WRECK: The direct loss is the medical bill from your broken leg, the indirect
loss is the cost of paying someone to mow your lawn or take care of your child while
your leg is broken.
-
HOUSE FIRE: The direct loss is the cost of repair the damage to your house. The
indirect loss is the cost of boarding your dogs, putting your family in a hotel, eating
out three meals a day, sending your clothes out to be laundered instead of being
able to do laundry at home.
Loss-related Definitions
-
Peril
#
#
Named Peril insurance policies
*
An insurance policy that covers “named perils” only.
*
The burden of proof is on the INSURED to show the insurer that the
cause of the loss is on the list of perils
*
If the insured cannot prove that the cause of the loss is one of the
covered perils, the insurer does not have to pay for the loss
*
Example:
+
Your insurance policy covers fire, wind, and lightning
+
Your property is damaged by a burglar
+
The loss is not covered, since burglary/robbery/theft is not a
covered peril.
All-Risk (Open perils) insurance policies
*
Example
+
Your insurance policy says that all perils are covered, except
burglary/robbery/theft.
+
A punk defaces your property with graffiti.
+
The loss is covered, since the loss has nothing to do with the
taking of property (theft), it is just vandalism.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 2
-
Frequency and Severity
#
#
#
-
Every peril (cause of loss) has two dimensions: frequency and severity
Frequency:
how often a loss happens (probability... the long run chance of
occurrence)
Severity:
how bad a loss will be when it happens (how much will it
cost?)
Hazards: increase frequency and/or severity of a peril and the damage that results
#
#
Physical:
Moral:
#
Morale:
EXPOSURE
TO LOSS
actual physical condition, such as icy roads or worn tires
a person with a conscious desire for a loss. Often someone
with criminal intent, such as someone who kills someone to
receive the life insurance proceeds.
a person who is careless or indifferent to loss, such as
someone who leaves their keys in the car while they go inside
a store, or, someone who uses more medical care when they
have health insurance than they would if they did not have
health insurance.
HAZARDS
PERIL THAT
CAUSES LOSS
Automobile damage
Icy roads, worn tires
collision
Residence damage
faulty wiring, smoking, leaving an iron on when you leave for work
fire
Loss of health/life
smoking, exposure to radiation, ingesting saccharin,
cancer
Insured life
beneficiary is a moral hazard
murder
Cash in a cash register
employee who is a moral hazard–someone with gambling debts, or, a dislike of the employer
embezzlement
"
"
Risk: "Uncertainty concerning occurrence of a loss"
-
Speculative risk:
has three possible outcomes--loss, profit, or no change
-
Pure risk:
has two possible outcomes--loss or no change
-
Subjective risk:
A person’s perception of risk; risk tolerance
#
There are a number of tests online to evaluate your personal level of subject
risk
#
http://www.maybank2u.com.my/risk_profiler.html is one test you can try.
-
Objective Risk: variation in possible outcomes
#
difference between what we expect and what happens
#
the chance that the outcome you predict will or will not occur
Chance of Loss or Probability of Loss
Probability = long run chance of occurrence
No chance of loss? DON'T NEED INSURANCE.
Objective risk is the chance that what you predict will NOT happen; and your predictions
about loss are based on probability.
"
Law of Large Numbers
The average of a random sample from a large population is likely to be close to the
mean of the whole population.
As the number of exposure units increase, the more accurate your predictions about the
losses for that group will become.
Example:
the more lives you insure, the better you will be able to predict the
number of deaths that will occur.
The fundamental basis of insurance.
U SING A C OIN T OSS TO I LLUSTRATE L AW
If we....
...toss the coin 10 times
L ARGE N UM BERS
...toss the coin 100 times
...toss the coin 10,000 times
N am e
# of Heads
Perceive d
Probability
# of Heads
Pe rce ive d
Probability
# of Heads
P erceived
P robability
B ob
4
0 .4
57
0 .5 7
5 2 28
0.52
M ike
7
0 .7
42
0 .4 2
4 9 75
0.50
Jennifer
9
0 .9
70
0 .7 0
5 0 99
0.51
Kim berly
5
0 .5
51
0 .5 1
4 9 11
0.49
R andy
6
0 .6
62
0 .6 2
4 9 90
0.50
Average Probability Result
!
OF
0 .6 2
ELEMENTS OF AN INSURANCE
PREMIUM
"
Losses
cost of paying claims
0 .5 6
A H YPOTHETICAL H OM EOW NERS ' I NSURANCE P OLICY
F a c ts Abo u t O u r Ins u r a nc e P o o l
Num ber of H om es in the Pool =
Va lue of Each H om e =
Tota l Va lue of Property in Pool =
"
Expenses to Operate the Pool
salaries
0 .5 0
1,000
$100,000
$100,000,000
Losses W e Expect =
Proba bility of Loss = 2 %
Predicted loss per hom eow ner =
$2,000,000
$2,000
Fa cts A bout O ur O p e ra tion s
"
"
Risk Factor for unexpected losses
in case our predictions about
losses are wrong
Earnings on Investments
this actually helps REDUCE
premiums a bit.
insurers hold your money
and pay out claims as they
are filed.
meanwhile, the insurer is
able to earn investment
income off the premium
dollars it holds
Tota l Expenses =
Expenses PER PO LIC Y =
Tota l Investm ent Incom e =
Investm ent Incom e PER PO LIC Y =
R isk R eserve PER PO LIC Y (based on the
know n reliability of our loss data) =
$50,000
$50
$40,000
$40
$100
W h a t D o W e C h a rg e E a ch In s ure d?
C ost of Losses =
Expenses =
$2,000
50
R e serve for Unexpected Losses =
100
Investm ent Incom e =
(40)
Premium Charged per Policy =
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
$ 2 ,1 1 0
Page 4
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RISK CLASSIFICATION & SUBSIDIZATION
"
Underwriting
selection of insureds and the pricing of insurance
Underwriters decide:
#
Whose business to accept (or renew)
#
Under what conditions to accept
#
classification (rating group) the insured belongs in
"
Subsidization:
the insured is not paying the mathematically (“actuarially”) fair price for coverage.
underwriters attempt to put people in the proper coverage class
"
Principles of Risk Classification:
what makes a good underwriting factor?
-
"
!
Builds separate classes
Ensures homogeneity
Is Reliable
Is Admissible (related to losses)
Provides incentive value
Is socially acceptability
Auto Insurance
Factors
Separate Classes?
Build Homogeneity?
Reliable?
Admissible?
Incentive Value
Social Acceptability
Gender
Driving
Record
Yes
Not always
Yes
No
No
Not always
Yes
Yes
Yes
Yes
Yes
Yes
ADVERSE SELECTION: (also see http://www.wordiq.com/definition/Adverse_selection)
When those who have a substantial risk of loss are the only ones willing to purchase
insurance.
Result: insurance becomes unfeasible
Underwriting reduces adverse selection problem.
HOW DO INSURERS MAKE MONEY?
"
Selling insurance (“underwriting”)
COMBINED RATIO (in theory) =
"
"
"
"
Money Spent on Insurance / Premiums Received
95 = spent .95 for every $1 we made (GOOD!)
105 = spent $1.05 for every $1 we made (BAD!)
In 2002, U.S. Property/Casualty industry had combined ratio of 107*
Investing money (money is generated from underwriting)
*See www.iii.org for information on past combined ratios in the P&C Industry
!
BENEFITS AND COSTS OF INSURANCE TO SOCIETY
"
Major Costs
Expense of operating the insurance pool
Fraud: the INSURED ultimately pays for this!
#
Estimated cost just in the P&C industry is $100 billion per year.
http://www.irmi.com/Expert/Articles/2003/Zalma09.aspx
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 5
"
Important Benefits
-
-
!
IDEALLY INSURABLE RISKS (not speculative risks or gambling!)
"
"
"
"
!
Reduces bankruptcy risk of firms and individuals
#
Results in financial stability for everyone
#
Reduces the cost of borrowing money
Antimonopoly device
#
Small businesses can survive catastrophes
Financial intermediaries (reinvest money from small “savers”)
#
Keeps supply of investment funds plentiful
#
Reduces cost of borrowing
Insurers promote loss prevention & medical research
Large group of homogenous exposure units
Losses accidental from insured's standpoint
Losses are definite and determinable
Catastrophic potential is low
HOW CAN WE INSURE SOME "CATASTROPHES?"
"
Catastrophe to an insurer =
"loss that is unpredictable and capable of producing damage extraordinarily large relative to
the amount of coverage provided by the insurance pool."
Characteristics:
Limited in Geographic Impact
Not Accurately Predictable
"
GOVERNMENT provides or encourages coverage
"
Which of these would be catastrophes to an insurer?
Tornado
Hurricane
Fire destroying three homes in a residential area
Destruction of World Trade Center Towers
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 6
INTRODUCTION TO RISK MANAGEMENT
Chapter 3 (Online Lecture)
When you see an “online lecture”, that means you
should read this material on your own. It will not be
covered in class. Be sure to read the corresponding
textbook chapters!
From www.wordiq.com: the process of measuring, or assessing risk and then developing strategies to manage the risk. In
ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest
probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later.
In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss
vs. a risk with high loss but lower probability of occurrence can often be mishandled.
Risk management also faces a difficulty in allocating resources properly. This is the idea of opportunity cost. Resources
spent on risk management could be instead spent on more profitable activities. Again, ideal risk management spends the
least amount of resources in the process while reducing the effects of risks as much as possible.
!
THE RISK MANAGEMENT PROCESS
"
Identify and Evaluate Loss Exposures that are PURE RISKS
This is by far the most DIFFICULT step of the process. Businesses are constantly
changing, as are the hazards and perils the firm is susceptible to. And, when it
comes to being sued that can change in a DAY! It only takes one creative lawyer to
start a new wave of lawsuits you never anticipated!
PURE RISKS are what most risk managers manage. Speculative risks are usually
handled by someone in the finance department of the company, although the two
may ultimately work close together.
-
Such as:
#
Direct and Indirect Property Losses, such as
Fires that destroy stores and factories
Loss of business income resulting from fire damage
Destruction/collision of company vehicles
#
Liability Losses (“getting sued for stuff you did to injure another”)
Getting sued by customers who are injured by your product
Getting sued by employees who say they were wrongly
terminated
Getting sued by a parent for promoting a child who cannot read
Getting sued for defective workmanship that results in bodily
injuries to others (i.e., poorly constructed roof caves in on
someone)
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 7
#
Loss to Personnel
People are a major asset to the company! Their illnesses cost
the company in terms of health insurance claims, as well as lost
productivity and time off from work.
Also, the death of a “key employee” can really impact a firm.
Imagine you are a top scientist, being paid $1 million a year to
work on a cure for cancer. The company has been paying you
this much for five years, plus funding your research projects
that cost millions each year. You are getting close to a
breakthrough. If you are hit by a truck and get killed or
mentally incapacitated, the company has lost a big chunk of its
investment in you.
(Also think about NFL teams and other sports teams that pay
their players huge signing bonuses and sums of money up
front).
-
Measurement and Estimation is never exact, but two characteristics of any
loss exposure are critical:
#
Frequency “How often will it happen?”
Remember that frequency doesn’t mean much on a subset of
ONE, such as your house or your car. Although the probability
(expected frequency) of a fire or a collision is very low, that
doesn’t mean it cannot happen!
#
Severity
“How bad will it be when it occurs?”
*
Severity is often underestimated
*
Examples of underestimated severity:
+
Titanic (It couldn’t possibly sink, could it?)
+
World Trade Center
You’ll recall that the plane crashes did not seem to
damage anything but the floors directly impacted? They
were engineered withstand not only earthquakes, but
even plane crashes!
But, they were not able to withstand the HEAT from a
high-temperature jet fuel fire. The core of the building’s
steel frame melted at the high temperatures and the
buildings collapsed.
The engineering of the buildings is still amazing. Note
that the buildings were designed to cave in on
themselves, as opposed to falling to the right or the left.
Can you imagine how much MORE damage would have
been done if one of the towers had fallen “OVER”, rather
than dropping down on top of itself?
In conclusion, the lesson here is that you should never assume that a
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 8
loss is NOT possible or that severity of loss is not important, even
when you are dealing with the most seemingly indestructible property
and/or the most far-fetched (or even mundane) peril!
"
Construct a Program for Handling the Loss Exposures
This second step in the process is both a science AND an art. There are
certain rules we can follow to determine the best method for handling risks.
At the end of this section I’ll show you a “decision matrix” that will help.
-
CONTROL when possible using:
This is the best thing to do when it is feasible. Control simply means to
change the frequency and/or severity of loss. Nobody “wants” losses (unless
of course they are a moral or morale hazard), so, it makes sense to always
reduce frequency and severity whenever possible.
#
Avoidance (don’t do it)
This is a good strategy for things that are not essential to your day-today operations. As you will see later, this is the best risk management
tool to use when the expected frequency AND severity are both high.
It is hard to come up with a good example of something that should be
avoided, because inherently you WILL choose to avoid it.
One example could be flying small aircraft in thunderstorms. Most
pilots will not do that. Why? Because the chance of loss is high, and,
the severity is VERY high in a crash.
#
Prevention (reduce frequency)
Loss “prevention” seeks to reduce frequency, or how often losses
happen. Examples of loss prevention might include:
*
*
*
*
#
Reduction (reduce severity)
Loss “reduction” seeks to reduce the severity of losses. In other
words, if you are going to have a loss, what can we do to reduce the
damage that results from that loss.
*
*
*
-
Anti-lock brakes (the idea behind these is to avoid a car
accident altogether by maintaining control of your car)
Immunizations (to prevent disease)
A “no-smoking” policy to prevent fires
Having a workplace safety policy that requires two workers to
lift anything over 100 pounds (to prevent back strains and
injuries)
Wearing seatbelts (if you are going to lose control of the car,
these can help reduce the injuries you suffer)
Having a smoke alarm (allows you to save lives and call the fire
department before the damage gets any worse)
Requiring workers with back injuries to do “desk jobs” until
their backs are healed (keeps the back injury from becoming
more severe).
FINANCE the rest: Hey, you’re going to have SOME losses. How will you pay
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 9
for them?
"
#
Assumption/Retention (pay for it yourself)
*
From your perspective, a deductible is a form of assumption or
retention. When you take a $500 deductible on your auto
insurance, you are telling the insurer that you are able to pay
the first $500 of any loss.
*
Do nothing else (if you don’t buy insurance or have some other
means of financing the loss, then by default you are choosing to
assume it).
#
Self-funding/self-insurance (formal prediction & pre-funding losses)
*
Some businesses meet the law of large numbers on their own.
For example, Avis & Hertz have enough automobiles that they
easily meet law of large numbers.
*
When a business is in this situation, it can create a formal “selfinsurance program,” via which it predicts losses and puts the
money aside to pay for them.
*
This works because the business has its OWN pool already,
and, does not need to share expected losses with others.
