Properties & Casualty Study Guide
Unit 1: Principles of Insurance
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Risk and Exposure: Risk is defined as the uncertainty of loss. Exposure refers to situations that
present the possibility of loss, such as owning a house in a flood-prone area.
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Managing Risk: There are four primary methods:
1. Avoidance: Avoiding risk entirely (e.g., not driving to avoid accidents).
2. Control: Implementing measures to reduce loss frequency (e.g., installing safety
equipment).
3. Retention: Accepting and paying for losses out of pocket.
4. Transfer: Shifting risk to another party, commonly through insurance.
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Insurance: It is the transfer of risk from an individual or business to an insurance company, in
exchange for a premium. The insurer agrees to cover losses based on pooled resources collected
from many insured parties.
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Law of Large Numbers: This principle allows insurance companies to predict losses and set
premiums accurately by pooling a large number of similar risks.
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Insurability Elements:
1. Pure vs. Speculative Risks: Only pure risks (possibility of loss only) are insurable.
Speculative risks, which involve the possibility of gain or loss (e.g., gambling), are not
insurable.
2. Insurable Interest: The insured must have a financial interest in the property or person
being insured.
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Other Insurance Terms:
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Peril: The cause of loss (e.g., fire, theft).
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Hazard: Anything that increases the chance of loss (e.g., faulty wiring is a physical hazard).
Unit 2: The Insurance Contract
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Elements of a Valid Contract:
1. Competent Parties: The parties involved must be legally capable of entering into a
contract (e.g., not minors, intoxicated, or mentally incapacitated).
2. Legal Purpose: The contract must be for a lawful purpose (e.g., you cannot insure illegal
activities).
3. Offer and Acceptance: One party makes an offer, and the other accepts it. In insurance,
the offer is the application, and acceptance is the issuance of the policy.
4. Consideration: Both parties must exchange something of value. For insurance, this is the
premium paid by the insured and the promise of coverage by the insurer.
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Characteristics of Insurance Contracts:
1. Principle of Indemnity: Insurance contracts aim to restore the insured to their financial
position before the loss without providing a profit.
2. Personal Contract: The insurance contract insures a person, not the property itself. The
contract cannot be transferred without the insurer's consent.
3. Aleatory: The contract involves an unequal exchange, meaning that the insured may pay
premiums without making a claim, or the insurer may have to pay out much more than the
premiums collected.
4. Unilateral: Only the insurer makes legally enforceable promises (i.e., to pay for covered
losses).
5. Adhesion: The contract is drafted by the insurer, and any ambiguity will be interpreted in
favor of the insured.
6. Utmost Good Faith: Both parties must act honestly and disclose material information.
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Parts of the Insurance Contract:
1. Declarations: Personalizes the contract with the insured’s name, address, coverage
details, and premium.
2. Insuring Agreement: The insurer’s promise to pay for specific risks covered.
3. Conditions: Rules governing the contract, including responsibilities of both parties.
4. Exclusions: Lists the risks or perils not covered by the policy.
5. Definitions: Clarifies terms used in the policy.
Unit 3: Insurance Company Organization and Regulation
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Types of Insurance Companies:
1. Stock Companies: Owned by stockholders who share profits and losses. The goal is to
generate profit for shareholders.
2. Mutual Companies: Owned by policyholders who receive dividends or reduced premiums
when the company is profitable.
3. Reciprocal Companies: Managed by an attorney-in-fact, these companies allow members
to share insurance responsibilities.
4. Lloyd’s Associations: A marketplace where individuals or groups assume risks, like Lloyd’s
of London.
5. Fraternal Benefit Societies: Non-profit organizations offering insurance to members.
6. Risk Retention Groups (RRGs): Formed by businesses to provide liability insurance to
group members.
7. Self-Insurance: Some organizations prefer to retain and manage their own risk.
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Private vs. Government Insurers:
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Private: Insurers that operate to make a profit.
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Government: The government provides insurance for risks that the private market won't,
such as flood insurance and federal crop insurance.
Lines of Insurance:
1. Property Insurance: Covers damage or loss of property.
2. Casualty Insurance: Covers legal liabilities, such as auto and workers' compensation
insurance.
3. Personal Insurance: Policies for individuals and families, like home or auto insurance.
4. Commercial Insurance: Policies tailored to businesses, such as commercial property and
liability insurance.
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Duties of an Agent:
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Selling Insurance: Agents are responsible for finding clients and selling appropriate
policies.
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Field Underwriting: Assess risks and help match clients with the right coverage.
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Providing Service: Agents must help clients manage policies, update information, and file
claims.
Agent Authority:
1. Express Authority: Clearly defined powers in the contract between the insurer and agent.
2. Implied Authority: Powers assumed necessary to perform duties (e.g., collecting
premiums).
3. Apparent Authority: Powers that a reasonable person believes the agent has based on
their actions.
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Insurance Marketing Systems:
1. Exclusive Agency System: Agents represent only one insurance company.
2. Independent Agency System: Agents represent multiple insurance companies.
3. Direct Writer System: Agents are employees of the insurance company.
4. Direct Response System: Insurance is sold directly to consumers, typically through mail,
phone, or the internet.
Unit 4: The Insurance Transaction
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The Application Process:
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Binders:
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A certificate of insurance provides proof that an insurance policy is in effect. It details the
policyholder, coverage type, limits, and expiration date.