#
Insurance Transfer
*
Transferring the cost of a loss to an insurer
*
This is best-used when the potential loss frequency is low, but,
the potential SEVERITY is high. If severity is low, you should
pay for it yourself via assumption.
#
Non-insurance Transfer (contracts, incorporation)
*
When you incorporate, what are you doing? You are
transferring your personal liability to an entity. Otherwise, if
you remain a sole proprietor or partnership, you have unlimited
personal liability. If you harm someone in the course of
business, they can sue you personally and take your personal
assets!
*
Have you ever signed a waiver or release form, promising that
you won’t hold someone else liable if you get hurt? That’s a
non-insurance contractual transfer.
*
Keep in mind, though, that non-insurance transfers are only as
good as the lawyer who writes them, and, the court that is
asked to uphold them!
Implement and review the program
Risk management is an ongoing thing. You can’t just identify all the risks,
buy the insurance, implement the safety programs and then go home for the
rest of the year! Constant review is important. Examining the losses that
occur can give us insight into changes we need to make in loss control, just
as one example. And, new risks arise every day.
Implementing the program is not easy. Buying commercial insurance for a
company usually takes about 60 days from start to finish. Risk managers call
that time of year their “renewals.” Most get their insurance coverages to
start and end on the same day each year so that all renewals can be
processed at once.
Also, if you have loss control programs, you have to actually implement them
and make sure they are working. For instance, if you require all employees
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 10
in the company to take defensive driving before operating a company
vehicle, how do you monitor that? How do you communicate it to the
supervisors so they can monitor it?
!
CONSTRUCTING THE RISK MANAGEMENT PROGRAM
Look at the matrix on this page, and, note that we analyze losses by frequency and
severity.
Insurance was designed for LOW FREQUENCY, HIGH SEVERITY losses!
Low severity losses should never (or rarely) be insured! If you use your insurance for
frequent but small losses, you will eventually pay more for your insurance than you ever
collected in loss payments. Ultimately, you can be cancelled!
Insurers view frequency as much more controllable by the insured than severity. For
example, if you are on a ladder and you fall off, HOW you land and WHICH bones you break
are largely out of your control. But, you DID have a choice to be on the ladder in the first
place. That was within your control.
Another example... if you aren’t watching where you are going while driving, and hit
someone from behind, the resulting injuries can be anything from very minor (nobody is
hurt), to giving someone a debilitating back injury. You have no control over how many
people are in that car, either. You might hit a one-driver car, or, you might hit a 10passenger van. The part you could have prevented was the FREQUENCY, though.
How would you handle the following automobile losses?
"
Chipped windshields
"
Damage to engine by not changing oil
"
Tire damage (running over glass, rocks)
"
Collisions
the damage to your car
the bodily injuries you cause others to suffer
your bodily injuries
RISK MANAGEMENT
DECISION MATRIX
SEVERITY
F
R
E
Q
U
E
N
C
Y
Low
High
Low
Retain
Insure
High
Retain &
Control
Avoid
Start be determining the frequency and severity of each of the losses shown. Chipped
windshields and damaged tires? Those are both low severity (compared to the value of the car).
So, by definition, you should NOT insure these. You should retain them. If the frequency is high,
then you should try to control by practicing loss prevention to reduce frequency.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 11
Damage to the engine caused by not changing the oil? That’s sort of tricky. You are probably
thinking, “That’s a stupid thing to let happen!” Exactly! That’s the point. Out of 1,000 cars in
which the oil is never checked or changed, how many will suffer damage? It’s about 100%, which
is VERY high frequency. What is the damage? Typically, you need a new engine. That is a high
severity loss, new engines are expensive. So, high frequency and high severity should lead you
to choose AVOIDANCE. (Don’t operate a car without taking care of the oil.)
Car accidents are a classic example of something with high severity potential. They lend
themselves to being financed with insurance very well. They should almost always be very low
frequency events. The damage to your car can be expensive (unless of course you drive a really
old car that isn’t worth much, in which case you probably won’t have insurance for damage to the
car). The injuries you can cause others to suffer can be very severe, though. So, you always
want to carry liability insurance for that.
Note, however, that you often use MORE than one technique to handle a loss exposure. Keep
thinking about automobile accidents... in addition to buying auto insurance, you also...
1.
2.
3.
4.
Retain a portion of the collision loss (with a deductible).
Practice loss control techniques (wear seat belts, pay attention to the road, etc)
Avoid extremely dangerous conditions (icy roads, driving while intoxicated, etc).
Have HEALTH insurance to cover your own bodily injuries, if they are severe
Although the focus of this chapter is “commercial” risk management, you’ll notice that some of
the examples I have used involve your PERSONAL loss exposures. That is because as
individuals, we are each our own “risk manager.” When you buy insurance, choose a deductible,
take defensive driving, check the air in your tires before leaving on a trip...you are making risk
management
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 12
UNDERSTANDING THE INSURANCE INDUSTRY
Chapters 4, 5, 6, 7 & 8 (you only need to read the pages and sections that
correspond to the topics presented in these notes).
!
MAJOR TYPES OF INSURERS BY LINE OF BUSINESS
"
Property & Casualty (sometimes called Property & Liability)
"
Life & Health
One insurer can only sell ONE type of insurance, as shown above. For instance, an auto insurer
cannot sell life insurance. But, you may have noticed that some insurers advertise that they
provide “Life, Health, Auto and Home” coverages. This is because most major insurers are not
ONE company, but a group of companies under one ownership. State Farm, for example, is not
ONE company, but a group of several companies. Each company is either a life & health
company, OR, a property & casualty company.
!
INSURANCE AGENT VS. INSURANCE BROKER
"
Similarities
Distribute insurance products
Compensated on commission (usually)
Must be licensed by the state insurance commissioner
"
Differences
Agent represents INSURER
#
Usually has “binding authority” on the insurer
#
Handles personal and commercial accounts
Broker represents BUYER
#
No binding authority
#
Usually handles only commercial accounts
"
Major Types of Agents
-
Direct Writers/Exclusive Agents:
represent only one insurer
#
Companies that distribute through exclusive agents include
*
State Farm
*
Allstate
*
Nationwide
-
Independent Agents:
represent multiple companies
#
Companies that distribute through independent agents include:
*
Traveler’s
*
Chubb
*
Hartford
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 13
-
!
Some companies do not use agents at all, but sell directly to the customer:
#
GEICO
#
USAA
#
Amica
#
Progressive (but Progressive ALSO sells through independent agents, too!)
TWO MAJOR TYPES OF PRIVATE INSURERS
"
Stock Companies
For profit, owned by stockholders
Do NOT have to buy a policy to own.
Can sell either P&C or L&H
If a profit is made it goes to the shareholders
"
Mutual Companies
Nonprofit
If a profit is made, it is returned to policyholder/owners in the form of a dividend
#
These dividends are NOT taxable, because they are viewed as a refund of
premium, and not investment income.
Can sell either P&C or L&H
Owned by Policyholders
#
Elect a board of directors through proxy (the current board holds
everyone’s proxy)
#
Board usually appoints managers
#
From there, it operates like any other insurer
Two Major Types of Mutuals
#
Advance Premium Mutual
*
Premiums are set “in advance” of the policy period.
*
If the company makes money, it will return the extra profits to its
policyholder/owners.
#
Assessment Mutual
*
Premiums are set in advance, but, the policyholder must agree that
if the company has a bad year, an “assessment” can be made
against each policyholder/owner.
*
If the company makes money, it will return the extra profits to its
policyholder/owners.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 14
!
LLOYD'S OF LONDON
Lloyd’s Example
"
Insurance EXCHANGE (NOT an insurance
company)
"
How It is Structured
Over 2,000 individual members
(NAMES)
Members form SYNDICATES (there are
around 60 of these).
Members have unlimited personal
liability for their trades
Lloyd’s is NOT responsible to individual
policyholders; the underwriting
syndicates are instead responsible.
"
"
!
What They Specialize in Insuring
Shipping Risks
"Surplus Lines"
Reinsurance
Buffett needs insurance on his voice. He approaches
a broker in the U.S. and the broker approaches an
underwriter at Lloyd’s. Buffett’s annual premium is
$10,000 for $1 million of coverage. The broker and
underwriter together take a 10% commission. $9,000
in premium is left.
Suppose syndicate 1294 has several names. Al owns
a 5% interest in the syndicate, Bob owns a 10%
interest, and Chester owns a 20% interest. (We’ll forget
about the other 65%...it’s owned by other people).
Syndicate 1294 agrees to take 2% of the Buffett risk.
The syndicate gets 2% of the $9,000, which is $180.
Per their organizational arrangement:
Al Gets 5% , or $9
Bob Gets 10% , or $18
Chester Gets 20% , or $36
If Jimmy Buffett loses his voice, and can collect the
policy benefit, .Syndicate 1294 Is Responsible for 2%
of $1 Million, or $20,000.
Al Must Pay 5% , or $1,000
Bob Must Pay 10% , or $2,000
Chester Must Pay 20% , or $4,000
For more info, see www.lloyds.com
CLAIMS ADJUSTING
"
Primary goal: CONTRACT COMPLIANCE
"
Three Major Types of Claims (Loss) Adjusters
"
-
Private Adjusters
-
Independent Adjusters
-
Public Adjusters
Bad Faith Claims Handling
What is Bad Faith? (www.uslegalforms.com)
Bad faith refers to dishonesty or fraud in a transaction, such as entering into an agreement with
no intention of ever living up to its terms, or knowingly misrepresenting the quality of something
that is being bought or sold. It may involve an intent to deceive or mislead another in order to gain
some advantage. It is often related to a breach of a the obligation inherent in all contracts to deal
with the other parties in good faith and with fair dealing, such as in paying claims, or issuing a
cancellation under an insurance policy.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 15
-
Websites for More Information (There are dozens of others!)
#
www.badfaithinsurance.org
#
law.freeadvice.com/insurance_law/insurers_bad_faith
#
www.allstateinsurancesucks.com
#
www.texaswatch.org
Getting Your Claim Paid
Nothing is more frightening to most consumers than dealing with a claims adjuster! Here are some tips to help you if you should
ever find yourself in the unfortunate position of filing a claim. This list assumes that you are filing a claim for damages under your
OWN insurance policy, and that you are not asking someone else’s liability insurance to pay for a loss.
!
Call your agent immediately to notify him of the accident (I actually try to keep my agent’s number in my automobile–when I wrecked
!
!
!
!
!
!
!
!
my car in February, 2001, I phoned him from the accident site).
Find your policy, and make certain you know which coverages you have.
Check the section of your policy called “Duties Following a Loss” and make certain that you comply with them as quickly as possible.
Make certain your agent and the insurance company’s claims adjuster have all phone and fax numbers where you can be reached,
and be available to speak with them when they call.
Take photographs of damaged property.
Get your own estimates of the property damages as soon as possible, preferably before the claims adjuster has a chance to offer you
a settlement. Use local dealerships, construction companies, the internet, etc.
"
Consult as many sources as you can, especially when you are valuing the damage to an automobile.
"
If it is automobile damage, make certain you visit the collision shop holding the auto as soon as you can, remove your
personal belongings from the auto, and speak to a collision expert about their preliminary assessment of the damages.
"
Any estimates or other information you gather should be put in writing. Create a folder to carry all information about your
claim, and jot down the name and number of everyone you speak with.
Be aware that there is an “appraisal clause” in property insurance, that guarantees you the right to submit your own appraisal of
damages. If, after doing your own research, you find that most sources say the value of your totaled car is $15,000, but the claims
adjuster offers you $13,000, inform him/her immediately that you would like to submit your own appraisals of damage, and that you
will not accept their initial offer. Do NOT let them “bully” you into taking an amount you think is less than fair.
Check with your lender about the pay-off amount on any financed item you are asking the insurer to pay for, just so that you have this
information handy if the claims adjuster asks for it. Understand that it is not the insurer’s responsibility to pay off your car or
mortgage loan in the event of a total loss. If your loan pay-off is more than the fair market value o f the automobile, you will have to
pay the lender the difference. The insurer is NOT responsible for that amount, unless you have purchased “gap coverage.”
If you have trouble communicating with your claims adjuster, call your agent and ask for assistance. (If your agent refuses to help,
remind him that at renewal you can move your policy to another agent who represents the same company.)
-
One last word about Bad Faith...
#
Bad Faith is NOT recognized in Texas as a tort if you are a third-party
claimant
#
You can still file a complaint against the Texas Department of
Insurance if you feel that a third-party claims adjuster is treating you
unfairly.
ACTUARIAL SCIENCE
!
Determine insurance rates and loss statistics, and certify financial statements.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 16
What If They Deny Your Claim?
The MOST valuable tool you have in settling a claim is knowledge. Read your policy, and remember the material covered
in this course to the best of your ability. Use the internet for the most current information about your rights and
responsibilities. An essential skill to have if you expect to negotiate anything effectively is accurate records. Make
certain you save every single document related to a claim. Write down the times and dates you speak with people, and
get their names.
This letter was drafted by a UNT employee in 1993, to dispute a coverage decision made by her HMO. Names have been
deleted or changed to protect anonymity. The insurer’s response follows the letter. (Some sections are deleted in the
interest of brevity....)
Dear Sir or Madam:
I would like to lodge a formal grievance with the NOPAY Health Plan. I am an employee of the University of North Texas. Last summer
(1992) I made a decision to enroll with NOPAY. NOPAY had distributed a booklet titled, "State of Texas Employees 1992-1993
Benefits" as a decision-making tool.
In March of 1993 Dr. Rob Mansfield determined that my husband, Charles, would benefit from hearing aids and began the referral
procedures. Charles received a copy of the referral several days later. He saw Dr. Crumbly who performed an audiometry and
recommended hearing aids for both ears.
At this time, I called NOPAY to verify the coverage. I spoke with Daria in Customer Benefits on March 11,1993 and she verified that the
coverage was 100% and therefore there would be no co-payment. I asked her to check with a supervisor, because there was such a
radical difference in the coverage provided by the health maintenance organizations under contract by the State of Texas. The
supervisor verified what Daria had told me, NOPAY covered 100% of the physician's charges and the hearing appliances.
We proceeded to have Charles fitted for hearing aids and he had been wearing them about two weeks when Janice, the receptionist
with Dr. Crumbly’s office, phoned on June 14 and told us that we had a $300 co-payment that was due immediately. I phoned the
Customer Benefits office at NOPAY and spoke with Kelley, who told me I should have read in my "statement of coverage on page 6"
that durable medical equipment excluded hearing aids and that I was responsible for a 20% co-payment. When I argued that point
was not included in the information that I had been provided, Kelley referred me to Beverly Rector, her supervisor.
Beverly said there appeared to be a discrepancy between the marketing information and the actual certificate of coverage, all ERS
policies had a limitation on hearing aids, but that she would take my case to an appeals committee for review since it was unclear,
even to her, how this mixup could have occurred.
On June 22, I called Beverly for information on my appeal. She said that the committee had been unable to make a decision and
needed to contact the marketing representative that worked with ERS of Texas to get more information.
I have consulted an insurance professional who says that insurance coverage is a "contract of adhesion and that any ambiguities in
the contract are construed against the drafter." The rider concerning durable medical equipment and hearing aids is ambiguous. I
have done everything that could be reasonably expected to insure that I understood and verified the coverage. I am asking NOPAY to
cover the benefits listed in the booklet and verified by the Customer service line. As this situation has gone on for several months, I am
anxious to resolve it as soon as possible and I look forward to your reply.
Dear Ms. X:
I am writing in regard to your request for an Executive Review of your complaint regarding your husband's hearing aids. Although you
were unable to be present, the Executive Review committee met on November 2, 1993 and discussed your request for additional
reimbursement.
Please be reminded that NOPAY has already paid above and beyond the $500 hearing aid benefit due to a claims adjudication error.
However, due to the conflicting information you received in your pre-sale literature and your phone conversations with several NOPAY
employees, the Committee has agreed to pay the remaining $300 balance. The Claims Department has been notified, and your claim
will be reopened and paid. Please note, this is a one time exception, and any future hearing aid benefit will be subject to the $500
maximum benefit. We thank you for bringing your concerns to our attention and value your continued membership with NOPAY. If I may
be of further assistance, please let me know.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 17
A major consideration in understanding how claims are handled is understanding the difference
between a first party and a third party claim. You file a first party claim when you are asking your
own insurer to pay for your damages, such as under your auto collision damage coverage. A
third party claim is filed against someone else’s liability insurance–you are alleging that the
insured harmed you in some way and is legally responsible to pay for your damages.
When you are asking your OWN insurer to pay, you are working with a service provider that you
paid. You may have several policies with this company, and, if you do not get good service, the
insurer stands to lose your business. Your agent can be an effective ally in negotiating with your
own insurer, because s/he also does not want to lose your business.
When you are asking someone else’s insurer to pay, you are effectively taking the first step
towards a lawsuit against an insurer with which you have no contractual relationship. The
insurer’s only real motivation to settle with you quickly and fairly is to avoid being taken to court.
And thus, you will find this to be a much more adversarial relationship than one involving your
own insurer. However, you should not go immediately to a lawyer in these cases. If the amount
of loss is relatively low, you will often fare better settling it yourself.
The secret to settling a claim successfully is to do your homework before talking with the claims
adjuster. Investigate the actual value of the damaged/lost property. If you are asking that
medical bills and lost wages be paid for, you should maintain receipts and records for those items
to present the insurer. The university also has a student legal office in which you can get free
legal advice if you aren’t sure what you are entitled to receive.
INSURANCE REGULATION IN THE UNITED STATES
"
McCarran-Ferguson Act (Congress, 1945)
Insurance is an “intra-state” activity
Insurance transactions are thus exempt from federal anti-trust regulation
Regulation is left up to each individual state
Applies only to the insurance transaction itself; insurers are still required to
comply with other federal laws, including EEOC, ADA, etc.
"
Gramm-Leach-Bliley Act of 1999 (GLB)
allows combination of banks, insurers and security dealers into financial
service holding companies.
most major insurers and banks now offer complete financial services as a
result (check out www.statefarm.com as one example)
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 18
"
!
The Insurance Commissioner System
-
Elected or appointed position
-
Four Major Duties
#
Ensure insurer solvency (***most important duty!)
*
Annual reports and examinations
*
Dictate investment guidelines
*
Manage and oversee insolvencies
#
Formation and licensing of insurers
#
Regulation of rates and expenses. Rates should be
*
Adequate (fair to the insurer)
*
Not excessive
*
Not unfairly discriminatory
#
Agents' Activities and Consumer Protection
*
Licensing of agents
*
Process complaints
INSURANCE REGULATION IN TEXAS
"
The Texas Department of Insurance (TDI)
Governor appoints the commissioner.
Commissioner enforces insurance laws and manages the TDI
"
Texas Guaranty Funds (also see http://www.tdi.state.tx.us/consumer/cbo6.html)
-
Two funds (one for P&C, one for L&H)
-
Fund pays
#
valid claims left unpaid, but only up to the limits of the policy and a
certain maximum set by the fund (for example, $300,000 on a
homeowner claim or auto claim)
#
partial refunds of unused premiums, up to $25,000
-
How it works:
#
If Commissioner finds insurer is not salvageable, he orders that the
company be liquidated.
#
May get another insurer to take over policies of the defaulting insurer.
#
The guaranty fund pays any debts remaining, and then becomes a
creditor of the default insurer.
#
If policyholder is not fully reimbursed by the fund, then he/she
becomes a creditor of the insurer also.
#
Money for the fund is obtained from other insurers in the same basic
line of insurance.
*
Assessments based on market share, but
*
Are returned through premium tax credits
(See subsequent reading, which was taken from the web link mentioned above)
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 19
If My Insurance Company Fails
When you buy insurance, you expect the company to be there when you need it. Sometimes, however, an insurance company may become
insolvent and be unable to pay its claims. This publication provides answers to questions people often have when their insurance company fails.
Who pays claims if my company fails?
Guaranty associations pay policyholders ' claims when licensed insurance companies fail. There are separate guaranty associations for life and
health insurance, property and casualty insurance (such as auto, homeowners, and workers ' compensation), and title insurance. Claims against
unlicensed insurers and certain types of licensed carriers are not protected by the guaranty associations.
Funds to pay claims on a failed company 's policies come from assessments paid by licensed companies that write the same type of coverage.
Companies recover these assessments through tax write-offs.
How do I find out if I am covered?
If you are a Texas resident and the company is licensed in Texas, you are probably covered, subject to some exceptions and limits. If your
company is based in another state, you 're probably covered, if your company is licensed to sell insurance in Texas and you 're a Texas
resident.
What happens when a company fails?
When a Texas company fails, a state district judge in Austin places it in receivership. The judge orders the Commissioner of Insurance to take
charge of the company. The Commissioner may hire a Special Deputy Receiver (SDR) to gather and distribute the company 's assets to
creditors.
If the company is a member of a guaranty association, the Commissioner will usually declare the company financially impaired. This authorizes
the appropriate guaranty association to pay claims. Claims are usually transferred to the guaranty association within a few weeks of the
declaration of impairment.
Will I be notified if my company fails?
If you are a Texas resident, the SDR or the guaranty association should notify you. However, if the company 's records are incomplete, the SDR
and guaranty association might not have enough information to notify every policyholder. SDRs publish notices of receivership in major Texas
newspapers. Guaranty associations also may publish notices.
How do I file my claim?
The SDR will send you information about filing claims, including deadlines, when policy or claim records are available. The guaranty association
also may send you information.
Tips
If your claim is already on file with the company, the guaranty association may pay it without requiring more paperwork. To be sure your
claim is on file and is being processed, send in the proof-of-claim form packet you received from the SDR or guaranty association.
Don 't delay filing a claim because of missing or incomplete paperwork. Documentation may show up in company records.
File your claim on time. The guaranty association could reject your claim if you miss the deadline.
How much can a guaranty association pay?
Claim payments are limited by the amount of your coverage and by Texas law. If your claim exceeds the association 's limit, the SDR will
consider the excess for payment from company assets, if any.
How long will it take for my claim to be paid?
Call the guarantee association or the SDR to find out. Normally, guaranty associations and companies have the same prompt-payment
requirements. Court-ordered deadlines, company restructuring, or poor records may delay the payment process. If medical providers or other
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 20
creditors demand payment, refer them to the guaranty association or SDR for payment information.
What happens to my policy?
Life, Health, and Annuities: The life and health guaranty association must keep paid-up life policies and annuities in force. Guaranteed
renewable life and health policies must be kept in force as long as premiums are paid. The association can non-renew other policies
at the end of the policy period, but usually avoids this by transferring a failed company 's policies to an active company. If you accept
the transfer, you will get an assumption certificate as proof of your coverage with the new company. When a policy cannot be
transferred, the guaranty association may take over the policy and act as the insurer.
If a court orders policy restructuring as part of an effort to save a company, the guaranty association will send you information on your options.
Property and Casualty: The court will cancel your policy. You will usually get at least 30 days to find new coverage. Your old policy stays
in effect during that time if you pay your premium. The guaranty association will pay valid claims incurred during this period.
The SDR will notify you of the cancellation date. Look for new coverage immediately. If you find coverage before the cancellation date,
you can cancel your old policy, but make sure the new policy is in effect.
Can I get a refund on premium paid for coverage I did not receive?
If a property and casualty company fails during a period you have already paid for, the association will pay the "unearned" premium, up to a
maximum refund of $25,000. You might be able to recover the remainder from company assets. To get a refund, you must ask for it in writing or
on a proof-of-claim form. Life-health policies normally have no unearned premium because coverage continues.
My health insurance coverage is with an HMO and is not protected by a guaranty fund. What protection do I have?
Most HMO contracts have a provision that requires doctors, hospitals, and other providers to collect for covered services only from the HMO if it
fails, not from you.
I am receiving workers ' compensation benefits from a company that went broke. Will my benefits continue?
Yes. The Property and Casualty Guaranty Association continues paying the benefits provided by law for licensed workers ' compensation
companies. Employers authorized by the state to self-insure their workers ' compensation claims participate in a special guaranty fund.
My employer funds our company pension plan with a guaranteed investment contract (GIC) from an insurance company. If the
insurance company fails, does a guaranty association protect our retirement benefits?
GICs issued to pension plans are generally covered. Check with the Texas Life, Accident, and Health Guaranty Association to find out if your
GIC is covered.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 21
!
Other Important Activities of the TDI
Handle complaints (call 800-252-3439), and provide info on insurers/agents
Educate the public (to order publications call 800-599-SHOP).
Investigate any insurance fraud
Maintain a web site to provide on-line information: www.tdi.state.tx.us
!
PRACTICAL INSURANCE SHOPPING: One Possible Approach
"
"
Know which policy and amount of coverage you need.
Call several insurance agents for quotes.
Write down ALL information they give you, including:
#
Type of policy quoted
#
Coverage limits, total premium, any discounts you were given, and
premium payment options
#
Specific name of insurer that will be providing coverage
"
Choose your INSURER first.
Check financial ratings online1 for the five rating agencies:
#
A.M. Best
www.ambest.com
#
Standard & Poor
www.standardandpoors.com
#
Fitch
www.fitchibca.com
#
Moody’s
www.moodys.com
#
Weiss
www.weissratings.com
-
Call the TDI for complaint history of insurer
Evaluate the company’s reputation for service
Eliminate any insurers (and their agents) that are unacceptable
"
From the insurers you are interested in, evaluate the agents.
Want a trustworthy, capable agent who provides good service!
You like Insurer X but not the agent who gave you the quote? Check a phone
book for other agents who represent the insurer.
Talk to the agents over the phone. Be sure you are comfortable with the
agent.
"
Find the price that suits you AFTER you have found the right insurer and agent!
There is some dispute over which rating agency is the “best.” A.M. Best’s is the “industry
standard,” and has been for decades. Weiss is the most controversial, because it does not
accept money from insurers for its ratings. Instead, it charges consumers to obtain ratings. The
other four agencies are paid by the insurers to rate them. The formulas and methods used for
ratings are proprietary and not revealed to the public or the companies.
Also, Weiss is the only rating agency that does not accept “subjective” input from insurers. The
other four agencies will allow input from management in addition to the actual numbers it gathers
1
Some libraries have subscriptions to these services, either online or in hardcopy. If you have trouble getting
the information you need via the website, check with a reference librarian for assistance.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 22
from financial statements. Weiss, on the other hand, uses a purely mathematical model.
It is my personal opinion that Weiss is the BEST if you only have time to check one agency’s
rating. However, I recommend that you always check at least 2 or 3 agencies when buying a
property/casualty policy, and, all five agencies when you are buying a longer-term product such
as life insurance or a retirement fund product. Although current ratings are no guarantee of future
performance, you certainly don’t want to start out with a poorly-rated company!
For more information about the differences among the agencies, you can explore some of these
links:
http://www.weissratings.com/weiss_vs_best.asp
http://www.weissratings.com/gao_study.asp
http://www.tonysteuer.com/res_RatingServices.html
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 23
FUNDAMENTALS OF INSURANCE CONTRACTS
Chapter 8
!
!
CONTRACT TERMINOLOGY
"
Contractual Elements: offer, acceptance, consideration, legal capacity, legal
purpose
Valid: has all five elements
Void: missing one of the five elements; courts will not enforce it
"
Binder: used in property & liability
P&L agents usually have binding authority.
Instant, temporary (30, 60 or 90 days) coverage until application can be
processed and the policy is issued.
#
If insurer finds applicant is not insurable, then no policy will be issued
#
You pay only for the coverage actually provided
May be written OR spoken
"
Conditional Receipt: used in life & health
Most agents not authorized to bind their insurers.
Temporary coverage contingent upon insurability
#
If found to be insurable, a policy is issued and coverage starts on the
date of the receipt.
#
If found to be uninsurable, coverage NEVER existed. Premium is
refunded, no policy issued.
#
If you die BEFORE they finish underwriting:
*
Bob applies for life insurance, pays first premium, gets
conditional receipt.
*
Before underwriter finishes investigating Bob, he dies.
*
Underwriter MUST complete the process and make a decision
using the same criteria s/he would have used had Bob lived.
*
If, posthumously, Bob is found to have been insurable, then the
insurer pays the claim.
INSURANCE IS A CONTRACT OF....
"
Indemnity:
Insured should not profit from insurance
-
Actual Cash Value =
Replacement Cost minus depreciation
-
Exceptions to The Principle of Indemnity
#
Replacement Cost Coverage
#
Life Insurance and other “valued”
policies
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Example of Actual Cash Value
A stereo you paid $500 for 4 years
ago now has a replacement cost of
$1000. The typical life of such a
stereo is approximately 5 years.
The ACV of the stereo will thus be
1/5 of its replacement cost today,
or $200.
Page 24
-
Insurable Interest is Required before you can buy insurance
#
#
Property Insurance
*
Insurable interest must exist when the LOSS occurs
*
You must have some type of financial interest in the property
*
More than one party can certainly have insurable interest, but
the property should only be covered ONCE
+
Example: a homeowner and his/her mortgage company
both have insurable interest, but only one policy is
needed to cover both their interests.
Life Insurance
*
There are three parties to a life insurance contract:
+
Insured
+
Beneficiary
+
Owner
*
Person who insures her own life (is the insured and the owner)
+
Has unlimited insurable interest
+
May choose any beneficiary
*
Person who insures another’s life (is the owner but not insured)
+
Must have
insurable interest
+
Insurable interest
Subrogation Examples
must exist when
the policy is
Insured for $60,000, suffer a $10,000 loss,
pay a $500 deductible, and collect $9,500
purchased, and
from insurer
not necessarily at
!
You're out $500. Insurer is out
the time of the
$9,500. BOTH of you have
insured’s death.
subrogation rights.
!
Suppose insurer sued negligent party
and collected $9,500. UNLESS the
policy said otherwise, the insurer
would first have to pay you $500.
Thus, most insurers will subrogate for
the FULL loss amount ($10,000)
Arsonist burns your house down, and the loss is
$100,000. House is insured for ONLY
$80,000.
!
Insurer pays you $80,000, and then
sues the arsonist. After legal
expenses, the insurer collects
$50,000.
!
Insurer MUST give you $20,000 and
keep $30,000 for itself.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 25
-
Subrogation
#
#
Insurer can recover from a negligent 3rd party after it pays its insured's
claim.
General Rules Regarding Subrogation
*
Do not impair insurer's rights
*
Insured must be fully compensated before insurer can keep
subrogation proceeds (even if the property is not fully-insured;
see example)
*
Does not apply to life insurance
"
Adhesion
Contract drafted by one party (insurer)
The law will construe all ambiguities in the wording of the contract AGAINST
the draftor (insurer)
"
Utmost Good Faith:
-
Insureds are held to the highest standard of honesty in dealing with the
insurer
-
Definitions:
#
Representation: a statement made by the insured to obtain coverage
#
Warranty: a promise made by the insured to the insurer
#
Concealment: silence when obligated to speak
-
Standards the insured is held to:
#
ANY breach of warranty voids coverage
#
Misrepresentations void coverage if they are MATERIAL to the risk
#
Concealments void coverage if they are MATERIAL and made with the
INTENT TO DEFRAUD the insurer.
-
EXCEPTION FOR LIFE INSURANCE: Incontestable Clause
#
Life insurance becomes “incontestable” after a period of 2 years (or
less)
#
Misrepresentations or concealments discovered after the "contestable
period" are not grounds for cancellation or contract avoidance.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 26
IMPORTANCE OF POLICY WORDING:
WORLD TRADE CENTER COVERAGE DISPUTE
Larry Silverstein Squares Off Against Swiss Re in Epic Battle
source: http://www.insurancejournal.com/html/ijweb/publications/IJWest/w122401/larry.htm
By Charles E. Boyle
Claims adjusters and policyholders may wrangle over the amount of compensation due following an automobile accident, or a fire, and
eventually reach a compromise. But when you’’re arguing over a difference of three and a half billion dollars, neither party is inclined to give up.
That’’s the current situation between Larry Silverstein, head of Silverstein Properties, the company which acquired the master lease on the
World Trade Center last July, and Swiss Re, the insurer which heads a group of 22 companies that signed binding commitments to insure it.
While the ““binders”” are enforceable insurance contracts under New York law, the absence of a formalized policy has led, perhaps inevitably, to
disputes over terms——particularly with regard as to what constitutes an ““occurrence.””
Swiss Re opened the battle on Oct. 22, when it filed a lawsuit in the U.S. Federal District Court for The Southern District of New York in
Manhattan seeking a declaratory judgment ““that the September 11 collapse of the World Trade Center is one insured loss.”” Although it framed
the request as necessary in order to determine to whom insurance payments should be made, the company’’s intent was clear: one occurrence
means one loss—— and, therefore, liability to pay for only one building, as there was no coverage against a simultaneous loss, a possibility
which had been deemed unthinkable.
The binder placed a maximum limit on liability of $3.56 billion. Swiss Re avows that this is the most the insurers will be required to pay. Its own
portion of the loss is 22 percent, around $780 million.
Silverstein responded by reaffirming his position that two loss events occurred and accused Swiss Re of trying to avoid its obligations, which
brought a swift denial. He filed a formal response to the legal action two weeks later, asserting that since two airplanes smashed into two
buildings, at two different times, two losses had occurred. Therefore, his company, its associate Westfield America, and the WTC’’s owners, the
Port Authority of New York and New Jersey, had the right to make two claims and be paid for two loss events. He also filed for an injunction to
prevent ACE and XL from opening an arbitration proceeding in London to determine the extent of their WTC-related losses.
Whatever the court decides, the loser will probably appeal, and it could be a long time before the issue is settled. Other questions that get raised
are when the $3.5 billion owed should be paid, and who earns the interest on that money.
Swiss Re has maintained almost from the day of the disaster that it is fully committed to paying its share of the claims. Jacques Dubois,
president and CEO of Swiss America Holding and a member of the parent company’’s executive Board, said special resources had been
committed ““to help clients manage these unprecedented claims,”” and initial payments had begun to be distributed.
To pay interest on some $760 million General Motors Acceptance Corp. had loaned Silverstein to purchase the lease, $14.3 million was paid
into an account set up by GMAC. Insurers have also begun paying the lost rental on the property, some $25 million a month. Over the five years
it is estimated it will take to rebuild the WTC, that amount will come to around $1.5 billion.
Intimating that Swiss Re’’s attitude was all show and no go, Silverstein opened another front in the confrontation, filing a ““Preliminary proof of
losses”” with the company and demanding payment of the”” actual cash value”” of the complex.
Dubois led Swiss Re’’s counterattack. In a written statement, he asserted, ““By electing to recover an ‘‘actual cash value’’ payment, Mr.
Silverstein has apparently abandoned his plan to rebuild the World Trade Center.”” Dubois added that if such were the case, the Port Authority
would receive $1.5 billion, Silverstein and Westfield around $1.3 billion, and various lenders, principally GMAC and UBS Warburg, about $700
million.
Barry Ostrager, a lawyer for Swiss Re, told Reuters News Agency that the situation was ““just like with your car.”” If the company pays cash
value for it, it doesn’t have to then pay to replace it. However, this analogy seems a little thin, as there are very few $3.5 billion cars.
Silverstein shot back that Swiss Re’’s claim was ““total and complete fiction”” and emphatically denied he wasn’t going to rebuild. He maintained
that how the claims are settled is separate from the issue of whether he and the Port Authority intend to rebuild the complex.
Some commentators indicated that Silverstein’’s demand for the cash value was a move to obtain immediate funds, which might be worth more
at present, than a series of payments spaced out during the years it would take to rebuild the WTC. He’’s probably also aware that office space
in downtown Manhattan is not exactly in demand since Sept. 11. One recent report found 13.2 million square feet of vacant office space in the
area, a 49 percent increase in vacancies since the time prior to the attacks.
That’’s where things stood at the end of November, but either side could open a third or even a fourth front before the battle is over. And even
Solomon might have a hard time trying to settle their differences.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 27
STB Successfully Opposes Summary Judgment in World Trade Center Litigation
source: http://www.stblaw.com/FSL5CS/news/news1319.asp
Following the tragic September 11, 2001 terrorist attack on the World Trade Center, Swiss Reinsurance Company ("Swiss Re"), the second
largest reinsurer in the world, retained the Firm to represent its interests and coordinate with Swiss Re's senior management on all aspects of
the World Trade Center disaster.
On October 22, 2001, the Firm filed a complaint on Swiss Re's behalf in New York federal court against the World Trade Center's leaseholders,
their lenders and the Port Authority of New York and New Jersey (the owner of the World Trade Center). Swiss Re seeks, among other things, a
declaration that the September 11 attack constitutes one insurance loss under the leaseholders' property insurance program. Certain World
Trade Center leaseholders controlled by Larry Silverstein have taken the position that the September 11 attack constitutes at least two separate
insurance losses to multiply their insurance recovery. The leaseholders filed counterclaims against Swiss Re and over 20 other insurers. Billions
of dollars are at stake in this lawsuit, in which Swiss Re has the largest single exposure.
Swiss Re underwrote coverage based on the WilProp policy form, which defines "occurrence" as
all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be
added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over
which such losses occur.
As of September 11, however, no policy had been issued. On September 14, Travelers issued a policy to the Silverstein Parties on its own
policy form, which contained no occurrence definition.
On January 18, 2002, the Silverstein Parties filed a motion for summary judgment against Travelers on the number of occurrences issue.
Wachtell Lipton Rosen & Katz, who represents the Silverstein Parties, unabashedly stated its intention to use the judgment affirmatively against
other insurers to argue that (I) the Travelers form governs the entire insurance program and (ii) the attack on the World Trade Center constitutes
two occurrences entitling the insureds to double recovery. Recognizing that the decision could have significant ramifications for Swiss Re, the
Firm submitted a brief on Swiss Re's behalf in opposition to the motion and participated in oral argument. On June 3, United States District
Court Judge Martin denied summary judgment, holding that there is an ambiguity with respect to the meaning of term "occurrence" in the
context of this insurance program.
The parties have taken more than eighty depositions in this case, and have to take more than a hundred more before the end of discovery. In
addition, hundreds of thousands of documents have been produced by the parties. At the June 5, 2002 hearing, the Court extended the
discovery cutoff from June 28 to September 30. The case is set for trial on November 11, 2002, with jury selection scheduled to begin on
November 4.
Swiss Re: Rulings indicate support of single Trade Center occurrence
source: http://www.roughnotestoday.com/news/2002/jun02/jun27swissre.htm
Swiss Re said it believes a recent series of rulings with regard to the insurance companies’’ dispute with World Trade Center leaseholder Larry
Silverstein, as well as other developments, clearly support the insurers' view that the coordinated attack by Al Qaeda was one insurable loss.
Recent developments relating to Swiss Re's litigation with Silverstein Properties include the Court's denial of Silverstein's Summary Judgement
motion against Travelers, and the Court's order compelling discovery of Wachtell, Lipton communications with Willis Inc., Silverstein's insurance
broker.
In addition, testimony in both Willis and insured party depositions indicate that Willis and the insureds believe that the coordinated attack on the
World Trade Center constituted one insurable loss. Swiss Re believes that these and other ongoing developments are leading inexorably to a
single occurrence conclusion and to the fact that Swiss Re and all of the insurers are bound by the Wilprop policy form or its equivalent.
The Wilprop policy form included a clear definition of a single occurrence. The specific language is: "Occurrence" shall mean all losses or
damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the
total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.
"Silverstein must accept the fact that, aided by his own sophisticated and experienced internal and external advisors, he intentionally and
willingly underinsured the World Trade Center against the possibility of a total loss," said Swiss Re America Holding Corporation Chairman and
Chief Executive Officer Jacques Dubois. "Silverstein also must accept the fact that the coverage was bound under Wilprop."
Dubois also pointed out that in Silverstein's settlements with two of the other WTC insurers, ACE and XL in London, Silverstein has
acknowledged that under the Wilprop policy form, the coordinated attack on the World Trade Center resulted in one insurable loss.
Swiss Re said that under the Wilprop policy form, Silverstein has two choices:
1. He can elect to receive insurance proceeds under either the Actual Cash Value ("ACV") provisions of the policy form; or
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 28
2. He can elect proceeds under the Replacement Cost Value ("RCV") provisions. Each choice is bounded at the upper end by the $3.5 billion
policy limit.
The company went on to say that if Silverstein elects ACV, he must first abandon irrevocably his plans to rebuild. Proceeds then available under
this election are defined as the depreciated value of the World Trade Center as of Sept. 10, 2001. In the summer of 2001, an internal Silverstein
memo declared for insurance purposes, that replacement value (which by definition is greater than ACV) of the World Trade Center was $2.7
billion. After September 11, internal Silverstein analysis reduced the pre-September 11 estimate of replacement value to $2.4 billion. Under the
ACV election and using Silverstein's own analysis, Silverstein would be entitled to as little as $2.4 billion, before deducting depreciation, required
capital improvements and business interruption payments.
Under the RCV provisions, Swiss Re said, Silverstein would be entitled to proceeds up to a maximum of the policy limit of $3.5 billion. The
proceeds are stipulated to be paid on a "pay as you go" basis as funds are spent during the rebuilding at the World Trade Center site. Assuming
that it takes five years to rebuild and assuming the maximum three-year business interruption payments, the present value of the insurance
proceeds available for rebuilding are substantially below $3.5 billion.
Dubois said, "Because Silverstein insists on advancing his bankrupt two occurrence / Travelers' form theory, any ultimate recovery for
Silverstein and his partners on either an ACV or RCV basis will be reduced by the financial cost of wasted time, money, and legal expenses.
Swiss Re believes that Silverstein should abandon his over-reaching efforts in the interest of letting New York and the Port Authority go about
the business of rebuilding Lower Manhattan."
In short, ACV dollars in hand from Swiss Re today are worth more than the same dollars after another year or two of litigation, not to mention
the diminution of the total available limit arising from ongoing business interruption payments and legal costs. Source: Swiss Re America
Holding Corporation
February 9, 2004
In Dispute on Trade Center's Insurance, Billions at Stake
By CHARLES V. BAGLI (source: New York Times)
Opening statements are expected to begin today in the long-brewing court battle between the developer Larry A. Silverstein and two dozen
insurers over how much money will be available for rebuilding the vast commercial complex at the World Trade Center site.
A courtroom in the federal courthouse in Lower Manhattan will be jammed with dozens of lawyers, and much testimony in the coming weeks will
be from underwriters and agents discussing arcane insurance terms and forms. But the dry recitations will belie what is at stake for both sides:
billions of dollars.
Mr. Silverstein claims that he is entitled to a double payment of nearly $7 billion because two planes hit two towers in what he describes as two
separate occurrences during the terrorist attack on Sept. 11, 2001. Swiss Re, Travelers Property Casualty Corporation and the other insurers
that provided coverage for the trade center contend that the developer is entitled only to the policy limit, $3.55 billion.
Mr. Silverstein has lost a series of crucial rulings leading up to the trial, but both sides have expressed optimism over the ultimate outcome.
Opening statements will come from a trio of shrewd and colorful lawyers, with Barry R. Ostrager and David Boies representing the insurers and
Herbert M. Wachtell representing the developer.
The dispute has taken on an especially bitter cast over the past two years, with the chairman of Swiss Re, Jacques E. Dubois, portraying Mr.
Silverstein as a rapacious developer who concocted a "self-motivated hoax" in an attempt to grab an insurance windfall. Mr. Silverstein, in turn,
has denounced Swiss Re, calling its attacks scurrilous and accusing it of a "cynical" attempt to avoid its responsibilities.
But the ramifications of the case go beyond the two contending sides. It is being closely watched by city and state officials and people involved
in the downtown rebuilding effort, especially now that a master plan has been completed for the site, as well as initial designs for one of the first
buildings, the $1.4 billion, 1,776-foot Freedom Tower.
Judge Michael B. Mukasey of Federal District Court, who is hearing the case, has tried to contain the issues. He threatened contempt charges if
the two sides talked to the news media in an attempt to sway public sentiment. And he told the jury last week that he did not know if the verdict
would affect the rebuilding effort, but he cautioned jurors that it should not "enter into your decision in this case."
That prompted a reaction from Kevin M. Rampe, president of the Lower Manhattan Development Corporation, the agency overseeing plans for
the trade center site.
"This litigation will have a real and direct impact on the rebuilding effort," said Mr. Rampe, who estimates it will cost $9 billion to $11 billion to
rebuild the trade center. "I invite the judge to come down here if there's any uncertainty in his mind. We understand this is a private litigation, but
there's a substantial public interest: healing the wounds from the worst terrorist attack in U.S. history."
So far, the insurers have paid out $1.9 billion, $600 million of which has been spent on rent, debt service and legal fees. (An additional $700
million was spent on paying off the mortgage on the property and buying out the trade center mall operator, Westfield America. But both Mr.
Silverstein and the Port Authority of New York and New Jersey are required to replenish the rebuilding fund when the insurance case is
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 29
resolved.)
The two sides have been at odds on almost every point. The case is particularly complicated because Mr. Silverstein took control of the office
complex at the trade center only six weeks before the terrorist attack. At the time, the insurance companies had signed binders pledging to
provide coverage but had not completed the final documents.
The two sides have split over which insurance form was in place at the time of the attack. Mr. Silverstein claims that the companies are bound
by a proposed policy known as the Travelers form, which, he says, makes it easier to claim that the attack on Sept. 11. constituted two
occurrences.
The insurance companies, however, say that the document in force was the so-called Wilprop form, a policy devised and proposed by Mr.
Silverstein's consultants to avoid multiple deductibles.
The court has already ruled that three insurers, with a total coverage of $112 million, were bound by Wilprop, which regards the destruction of
the trade center as a single occurrence. Early on, Mr. Silverstein settled with two other companies, with coverage totaling $365 million.
This trial is to determine whether Swiss Re and 12 other insurers were bound by Wilprop, as they contend. Swiss Re's legal arguments have
centered on one of Mr. Silverstein's insurance executives, Robert Strachan, the developer's risk manager. The day after the attack, Mr.
Strachan sent out a memo indicating that the insurance language entitled Mr. Silverstein to one payment of $3.5 billion.
But Mr. Silverstein's pretrial memo contends that Swiss Re never accepted the Wilprop form and that the company was later notified that the
Travelers form was going to be used in the placement.
A second phase of the legal proceedings will determine whether Mr. Silverstein is entitled to two payments under the Travelers form.
Swiss Re Issues Statement on Jury Verdict (source: www.swissre.com)
3 May 2004 Swiss Re today issued the following statement in connection with the jury verdict in the U.S. District Court, Southern District of New
York, in the case of SR International Business Insurance Company Ltd. v. World Trade Center Properties, LLC, et al.
"Swiss Re is grateful for the jury's full consideration and attention throughout this trial. We are pleased that the jury has confirmed the
contractual basis of our coverage," said Jacques E. Dubois, Chairman, Swiss Re America Holding Corp. "According to two prior court decisions
in this litigation, today's finding means that Swiss Re's payout obligation is no more than our 25 percent share of the $3.5 billion loss limit
property policy. We have always been convinced that the maximum payout under a loss limit property policy could never exceed the sum
insured, in this case $3.5 billion.
"Swiss Re played a leading role in this litigation," added Dubois. "We had an important obligation to resist the insureds' claim that they were
entitled to twice the maximum payout of the policy. We believe that paying anything more than the full amount of the sum insured is both outside
the terms of the coverage and wrong."
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 30
SECTION II
PERSONAL PROPERTY AND LIABILITY ISSUES
begins on the following page
The first Section of the course introduced basic terms and concepts you should be familiar with to
understand the more advanced material.
We now turn our attention to managing your personal property and liability exposures. You may
think of this section as “How to protect your assets.” We will talk about ways to protect things you
have acquired in the wealth-building process.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 31
BASIC PROPERTY & LIABILITY INSURANCE CONTRACTS
Chapter 9
!
THE CONTENT OF AN INSURANCE POLICY
"
Declarations Page
This is NOT the insurance card you keep in your car!
This is a full page that includes information about the insured, including:
#
Name, address, policy number
#
Agent’s name
#
Property insured (description of house or car)
#
Coverages purchased
#
Premium for each coverage
"
Insuring Agreement(s)
Broad statement of coverage that defines exactly what the policy will do.
In some policies there are numerous coverages included (such as the auto
policy, which has four different coverages in one package). EACH coverage
will have an insuring agreement included.
Excerpts from insuring agreement for auto liability coverage:
“W e will pay for damages for bodily injury or property damage for which any covered
person becomes legally responsible because of an auto accident.... W e will settle or
defend, as we consider appropriate, any claim or suit asking for these damages....”
"
Definitions
Important terms used frequently throughout the policy.
Will either be in bold print or in quotation marks.
Are usually in one clearly-defined section of the policy, but can be found in
other places, too.
Read these and mentally “insert” them into the policy as they are used.
Example Definition:
“Occupying” mean in, upon, getting in, on, out or off.”
(Note that one of the auto policy coverages, Medical Paym ents, agrees to cover anyone while
“occupying” a vehicle. This definition ultim ately m eans that if the person is stepping OUT of
the car, coverage still applies.)
"
Exclusions:
-
Items the insurer does not want to cover
Usually included to eliminate one of the following:
#
#
Uninsurable losses
*
Moral and morale hazards
*
Catastrophic losses
*
Frequent losses
*
Non-accidental (gradual) losses, such as wear-and-tear
Items that should be covered by another insurance policy.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 32
-
Exclusions may involve
#
Perils:
*
War (catastrophic)
*
Flood (buy a special policy)
*
Engine breakdown (non-accidental)
#
Losses:
#
Property:
*
Cash (moral hazard)
*
Tire damage (high frequency)
Increased cost of construction (buy a special policy)
"
Endorsements
Amendments or changes to the policy.
Can add a coverage, remove a coverage, or change the meaning of a policy
provision.
"
Conditions ("Rules of the Game")
-
Fraud/Misrepresentation
-
Cancellation
#
#
Property/Casualty Contracts
*
INSURER cancels:
+
only when allowed by law
+
must give a PRO-RATA refund of unused premium
*
INSURED cancels:
+
may cancel at any time
+
may receive a SHORT-RATE refund
+
in Texas only, insured still receives PRO-RATA refunds
Life & Health Contracts
*
INSURER cancels:
+
in life insurance, it’s very rare, and after the contestable
period has expired, impossible.
•
If insurer “cancels,” it has discovered that it never
intended to issue the policy in the first place
(probably due to misrepresentation)
•
If insurer cancels, generally a FULL refund of all
premiums paid in is given to the insured (or
beneficiary if the insured is deceased)
+
in health insurance, it may be allowed in some policies.
•
You should NOT purchase a cancellable health
policy. Guess when you’ll get cancelled?
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 33
*
-
INSURED cancels:
+
may cancel at any time
+
unused premiums are NOT refunded
+
if the insured wishes to discontinue coverage, he should
let the policy “lapse.” Do NOT cancel, since there’s no
refund!
Other Insurance
Pro-rata Clauses
#
#
-
-
Pro-rata Clause (see
example)
Bob has a house worth $5 million. He has his
house insured with the following insurers:
Insurer "A" = $1 million
Insurer "B" = $1 million
Insurer "C" = $3 million
Duties Following a Loss
#
Call police for theft
#
Submit inventory of
lost/damaged goods
#
Many others!
Appraisal (in property insurance)
#
#
#
"
Primary vs. Excess
The total amount of coverage is $5 million, of
which "A" provides 20%, "B" provides 20%, and "C"
provides 60%. If Bob's house suffers hail damage,
and it costs $100,000 to repair, "A" will pay
$20,000 (20%), "B" will pay $20,000 (20%), and
"C" will pay $60,000 (60%).
If Bob decides to over-insure his house by
purchasing more than $5 million of total coverage,
the pro-rata clause will prevent the principle of
indemnity from being violated:
This clause is useful when
Insurer "A" = $5 million
the insured and insurer do
Insurer "B" = $2 million
not agree on the amount of
Insurer "C" = $3 million
the loss.
Now, Insurer "A" provides 50% of all coverage, "B"
Allows insured to submit
provides 20%, and "C" provides 30%. If Bob's
his/her own appraisal of
house suffers hail damage, and it costs $100,000
damages for the insurer to
to repair, "A" will pay $50,000 (50%), "B" will pay
$20,000 (20%), and "C" will pay $30,000 (30%).
consider.
The total amount Bob receives does not exceed
If an agreement is still not
the actual loss incurred.
reached, this clause requires
the insured and the insurer to
share the cost of a 3rd party
“umpire” or mediator to settle the differences.
Deductibles
Usually will be “straight” or “per-occurrence” in personal lines coverages
Example
#
Have a $250 straight deductible, wreck your car and incur $15,000
worth of damages.
#
You will pay $250, the insurer will pay $14,750.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 34
"
Coverage Limits
-
Specific (Per Occurrence): most paid per loss
Aggregate: most paid during one time period.
Excerpts from Texas Law RE: Cancellation/NonRenewal
Cancellation m eans that before the end of the policy period the insurance com pany:
• term inates the policy;
• reduces or restricts coverage under the policy; or
• refuses to provide additional coverage to which you are entitled under the policy.
Refusal to renew and non-renewal m ean the policy term inates at the end of the policy period.
After your initial policy with your com pany has been in effect for 60 days, that insurance com pany cannot cancel your
policy unless:
•
you don't pay your prem ium when due;
•
you file a fraudulent claim ;
•
your driver's license or car registration is revoked or suspended;
•
the driver's license of any household resident or person who custom arily drives a covered auto is suspended
or revoked. If you agree to exclude coverage for that person, the insurance com pany cannot cancel your
policy for this reason; or
•
TDI determ ines continuation of the policy would result in violation of insurance laws.
To cancel your policy, your insurance com pany m ust m ail you at least 10 days notice of the cancellation.
Your insurance com pany cannot refuse to renew your policy solely because of any of the following types of claim s:
•
•
•
•
•
claim s involving dam age from a weather-related incident that does not involve a collision, like dam age from
hail, wind or flood;
accidents or claim s involving dam age by contact with anim als or fowls;
accidents or claim s involving dam age caused by flying gravel or flying objects; however, if you have three of
these claim s in a three year period, the insurance com pany m ay raise your deductible on your next renewal
date;
towing and labor claim s; however, once you have m ade four of these claim s in a three year period, the
com pany m ay elim inate this coverage from your policy on your next renewal date; and
any other accident or claim that was not your fault unless you have two or m ore of these claim s or accidents in
a one year period.
If the term of your insurance policy is less than one year, your insurance com pany m ust renew that policy until it has
been in effect for one year. Your insurance com pany m ay only refuse to renew your policy effective on the anniversary
of the policy's original effective date. For instance, if your policy was originally effective on January 1, 2000, the
insurance com pany m ust renew your policy to provide coverage until January 1, 2001 and thereafter, m ay only refuse
to renew your policy effective January 1 of any year.
You have the right to cancel your policy at any tim e and receive a refund of the rem aining prem ium . The refund will be
paid to you unless your prem ium was financed through a prem ium finance com pany. In that case, the refund will be
paid to the prem ium finance com pany to reduce the am ount you owe on your loan.
If the insurance com pany does not m ail you notice of non-renewal at least 30 days before your policy expires, you
have the right to require the insurance com pany to renew your policy.
Upon request, you have the right to a written explanation of an insurance com pany's decision to cancel or non-renew
your policy. The written statem ent m ust fully explain the decision, including the precise incidents, circum stances, or
risk factors that disqualified you. It m ust also state the sources of inform ation used.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 35
If your m arital status changes, you have the right to continue your insurance coverage. You have a right to a new
policy in your nam e that has coverages which m ost nearly approxim ate the coverages of your prior policy, including the
sam e expiration date. The insurance com pany cannot date the new policy so that a gap in coverage occurs.
Your insurance com pany cannot refuse to renew your policy based solely on the age of any person covered by the
policy. This includes placing you in a higher priced com pany or requiring a nam ed driver exclusion for a teenager who
reaches driving age.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 36
PERSONAL PROPERTY AND LIABILITY RISKS
Chapter 2 (selected pages, see syllabus), Chapter 14
!
PROPERTY EXPOSURES: fairly easy to identify
"
!
See Homeowner Inventory homework
LIABILITY EXPOSURES
"
"
Legal Liability
-
Responsibility for injuries you cause others
-
Classes of Injuries the Law Recognizes
#
Criminal acts: injuries to society
*
lawsuit will be filed by the “people” (district attorney)
#
Civil acts: injuries to an individual
*
lawsuit will be filed by an individual or group of people
*
Civil lawsuit can result from
+
Breach of Contract
+
Tort (any legal injury OTHER THAN break of contract)
#
Differences in Evidence Standards
*
Criminal: plaintiff must prove case beyond a reasonable doubt.
*
Civil: plaintiff must prove case with a “preponderance” of the
evidence.
Liability Insurance
-
Pays 3rd parties for injuries the insured inflicts
#
Covers certain types of civil liability only
#
Will not cover criminal cases or criminal defense
*
although, sometimes a criminal action can result in liability that
the insurance will cover
*
If you are in a wreck while drinking and driving, your liability
insurance will pay for bodily injuries and property damages you
cause others to suffer in the accident, but, it will NOT pay for
your criminal defense on the DUI charge.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 37
-
"
Three Parties to A Liability Insurance Claim:
#
Insured (person who injures another person)
#
Injured 3rd party
#
Insurer (pays damages the insured is legally responsible to pay the 3rd
party)
Never pays for the insured’s damages or injuries (you can't be liable to
yourself)
Torts: The Focus of Liability Insurance
-
Intentional Interference Torts
#
Deliberate act that results in injury
#
May overlap with criminal acts
#
Some ARE insurable for commercial entities and public figures
*
False arrest
*
Defamation
*
Copyright infringement
-
Strict/Absolute Torts
#
Law says one party is liable for another party's injuries, even if the
injury was not intentional
#
Strict Liability: tortfeasor (wrongdoer) can defend
*
Workers' compensation
#
Absolute Liability: no defense allowed
*
Owning a dangerous animal
*
Using explosives
-
Negligence (unintentional tort)
#
Webster’s Dictionary definition: “DOH!”
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 38
!
NEGLIGENCE: “Failure to act as a reasonable person would.”
"
Basic Requirements for Proving Negligence
Defendant had a legal duty to protect plaintiff
Defendant failed to perform the duty
Plaintiff suffered injury as a direct result of the defendant's failure to perform
his/her duty
"
Extensions of Negligence
-
Res Ipsa Loquitur: An Exception to the Requirements
#
Plaintiff must only prove injury
#
Defendant may still provide a defense
#
Required Circumstances for Using
*
*
*
"
-
Vicarious liability
#
Liability for the actions of someone else
#
Example: employers are responsible for things their employees do
-
Joint and several liability
#
Lawsuits alleging J&S liability are filed against an entire group of
people.
#
The group is being held liable “jointly” (as a group) and “severally” (as
separate individuals).
Damages a Plaintiff Would Ask for In a Suit
Economic Damages
#
Bodily Injuries (medical bills, lost wages, lost economic services)
#
Property Damage
*
Value of lost/damaged property
*
Indirect losses (that result from direct property damage)
-
"
Injury couldn’t happen without negligence
Som ething exclusively in control of defendant caused the injury.
Im possible for plaintiff's negligence to cause injury.
Non-Economic Damages
#
Pain and suffering; mental anguish
#
Loss of consortium
Punitive Damages
Commonly-used Defenses to Negligence Claims
Elements of negligence not present
Contributory negligence (rarely allowed anymore)
#
If the plaintiff contributes to his injuries in ANY way, no damages are
awarded to him.
#
Today, comparative negligence is more commonly used.
*
If plaintiff is found to be 20% at fault, and the defendant is found
to be 80% at fault, the damages to the plaintiff are reduced by
20%
Assumption of risk
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 39
!
LIABILITY EXPOSURES
"
Property Owner (tenants are treated as owners with respect to the portion of the
property they exclusively control)
-
-
Three classes of adults can come on to your property:
#
Invitee: invited primarily for your benefit (customers)
Duties (you owe the highest standard of care)
*
Warn of dangers
*
Protect from known dangers
*
Discover unknown dangers
#
Licensee: on premises for legitimate purpose with permission (friends)
Duties
*
Warn of Danger
*
Refrain from causing deliberate harm
#
Trespasser: no duties owed, but you cannot set “traps”
Children on your premises: Attractive Nuisance Doctrine usually applies
"
Business and Professional Activities
Anyone in the chain of product manufacturing/distribution is responsible for
product injuries
Principal-Agent Liability: responsibility for the actions of your employees
Professionals (doctors, lawyers, accountants) can be sued for malpractice
Employment Practices Liability: lawsuits filed by employees for discrimination,
harassment.
"
Ownership and Operation of Automobiles and Boats
Operator: always liable
Owner/Non-operator: usually not liable, but owner’s insurance usually covers
them anyway
Personal Activities: walking through the mall, riding a bike, golfing, painting your
house, using a grill... virtually anything!
"
Cincinnati Post: Saturday, August 20, 2005
Stabbed girl wins $10M judgment
By Tony Cook and Jeanne Houck
Post staff reporters
A Hamilton County jury on Friday ordered an Indian Hill couple and their 17- year-old son to pay $10 million to a 15-year-old girl whom he
stabbed. Her parents will share in that award.
Stan Chesley, attorney for the plaintiffs, said that the jury's finding that Ben White's parents were 70 percent responsible for the harm he inflicted
might be more noteworthy than the dollar value of the mega-verdict.
"That's a very strong message that parents of minors can be and will be held liable for not properly controlling and supervising their children,"
Chesley said.
White was just 11 days short of his 18th birthday when he stabbed Casey Hilmer, then 13, on an Indian Hill road July 13, 2003.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 40
Casey's parents, Steven and Meg Hilmer, also of Indian Hill, subsequently sued Ben White and his parents.
The Hilmers said Lance White - who is president of the Indian Hill School Board - and his wife, Diane White, were negligent parents who should
have better controlled their son, who was known to have emotional difficulties and to carry a knife.
Chesley argued in closing arguments Friday that his clients were entitled to $25 million in compensatory and punitive damages.
Ben White is now serving a 10-year prison sentence for the attack, in which he grabbed Casey as she jogged by, pulled her into a nearby
wooded area and stabbed her in the throat, neck, face and side.
"The evidence is undisputable that the Hilmers' lives have been changed forever," Chesley said. "Every time Casey looks in the mirror, she will
remember Ben White stabbed her."
The jury ruled that Casey was entitled to $45,000 for past medical expenses, $3 million for past pain and suffering, $200,000 for future medical
expenses, $3 million for future pain and suffering and $55,000 for her loss of ability to perform usual functions.
The jury also ruled that Steve Hilmer - who was the first to reach his daughter after the attack - was entitled to $200,000 for emotional distress
and that Ben White must pay $3.5 million in punitive damages. Lance and Diane White are not responsible for punitive damages, the jury
decided.
Chesley told the jury that the Whites allowed Ben - who his attorneys said had six types of mental illness - to carry a knife and make his own
decisions about whether to see counselors or take mood-stabilizing medicine.
Moments before the stabbing, Chesley said, the Whites pulled up in one of their many cars alongside their distraught son as he walked down
the street after a fight with his brother.
But the couple decided a country club dinner was more important than staying with their son, Chesley said.
He said that, based on Ben's past history, the Whites should have known he might hurt someone that night.
In their closing arguments, attorneys for the Whites told the jury they should award reasonable compensation, suggesting a figure of $1.05
million.
"I told you so," James Burke, Ben White's lawyer, told the jury after Chesley argued for a big judgment.
Burke had claimed earlier in the trial that revenge and money were at the root of the lawsuit.
An award of $25 million would "destroy the Whites," he said.
Stephen Bailey, an attorney for the Whites, said they acted on the advice of Ben White's counselor at the time, who told them to allow their son
to cool down before talking to him.
"We would have all done the same thing," he told the jurors.
Ben White had never misused a knife in the past and the Whites had taken their son to three different counselors to try to get him help, Bailey
said.
All three of those counselors said the attack was unforeseeable, he added.
SOURCE: http://news.cincypost.com/apps/pbcs.dll/article?AID=/20050820/NEWS01/508200366&template=printpicart
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 41
Mcdonalds' Coffee Case (source: www.lectlaw.com/files/cur78.htm)
Stella Liebeck of Albuquerque, New Mexico, was in the passenger seat ofher grandson's car when she was severely burned
by McDonalds' coffee in February, 1992. Liebeck, 79 at the time, ordered coffee that was served in a styrofoam cup at
the drive-through window of a local McDonald’s.
After receiving the order, the grandson pulled his car forward and stopped momentarily so that Liebeck could add cream
and sugar to her coffee. (Critics of civil justice, who have pounced on this case, often charge that Liebeck was driving the
car or that the vehicle was in motion when she spilled the coffee; neither is true.) Liebeck placed the cup between her
knees and attempted to remove the plastic lid from the cup. As she removed the lid, the entire contents of the cup spilled
into her lap.
The sweatpants Liebeck was wearing absorbed the coffee and held it next to her skin. A vascular surgeon determined that
Liebeck suffered full thickness burns (or third-degree burns) over 6 percent of her body, including her inner thighs,
perineum, buttocks, and genital and groin areas. She was hospitalized for eight days, during which time she underwent
skin grafting. Liebeck, who also underwent debridement treatments, sought to settle her claim for $20,000, but McDonald’s
refused.
During discovery, McDonald’s produced documents showing more than 700claims by people burned by its coffee between
1982 and 1992. Some claims involved third-degree burns substantially similar to Liebeck’s. This history documented
McDonald’s' knowledge about the extent and nature of this hazard.
McDonald’s also said during discovery that, based on a consultants advice, it held its coffee at between 180 and 190
degrees Fahrenheit to maintain optimum taste. He admitted that he had not evaluated the safety ramifications at this
temperature. Other establishments sell coffee at substantially lower temperatures, and coffee served at home is generally
135 to 140 degrees.
Further, McDonald’s' quality assurance manager testified that the company actively enforces a requirement that coffee be
held in the pot at 185degrees, plus or minus five degrees. He also testified that a burn hazard exists with any food
substance served at 140 degrees or above, and that McDonald’s coffee, at the temperature at which it was poured into
styrofoam cups, was not fit for consumption because it would burn the mouth and throat. The quality assurance manager
admitted that burns would occur, but testified that McDonald’s had no intention of reducing the "holding temperature" of
its coffee.
Plaintiffs' expert, a scholar in thermodynamics applied to human skin burns, testified that liquids, at 180 degrees, will cause
a full-thickness burn to human skin in two to seven seconds. Other testimony showed that as the temperature decreases
toward 155 degrees, the extent of the burn relative to that temperature decreases exponentially. Thus, if Liebeck's spill
had involved coffee at 155 degrees, the liquid would have cooled and given her time to avoid a serious burn.
McDonald’s asserted that customers buy coffee on their way to work or home, intending to consume it there. However, the
company’s own research showed that customers intend to consume the coffee immediately while driving.
McDonald’s also argued that consumers know coffee is hot and that its customers want it that way. The company admitted
its customers were unaware that they could suffer third degree burns from the coffee and that a statement on the side of
the cup was not a "warning" but a"reminder" since the location of the writing would not warn customers of the hazard.
The jury awarded Liebeck $200,000 in compensatory damages. This amount was reduced to $160,000 because the jury
found Liebeck 20 percent at fault in the spill. The jury also awarded Liebeck $2.7 million in punitive damages, which equals
about two days of McDonald’s' coffee sales.
Post-verdict investigation found that the temperature of coffee at the local Albuquerque McDonald’s had dropped to 158
degrees fahrenheit. The trial court subsequently reduced the punitive award to $480,000 --or three times compensatory
damages -- even though the judge called McDonald’s' conduct reckless, callous and willful.
The parties eventually entered into a secret settlement which has never been revealed to the public, despite the fact that
this was a public case, litigated in public and subjected to extensive media reporting.
excerpted from ATLA fact sheet. ©©1995, 1996 by Consumer Attorneys of California
----Brought to you by - The 'Lectric Law Library - http://www.lectlaw.com
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 42
WARNING LABELS SAVE LIVES
http://www.centerjd.org/press/release/050107.htm
NEW YORK — Lawsuits brought by injured consumers have saved millions of lives and prevented innumerable injuries by forcing
manufacturers to place critical warning labels on products, according to the Center for Justice & Democracy (CJ&D) report,
Lifesavers: CJ&D’s Guide to Lawsuits that Protect Us All. According to CJ&D Executive Director Joanne Doroshow, “Warning
labels save lives. At a time when the American public is particularly sensitive about the need for safety and protection, this is no
time to joke about one of the most effective ways we have to protect the public safety.”
Said Doroshow, “Corporate lobbyists and front-groups are swarming Congress and state legislatures around the country, asking
lawmakers to block injured consumers’ access to court by claiming personal injury lawsuits are ‘frivolous’ or that warning labels
that are a consequence of litigation are ‘wacky.’ Lifesavers stands as irrefutable evidence that far from being ‘frivolous,’ lawsuits
save lives, and we as a society would suffer tremendously if our civil justice system were weakened in any significant respect.”
Among the cases cited in Lifesavers and in its supplement, many of which concern children who were injured or killed, are:
- On June 24, 1993, five-year-old Valerie Lakey, playing in a recreation club’s wading pool became lodged in a drain cover
opening. The suction pulled out almost 80 percent of her small intestine and about 70 percent of her large intestine. The pool
equipment manufacturer knew of at least 13 similar injuries but failed to put warnings on its covers until mid-1987. After the case
was filed, the company changed its warnings and instructions regarding the safe use of its drain covers. The case later caused an
industry-wide recall of pool drain covers.
- In 1985, 80-year-old Mae Roberts was legally blinded in her left eye when a twist-off aluminum cap blew off a plastic two-liter
Diet 7-Up bottle and struck her in the eye. Lawsuit documents revealed that the company knew of the problem of exploding bottle
caps and of numerous resulting eye injuries yet failed to act. As a result of lawsuits, the company converted over to the plastic
pre-formed caps that greatly reduced the likelihood of caps blowing off and added a specific warning on the bottles.
- In December 1998, 31-year-old Todd Weger, a career soldier and Gulf War veteran, collapsed on a treadmill at a local health
club in Texas and suffered a massive stroke after periodically using a dietary supplement called Ultimate Orange. He had a
substantial portion of his brain removed, leaving him permanently disabled. As part of the lawsuit settlement, the company agreed
to change the label and promotional materials to reflect an appropriate warning of the potential dangers of heart attack and stroke.
- Four hundred lawsuits were brought against tool manufacturers by workers suffering from hand-arm vibration syndrome (HAVS)
after use of chainsaws, jack-hammers and sanding and scraping tools, which caused neurological and vascular damage to the
users’ hands. During discovery, evidence surfaced that the manufacturers had discouraged the use of warnings on their tools for
nearly a decade. After the lawsuits, the American industry began putting warnings on their machines and one company developed
a rubber shock absorber for the handle of some tools.
- When Antonio Benedi entered the hospital on February 10, 1993, he was in a coma, near death, and required an emergency
liver transplant after having taken Extra-Strength Tylenol to treat flu symptoms. He normally drank several glasses of wine with
dinner. When Benedi sued the manufacturer, McNeil, P.P.C., Inc., he discovered that since the late 1970s the company knew of
the link between acetaminophen, alcohol and liver damage. Before the jury verdict, the FDA decided that all over-the-counter pain
relievers containing acetaminophen would carry a warning about the risks of alcohol. The FDA announced the plan right after the
verdict.
- James Saupitty, a 22-year-old civilian employee of the United States at Fort Sill, Oklahoma, suffered an arm injury and finger
amputation after being thrown from a lawn mower while cutting the grass on the Fort Sill grounds. The gears had locked. Evidence
at trial showed that Yazoo knew of prior injuries but refused to retrofit, repair or warn about the mower’s dangerous design. After
the verdict, the company recalled and retrofitted the mowers.
- On April 2, 1983, Betty O’Gilvie died from toxic shock syndrome after using Playtex super-absorbent tampons. Although the
package warning complied with the minimum FDA standard, experts testified that mere compliance was inadequate under the
circumstances. Following the verdict, Playtex took the product off the market and modified the TSS warning statement on its
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 43
tampon packaging.
- Six-year-old Mary Ann Incollingo died from aplastic anemia after taking Chloromycetin over a one-year period to treat the various
illnesses she suffered. The manufacturers’ warnings to doctors were inadequate. Since this case, chloramphenicol has carried on
its label the warning that it should be the drug of choice only for such virulent but rare diseases as typhoid and Rocky Mountain
spotted fever.
- On May 14, 1980, Georgia Huchingson underwent surgery at a hospital in Little Rock, Arkansas. An Airco ventilator, which was
set up incorrectly to assist her breathing, led to lung and brain damage. After the verdict was upheld on appeal, Airco issued an
FDA-sponsored medical device alert, warning doctors and hospitals nationwide of the potential for product misuse.
- In the 1980s, Cynthia Littlejohn suffered third degree burns over 25 percent of her body when her Bic lighter ignited in her leftfront shirt pocket. After her lawsuit, Bic recalled 12 million defective lighters and changed the lighter’s design. After the findings of
a Consumer Product Safety Commission study were released, Bic said it would put warning labels on every new lighter until it
designed one that was childproof.
- In the late 1960s, the above-ground pool industry received numerous reports of life-threatening injuries resulting from dives into
its swimming pools. On June 3, 1978, 27-year-old Joe Corbin became quadriplegic after diving into and hitting his head on the
bottom of an above-ground Coleco swimming pool. Following this and other cases, much more stringent warning signs were
placed around such pools along with distribution of detailed consumer information about this hazard.
- In November 1972, Clyne Robinson, his wife, Edna Faye, and their two young children died from carbon monoxide poisoning
caused by burning of charcoal briquettes indoors. After this and other lawsuits following deaths and injuries, charcoal briquette
manufacturers placed prominent warnings on the charcoal bags about the deadly hazards of using charcoal without ventilation.
- On August 19, 1970, two-year-old Susan Bowen sustained severe burns to her esophagus, necessitating over 240 surgical
procedures, after she ingested some drops of Liquid Plum’r. The Bowen case, together with over 20 similar lawsuits filed on
behalf of young children, caused the Clorox Company to change Liquid Plum’r’s formula and redesign its container, and led
government agencies to improve child restraint closure and labeling standards.
- On December 8, 1969, four-year-old Lee Ann Gryc was severely burned when her cotton flannelette pajama top ignited as she
leaned over an electric stove. Evidence showed that the flannelette manufacturer knew as early as 1956 that the fabric was
flammable and posed a serious threat. At trial, the company argued that it could not warn consumers about the material’s
flammability because such a warning would “stigmatize” its product and hurt sales. After this case, the product was removed from
the market.
- In November 1959, a 14-month old baby died from ingesting Old English Red Oil Furniture Polish. At trial, the child’s mother
testified that the label, which said that the product might be harmful to children, was placed eight lines under the directions, in
brown ink and measured only 1/32 of an inch in height. Moreover, experts testified that the warning was misleading because it did
not indicate that ingestion would cause death. After trial, the product’s warning label was changed to read: “DANGER. HARMFUL
OR FATAL IF SWALLOWED. COMBUSTIBLE. KEEP OUT OF REACH OF CHILDREN. SAFETY CAP."
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 44
Childproof Lighters?
(From the Suprem e Court of Alabama, 05/05/2000 WILLIAM S v BIC CORPORATION )
On November 15, 1991, Constance Cunningham and her three children, her sons Mark and Dontavious
and her daughter Antrinique, occupied Cunningham's bedroom at her apartment. According to Mrs.
Cunningham's best friend and next-door neighbor, Cassandra Formby, on the previous evening
Cunningham and Formby had gone to the Oak Tree Lounge around 11:45 p.m. and had continuously
drunk alcoholic beverages until they returned to their apartments at 3:45 a.m.; then they had talked for a
while, she said, before each returned to her separate apartment. Cunningham testified that she went into
her living room, because her back was hurting, leaving the sleeping children in the bedroom. Cunningham
then fell asleep in the living room. Cunningham testified that some time later five-year-old Mark awakened
her because three-year-old Dontavious had started a fire in the bedroom; she said he had started the fire
by using a disposable lighter he had found on Cunningham's dresser; and she said the lighter had been
manufactured by the defendant BIC Corporation. Dontavious testified in his deposition that Cunningham
went into the bedroom when she heard Antrinique crying. When Cunningham entered the bedroom, she
said, she found two-year-old Antrinique on the bed, engulfed in flames. Cunningham said she pulled her
off the bed and ran out of the apartment. Antrinique was severely burned in the fire and, since the fire, has
had numerous surgeries and skin grafts.
On November 15, 1993, Cunningham, as mother and next friend of Antrinique Cunningham, a minor, filed
a lawsuit in the Talladega County Circuit Court against BIC Corporation.(1) She alleged that BIC had
negligently and/or wantonly designed, manufactured, distributed, and sold the disposable lighter; that BIC
had failed to warn of the dangers associated with use of the disposable lighter; that BIC had breached
express and implied warranties; and that BIC was liable under the Alabama Extended Manufacturer's
Liability Doctrine ("AEMLD").
In May 1995, Frankie Williams, Antrinique's maternal grandmother was substituted as plaintiff because she
had been appointed legal guardian of Antrinique. The case proceeded to trial, and on December 8, 1998,
the jury returned a verdict for BIC. The trial court entered a judgment on the verdict.
.......
BIC argues that the evidence concerning the instrumentality that caused the fire was extremely confusing.
Cassandra Formby, Cunningham's next-door neighbor, was the first person to view the scene after the fire.
She said she saw a burned box of matches, aerosol cans,(2) and lighters in Cunningham's bedroom.
Cunningham testified that she had no idea how the fire started, although she had told the medical team at
the hospital that the fire was caused by matches. Franklin Williams, Cunningham's brother, was living with
her at the time of the fire. He testified that he had no idea what had caused the fire but that he was told by
Cunningham or Mrs. Williams that the fire was caused by an exploding aerosol can. Franklin Williams also
said that, on the day of the fire, he had left a lighter on the dresser in Cunningham's bedroom.
Dontavious's deposition was read at the trial; when asked in his deposition how the fire had started,
Dontavious replied, "I had a cigarette lighter." Then, when asked what he was doing with the lighter, he
stated, "I was lighting the curtains." Dontavious, who was three years old at the time of the fire, was not
asked about use of an aerosol can at the time of the fire.
......
In addition, Formby testified that on several occasions she had seen Mark and Dontavious light cigarettes. She
testified that she and Cunningham had on several occasions asked the boys to light cigarettes for them by using
the gas stove in the apartment and that the boys had also lit cigarettes by using a cigarette lighter. She stated
that it was not a surprise to her that the children knew how to use a cigarette lighter.
The facts before the jury, although in conflict in many instances, could permit a rationally functioning jury to
conclude that a manufacturer should not reasonably foresee the occurrence of this kind of physical injury under
such circumstances as we have described herein. The jury could have concluded that Cunningham returned at
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 45
3:45 a.m. from a bar after drinking for four hours and, after she returned, left three children, ages two, three,
and five, asleep in an adjoining room in the apartment, an apartment in which were located numerous cigarette
lighters and aerosol cans containing flammable materials, including several lighters and cans in the bedroom.
The jury also could have found that at least two of these children had been trained by an adult to use cigarette
lighters to light fireworks and cigarettes and that these children had at least witnessed, if they had not tried
themselves, the use of a cigarette lighter to ignite the contents of an aerosol can so as to produce a torch. The
jury also heard evidence indicating that the mother was aware of Dontavious's attraction to cigarette lighters,
having seen him lighting one at age three, six months before the incident, having indulged him in this
fascination by having him light her cigarette and permitting Formby to have him light her cigarette and that she
had seen Franklin Williams playing with fire, including igniting the contents of an aerosol can in the presence of
the children. Finally, the jury could have concluded that, while the mother slept heavily in the living room from
the effects of alcohol, Dontavious, age three, awakened in the bedroom, where there were numerous lighters
and aerosol cans within his reach, used one of them to set fire to the curtains, and thereby caused his two-yearold sister to be severely burned. Under these facts, the jury could have reasonably concluded that the adults
supervising the children, including Cunningham, were aware of the potential danger and displayed an incredibly
casual attitude toward the dangers of allowing small children to be entertained by fire.
Under these circumstances, we cannot say that as a matter of law BIC should have foreseen the conduct of the
parent in this case.....
BIC LOSES TEXAS CASE....
http://www.consumeralert.org/pubs/monitor/2003/March03.htm
Unsupervised child fire play resulted in severe burns to a six-year-old girl in 1998. A jury recently awarded
the child $5 million in damages in a lawsuit against BIC, the alleged maker of the lighter involved.[18]
In the incident, Brittany Carter, then six, was playing with her brother Jonas, who was then five. They were
alone in a bedroom melting crayons with a lighter when Jonas dropped the lighter on his sister's dress.
She suffered third-degree burns over 60 percent of her body.
BIC contends that there was doubt that the lighter used was made by BIC, and that BIC presented
evidence during the trial that all its lighters meet the CPSC child-resistant standard.
Plaintiff's attorneys argued that the lighter had inadequate child-resistant mechanisms. Expert witnesses
for the plaintiff testified that BIC lighters did not meet the specifications of the CPSC standard for child
resistance. The child's attorneys claimed that "BIC tests every lighter it manufactures for flame height and
flame color but only tests 50 out of every 4.5 million lighters made to see if they are child-proof."[19]
It is interesting to note how easily these attorneys can slide from the term "child-resistant" to "child-proof."
It is questionable whether cigarette lighters could be made "child-proof." CPSC uses the term "child
resistant" for its regulations on lighters, as well as for closures on prescription drugs and some toxic
household products. The purpose of the child-resistant design is to make it more difficult for children to
operate the lighter. In theory, if it takes a child a longer time to learn to operate a lighter, there is a greater
chance an adult will intervene and prevent a tragedy. In the Carter case, this did not happen. Childproofing a product is a much higher, probably impossible, standard to meet.
In this case, the existence of a federal standard for cigarette lighters was no protection for the
manufacturer, who had participated actively in the drafting of the lighter regulation.
BIC has said it will appeal the jury decision.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 46
AUTOMOBILE INSURANCE
Chapter 12
!
WHY DO YOU NEED AUTO INSURANCE?
"
"
"
!
!
Damage to your car
Bodily Injuries you suffer as a result of an auto accident.
People You Become Liable to:
People outside your vehicle you injure
Injured passengers (non-family) in your car
Those who own property that you damage
LEGAL INSURANCE REQUIREMENTS
"
Financial Responsibility Laws
Require drivers to prove they are responsible for a certain dollar amount if
they are in an automobile accident.
"
Compulsory Automobile Insurance Laws
Require drivers to actually purchase and carry proof of liability insurance
Require a minimum amount of liability insurance be purchased
Usually require drivers to show proof of insurance
#
when asked by law enforcement
#
after any auto accident
#
when having a car inspected or registered
#
when obtaining/renewing a drivers license
Penalties imposed in Texas for not carrying liability insurance:
#
First Conviction: $175 to $350 fine
#
Subsequent Convictions: $350 to $1,000 fine, driver’s license
suspension, and impoundment of auto.
PERSONAL AUTOMOBILE POLICY (PAP)
"
Eligibility for Using This Policy
Individuals and families
Autos, Pick-ups, and Vans, whether owned or leased
Use
#
Designed to primarily cover personal use.
#
Most insurers will cover business use as well.
"
Liability Coverage (PART A)
Who is Insured?
#
Insured or a family member while driving ANY auto (unless excluded)
#
Anyone driving the insured’s car with permission
#
Anyone responsible for the driver (employer, fraternity, charity)
Important Exclusions: the insurer will not cover the following
damages/injuries:
#
intentional acts
#
damage to the insured or his/her property
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 47
Liability Limits Illustration
YOU HIT A MINI-VAN, AND YOU ARE AT FAULT. THERE ARE FOUR PASSENGERS IN THE VAN. ASSUMING THE CLAIMS ARE PAID IN THE
ORDER THEY ARE RECEIVED, HOW MUCH WOULD WE PAY FOR EACH PERSON'S INJURIES, IF YOU CARRY THE 20/40/15 LIMITS?
1.
DRIVER:
2.
3.
PASSENGER #1:
PASSENGER #2:
4.
PASSENGER $3:
5.
HOMEOWNER:
$7,000 MEDICAL EXPENSES (Bodily Injury)
$3,000 LOST WAGES (this is also a component of Bodily Injury)
$12,000 DAMAGE TO VAN (Property Damage)
$5,000 MEDICAL EXPENSES
$42,000 MEDICAL EXPENSES
$12,000 LOST WAGES
$17,000 MEDICAL EXPENSES
$2,000 LOST WAGES
$7,000 DAMAGE TO LAWN
Answers: 1) $10,000 for bodily injuries, plus $12,000 for property damage. 2) $5,000 for bodily injuries. 3) $20,000 for bodily injuries. 4) $5,000
for bodily injuries. 5) $3,000 for property damage.
#
#
#
#
#
-
bodily injury to an insured's employee (workers compensation)
autos for hire (carrying people/property for a fee)
using a vehicle without permission
vehicles having less than 4 wheels
vehicles the named insured owns or has regular use of (company cars)
but has not purchased insurance for
Limits of Coverage on an Auto Liability Policy = X/Y/Z where:
X = most paid to any ONE person for bodily injuries in any one accident
Y = most paid for ALL bodily injuries sustained in one accident
Z = most paid for property damage in one accident
-
Other States Coverage
#
Will pay higher liability limits than the insured has purchased, if
required by law.
#
Example: insured carries 20/40/15, and drives to Alaska, where limits
are 50/100/25. The PAP will pay those higher limits while the insured
is in Alaska.
"
Medical Payments Coverage (PART B)
Pays medical/funeral bills of the following people, without regard to fault
#
The insured or any family member while in any vehicle licensed for use
on public roads, or, when hit as a pedestrian
#
Anyone riding in the insured's owned vehicle
"
Uninsured Motorist Coverage (PART C)
Pays for bodily injuries and property damage the insured (or family members)
suffers because of an/a:
#
Uninsured motorist
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 48
#
#
"
Hit-and-run driver
Underinsured motorist
*
Carries less coverage than required by law
*
In Texas, carries less coverage than the insured has purchased
under Part C.
Other driver MUST be at fault in order to collect from this coverage!
Damage to Your Auto (PART D)
Two Coverages Available
#
Collision
*
Higher premium & higher deductible
*
Considered to be the insured's fault
#
Other than Collision
*
Lower premium & lower Deductible
*
Considered to be unavoidable
-
Summary of Coverages
#
Collision coverage: upset or collision
#
Other than Collision coverage: non-collision losses, including
*
*
*
*
*
*
*
m issiles or falling objects
fire, explosion or earthquake
theft, larceny, m alicious m ischief or vandalism
windstorm , hail, water, or flood
riot or civil com m otion
breakage of glass (but if caused by a collision, the insurer treats it as a
collision loss. Otherwise, the insured would have to pay two deductibles!)
contact with bird or anim al
-
Covers
#
Your owned autos, and, SOME non-owned autos
#
Read your policy and contact your agent before relying on this
coverage for non-owned vehicles!
-
Pays the lesser of:
#
Cost to repair the damage
#
Actual cash value of the lost/damaged car
-
What deductibles should you carry on Part D?
#
Other than Collision: $250 is usually the right amount, to go any higher
doesn’t typically save you much money.
#
Collision Deductible: compare various levels
*
Ask agent to quote you premiums at $500 and $1,000.
*
Suppose premium is $200 with a $500 deductible.
*
$100 with a $1,000 deductible
*
Thus, $500 worth of extra coverage costs $100 a year, which is
VERY expensive coverage!
*
If going on to $1,500 deductible only saves you $15 or so in
premiums, probably isn’t worth increasing to that level.
-
When should you stop carrying Coverage D?
#
You can’t do this until your car is paid off.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 49
#
#
"
!
Find out from your bank what the loan value of the car is. That is
roughly what you would collect on a total loss, MINUS your deductible!
Compare this to the premium for these coverages–is it worth the price
to continue the coverage?
General Auto Policy Provisions
If More than One Policy Applies
#
Coverage on the vehicle is PRIMARY
#
Coverage on the driver is EXCESS
Covered ONLY in US (territories & possessions), Puerto Rico and Canada
UNIQUE FEATURES OF THE TEXAS PAP
"
Part "B" Consists of Two Coverages (you only need one)
"B1"=Medical Payments Coverage (medical bills only)
#
Pays medical and funeral expenses
"B2"=Personal Injury Protection (B1+wages+services)
#
Up to 80% of lost income of an injured person
#
Cost of hiring someone to take on household and caregiver
responsibilities of an injured person
"
Part “C” Provisions
Pays for auto repairs and rental, with a $250 deductible.
"
Mexico Coverage
Covers you within 25 miles of US border, for trips of 10 days or less
"
Other Coverages Available
Towing and Labor
Rental Car Reimbursement
!
TEXAS MANDATORY AUTOMOBILE INSURANCE LAW: 20/40/15 is required
!
COVERAGE FOR HIGH RISK DRIVERS IN TEXAS
"
THE TEXAS AUTO INSURANCE PLAN
Plan assigns BAD risks to insurers
#
Premiums the insurer can charge are set by the plan.
#
Can get ONLY the minimum limits for:
*
Liability (20/40/15)
*
Personal injury protection ($2,500 per person)
*
Uninsured/Underinsured motorist coverage (20/40/15)
-
Insurers selling auto insurance in this state are REQUIRED to participate in
the plan. They must cover a certain portion of the cars in the plan, and that
portion is based on their voluntary market share in the state
-
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
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!
TEXAS COUNTY MUTUALS
Exempt from rate regulation; may charge whatever they wish for auto
coverages.
Will be used by insureds who:
#
Need Part D coverage for their vehicles
#
Need higher limits of coverage than those offered by the Auto Plan.
!
Auto Insurance Pricing in Texas
MANDATORY Discounts (insurer must offer)
!
Defensive Driving:
10% off Liability, Collision, Med-Pay and PIP
!
Airbags/Passive Restraints: 15% off Med-Pay and PIP (driver’s side only)
30% off Med-Pay and PIP (both sides)
!
Drug/Alcohol Education
5% off Liability, Collision, Med-pay and PIP
!
Anti-theft Devices
discount varies by device and by county
!
Multi-Car Discount
20% off Liability, Med-pay and PIP
15% off Collision
OPTIONAL Discounts (insurer may offer)
!
your age and annual mileage driven
!
policy renewal, with good claims and driving records
!
anti-lock brakes
!
a parent or family whose young driver is away at school without a car
!
full-time college and high school students with a “B” or 3.0 GPA
!
cars with automatic daytime running lights
!
membership or adult leadership in certain youth organizations
MANDATORY Surcharges for Bad Driving
(applies to most drivers NOT insured through the TAIPA; surcharges for TAIPA insureds
are generally higher)
!
One/Two/Three at-fault accidents in 36 months: 15%/35%/60%
!
Each moving violation (speeding, etc):
0%
!
Involuntary Manslaughter:
60%
!
DUI:
60%
!
Criminally negligent driving:
60%
!
No license or license suspended:
35%
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 51
!
AUTO INSURANCE PRICING is a function of:
"
"
"
"
"
Policy limits desired (amount of coverage)
Where car is principally garaged
Use of auto (leisure, to/from work, business, farm)
Principle driver of the vehicle
Driving Record
Age
#
< 25: sex, marital status, and academic performance
#
> 25: considered "safe"
Defensive Driving courses taken
Make and Model of Auto
High value = high price for Part "D"
Fast car
= fast driver = high price for ALL coverages
Safety features installed in the car
Note: Any feature can increase the price of one coverage while reducing the price of another. Example: a very large auto will have a lower price
for personal injury protection, since passengers in the car are safer. However, this large car can also do tremendous damage to other property in
a collision, so the liability premiums may be higher. Check with your insurer before buying a new car, to find out exactly what your premiums will
be!
!
RENTAL CARS
"
"
ARE USUALLY covered by your auto policy.
-
If the rental car is being used to REPLACE your covered car while it is being
repaired, the rental has the same coverage as the car it is replacing. So, if
your car has Part D, the rental car should have Part D, too.
-
In states other than Texas, the general rule is that If the rental car is being
used for any other reason (ex: on vacation), it will have the broadest
coverage purchased on any of the cars on your policy. So, if at least one of
your cars has Part D, the rental car on vacation will have Part D coverage,
too.
-
In TEXAS (see article by Jose’ Montemayor).
#
Rental cars in Texas are not covered under Part D, unless they are
replacement vehicles for a car under repair (see above).
#
Unlike other states, Texas views a rental car as a piece of property you
are “liable” for.
#
So, if you rent a car on vacation, your Part A will actually pay for any
damage you cause to it.
#
This results in an “at fault” claim against you, even if the
accident/damage is not within your control
Coverages Sold by Rental Car Companies
-
May duplicate coverages you already have under your auto policy, depending
on the reason you are renting.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
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-
The “Loss Damage Waiver” (aka “Collision Damage Waiver”) is the mostcommonly sold “coverage” for physical damage to the rental car.
#
#
#
#
-
It is not insurance; it is instead a waiver the auto company provides to
you, agreeing not to hold you responsible for any damages the car
suffers while it is in your possession.
If you deny it, and the car is damaged, you will either have to pay for
the repairs yourself, or file a claim under your insurance and pay your
deductible. In this case, your rates will also go up because of the
claim.
If you buy it, you protect your insurance and do not have to pay
deductible in the event of a loss. But, this waiver is generally
expensive ($15-$20 per day). For occasional rentals, that’s not too
bad. But, if you frequently rent cars, you will spend a lot on the waiver.
Many people believe their Gold/Platinum credit cards will provide free
loss damage waiver, BUT......most of those agreements pay for
anything that your own insurance will NOT pay for. Your current PAP
will pay for the entire loss under your liability coverage, or, it will pay for
all but your deductible under your Part D. So, this “feature” of your
credit card is not really as valuable as it may sound. Hints:
*
Check with your card issuer to make certain you are covered,
and to find out if there is any maximum limit on coverage.
*
Ask if the credit card company’s coverage is PRIMARY on the
rental car (most coverage provided through credit cards is
EXCESS over other valid insurance, which would include your
PAP)
Liability
#
Rental car company provides minimum amount required by LAW.
#
If you do not have an auto policy, or, have very low limits, you can buy
their coverage.
#
If you are in an accident that is your fault, the rental car company’s
coverage on the car will be primary. Your PAP coverage will be
excess.
TDI publishes rate comparisons for hypothetical drivers in each Texas county. Go to http://www.tdi.state.tx.us/consumer/auto.html to view rates
in your area.
Saving Money on Your Insurance
Rental Car Insurance Choices
By José M ontemayor
Commissioner of Insurance
Knowing what your auto insurance covers and doesn 't cover can save you money and grief when you rent a car.
If you plan to rent a car in the United States or Canada, the first thing to remember is to take a copy of your proof of insurance
card. The car rental agency may require it, and your insurance card can save you time and trouble if you 're stopped by a police
officer or have an accident. Your Texas policy automatically meets the minimum liability insurance requirements of any state or
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 53
Canadian province where you travel.
A decision that almost everyone who rents a car must make is whether to buy a collision damage waiver (CDW ). A CDW waives
the rental car company 's right to collect from you if the car is stolen or damaged while rented to you.
CDW s are controversial because they cost about $10 to $20 per day far more expensive than ordinary car insurance and may
overlap with your own coverage.
A CDW might not be necessary because the property damage portion of your Texas auto liability insurance covers damage to a
rental car if you cause an accident. Texas law requires rental car companies in Texas to tell you that a CDW may duplicate
insurance you already have. Some premium credit cards also provide rental car coverage, but they usually pay only what your
insurance company won 't pay. Don 't rely on your credit card without verifying what it covers.
There are times when a CDW is a good idea. If you carry only minimum liability insurance, the $15,000 for property damage
might not fully pay for fixing or replacing a rental car. A CDW can help you avoid filing a claim on your own insurance that could
raise your rates if you cause an accident that damages only the rental car. A CDW also can save time and hassle when returning a
damaged rental car. These advantages should be weighed, of course, against the high cost of CDW s and the duplication of your
property damage liability coverage.
You definitely should consider a CDW when renting a car overseas or in Mexico because your liability insurance covers you only
in the United States and Canada. Before driving in Mexico you also should strongly consider buying an auto liability insurance
policy written by a Mexican insurance company.
Car rental companies also offer rental liability and rental liability excess policies.
A rental liability policy provides primary bodily injury and property damage liability insurance for the state or country where
you 're driving. You probably don 't need it when traveling in other states or Canadian provinces because your Texas policy
already covers you. However, some kind of locally purchased auto liability insurance is essential in most other countries. Often, in
fact, European car rental companies include the cost of all compulsory liability coverages in the car rental fee.
Rental liability policies are a must if you don 't have your own policy but plan to rent a car anywhere, including Texas. In Texas,
rental liability policies do not cover damage to the rental car, so it's a good idea to add a CDW if your only insurance is what you
buy from the car rental agency.
Auto rental liability excess policies provide coverage only for the amount of your liability that exceeds the minimum limits of
financial responsibility required by state law. A rental agency in Texas can sell you an excess policy only if you have your own
liability policy in effect.
The Texas Department of Insurance (TDI) sets the policy language and rates for rental car liability and excess liability insurance
sold in our state. TDI requires car rental agencies to clearly disclose that you may not need these coverages, that the coverage may
duplicate insurance you already have and that buying auto rental liability insurance is not a condition for renting a car.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
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More Discussion on Auto Policy Coverages A, B, C, and D
Be sure to pay careful attention to how the coverages overlap in some cases. Here are some examples:
1)
2)
3)
Susan is hit by another car, and the other driver is at fault. It is best if Susan allow the other driver’s liability insurance to
pay for her bodily injuries and property damages; however, Susan’s Part B and Part D would also cover them if the other
driver’s insurer refused to pay. Filing claims under her own policy would, however, cause her premiums to go up, and
she would have to pay her collision deductible.
Susan is hit by another car, and the other driver is at fault AND uninsured. It is best if Susan uses her Part C to cover the
bodily injuries she suffers, plus the damage to her car. But, if she has not purchased Part C, she can use Part B to pay
for her bodily injuries and Part D to pay for the damages to her automobile. She will have to pay her deductible, and her
rates will go up, but coverage DOES exist if she has not purchased C. It is best that she use coverage C, however,
because her premiums should not increase (or would increase minimally), and the property damage deductible under
Part C is normally limited to $250.
Suppose Susan has two non-family passengers in her car, has an accident in which she is at fault. The passengers
injuries can be paid for under her Part A or her Part B. Claims filed under Part A tend to make the insureds rates go up
more than claims under Part B, so from Susan’s perspective, it would be best to have the passenger injuries paid for
under her Part B. But, Part B will not pay for pain and suffering losses, nor will it pay for punitive damages; and, the
injured passengers’ medical bills might exceed the Part B limit. Also note that the passengers could also file claims
against their own policies under their Part B; however, their coverages would be excess over Susan’s.
Sample Auto Insurance Coverage Questions
Questions on the exam will refer to the GENERAL PAP, as described in your textbook and in the notes. If I am asking a specific question about
TEXAS rules or coverages, I will explicitly mention TEXAS in the question.
Al owns a car. He has a Texas PAP and has purchased all available coverages (A, B2, C, and D) discussed in class. Determine
whether or not the loss described in each question could be covered under Al’s PAP.
1.
Al’s son (10-years old) is killed in a car accident. The accident occurred when Al’s next door neighbor was driving the
boy in her car. Are Al’s son’s final medical bills covered by Al’s PAP?
2.
Al’s cousin Jack borrows Al’s car to go on vacation to Idaho. During the trip, the cousin discovers that the engine block
has frozen. Will Al’s PAP pay for the repairs to the car?
3.
Al and his girlfriend, Betty, go to Florida. Al rents a car. One afternoon he is driving to the store, and has an accident
that is his fault. Betty is injured. Are Betty’s bodily injuries covered by Al’s PAP?
4.
Al is hit by another driver who is at fault, and who is insured. Where COULD Al have his injuries paid for?
A.
B.
C.
D.
E.
5.
Al is hit by another driver who is at fault, and who is insured. Where SHOULD Al have his injuries paid for?
A.
B.
C.
D.
E.
6.
The other driver’s Part A
Al’s Part B
Al’s Part C
Both A and B above
None of the above
The other driver’s Part A
Al’s Part B
Al’s Part C
Both A and B above
None of the above
Al’s son is riding home from school on the school bus. The bus is hit by an uninsured motorist. The boy’s injuries can be
paid for under Al’s PAP, Part C (Uninsured Motorist Coverage).
Answers: 1) yes (medical payments or PIP will cover the child’s bodily injuries). 2) no (excluded under Damage to Your Auto
coverage). 3) It depends (if he is legally liable, his liability coverage will pay for her injuries. If she tried to file a claim for damages
under his medical payments or PIP coverages, however, coverage would not apply because the vehicle is not one that Al owns or
is using as a replacement for one that he owns). 4) D, because part B is a no-fault coverage and will pay even if Al is not at fault.
5) A (Al doesn’t want his premiums to go up, and filing a claim under his policy will likely result in an increase). 6) yes (Part C
applies when an insured is occupying ANY motor vehicle).
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 55
Insu 2500 Auto Insurance Assignment
The purpose of this exercise is to give you some practice at shopping for insurance. This
assignment will have you:
1.
Find out about your current auto insurance coverage.
2.
Get a quote on your personal auto insurance. If you are still on your parents' coverage, I
want you to find out how much coverage on an individual policy would cost you.
3.
Analyze and compare the quotes, and tell me what you think of them.
Specific Instructions:
1.
Find your current auto insurance policy, and get a copy of your auto declarations page to
turn in to me. (If you are covered by your parents' auto insurance policy, then get a copy of
their auto declarations page that shows your name as an insured driver.)
2.
Get a quote on the same coverages you currently have (or some that are very similar).
Either call an agent, or, go online to one of the insurers that provides online quotes. Get a
quote for insurance on YOU only (if you are married, on you and your spouse.)
3.
Type up a summary of the following (please use the following headings in your typed
submission):
A.
B.
C.
Your current coverages
The quoted coverages
Your thoughts on the two quotes, and, what you would do if you had to make a
decision today.
Submit to me, IN HARD COPY FORM (NO E-COPIES), all of the following items, STAPLED
TOGETHER, and in the following order:
1.
2.
3.
4.
The typed summary, with your name at the top of the page.
A copy of your current auto declarations page.
If you got an online quote, a print-out of that information.
If you got a quote over the phone, please include in your typed summary the name of the
agent, the name of her/his agency, and their phone number or e-mail address in case I
need to verify the information.
How this Will be Graded:
1 point:
2 points:
2 points:
Current Copy of your Declarations page
New Quote on your coverages
Typed summary.
WORK THAT DOES NOT FOLLOW THE INSTRUCTIONS WILL AUTOMATICALLY RECEIVE A
GRADE OF ZERO.
ABSOLUTELY NO LATE WORK WILL BE ACCEPTED.
ALL WORK SHOULD BE TURNED IN BY THE DEADLINE DATE, AT THE BEGINNING OF
CLASS. If you cannot attend class the day it is due, please FAX it to me at 940.565.4234.
Lecture notes for Insu 2500 - Copyright 2006 - Dr. Brenda P. Wells, University of North Texas
Page 56