Misrepresentation, Concealment, and Fraud:
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The premium charged is based on the insured’s risk profile. This process is called rating.
Rates are influenced by factors like age, location, property value, and claims history.
Certificate of Insurance:
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Underwriting involves evaluating the risk and determining whether the insurer will issue a
policy and under what terms. The underwriter assesses the likelihood of a loss occurring
and sets appropriate premiums.
Rating the Policy:
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A binder is a temporary insurance contract issued until the policy is formally written. It
provides immediate coverage before the formal policy is issued. Binders are usually in
effect for a short period (e.g., 30 days).
Underwriting:
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The insurance process begins with the submission of an application by the prospective
insured. The information provided in the application is essential for underwriting the risk.
Misrepresentation: Providing false information, either intentionally or unintentionally. If it’s
material to the risk, the insurer may void the policy.
Concealment: Failure to disclose relevant facts. If intentional, the insurer can cancel the
policy.
Fraud: Intentional deception for financial gain. Fraudulent claims can lead to criminal
charges and denial of coverage.
Representations and Warranties:
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Representations are statements made by the insured to the best of their knowledge. If
they are false but not intended to deceive, the insurer typically cannot void the contract.
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Warranties are guarantees that certain facts or conditions will be true or met. If violated,
the policy can be voided regardless of intent.
Waiver and Estoppel:
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Waiver is the intentional relinquishment of a known right (e.g., an insurer waiving the right
to enforce a policy condition).
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Estoppel prevents a party from asserting a right if they previously acted in a way that
contradicts that right.
Cancellation and Nonrenewal:
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Cancellation refers to ending the policy before its expiration date. It can occur at the
insured’s or insurer’s request.
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Nonrenewal means the insurer chooses not to renew the policy after the current term
ends.
Unit 5: Introduction to Property Insurance
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Standardized Policies:
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Structure of a Property Insurance Policy:
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Property insurance policies are often standardized, meaning they follow a general format
with common sections and terms. This helps with consistency and understanding across
the industry
Declarations: Includes the insured’s name, property address, policy period, premium, and
coverage limits.
Insuring Agreement: Outlines the insurer’s promise to cover losses and details the type of
coverage provided.
Exclusions: Specifies the perils, property, and situations that are not covered under the
policy.
Conditions: Lists the obligations of the insured and insurer, including how claims are
handled and policy cancellation.
Property Coverage Concepts:
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Direct Loss: Physical damage to property (e.g., fire damage to a house).
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Indirect Loss: Financial loss resulting from direct damage (e.g., lost rental income due to
fire damage).
Types of Property:
1. Real Property: Land and structures attached to it (e.g., a home or office building).
2. Personal Property: Movable items (e.g., furniture, electronics).
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Valuation Methods:
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Actual Cash Value (ACV): The replacement cost of an item minus depreciation.
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Replacement Cost: The cost to replace the damaged item with a new one of similar
quality, without depreciation.
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Agreed Value: The insurer and insured agree on a specific value for the property at the time
the policy is written.
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Deductibles:
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A deductible is the amount the insured must pay before the insurer pays for a loss. Higher
deductibles typically result in lower premiums.
Coinsurance:
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Coinsurance clauses require the insured to carry a certain percentage of the property’s
value in insurance (usually 80%). If they do not, they will be penalized in the event of a
claim by receiving a reduced payment.
Unit 6: Introduction to Liability Insurance
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Liability Losses:
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Liability insurance covers financial losses due to the insured’s legal responsibility for
causing harm to others, including bodily injury or property damage.
Negligence:
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Negligence is a key concept in liability insurance. It refers to the failure to exercise the level
of care that a reasonable person would in a similar situation, resulting in harm to others.
Liability insurance typically covers losses resulting from negligence.
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Four elements of negligence:
1. Duty of care: The insured must owe a legal duty to the injured party.
2. Breach of duty: The insured must have breached that duty.
3. Causation: The breach must have caused harm.
4. Damages: There must be actual loss or damage as a result of the breach.
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Defenses Against Negligence:
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Contributory Negligence: If the injured party contributed to their own injury, the insured
may not be held liable.
Comparative Negligence: The injured party’s compensation is reduced by the percentage
of their own fault.
Assumption of Risk: The injured party knew the risks involved and voluntarily accepted
them.
Intervening Cause: An event that breaks the direct link between the insured’s actions and
the injury.
Absolute/Strict Liability:
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In some cases, the insured can be held liable without the need to prove negligence. Strict
liability applies in situations where certain activities are inherently dangerous (e.g., owning
wild animals, using explosives).
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Vicarious Liability:
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Liability Insurance:
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1.
Vicarious liability occurs when one party is held liable for the actions of another. For
example, employers can be held responsible for the actions of their employees during the
course of employment.
Liability insurance covers damages that the insured is legally obligated to pay due to
causing injury or property damage to others. This includes both legal defense costs and
settlements or judgments.
Types of Damages:
Compensatory Damages:
2.
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Special Damages: For tangible losses like medical bills and lost wages.
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General Damages: For intangible losses like pain and suffering.
Punitive Damages: Intended to punish the wrongdoer for particularly egregious behavior.
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Policy Limits:
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Liability policies typically have limits on how much the insurer will pay. These limits can be
split limits (separate limits for bodily injury per person, bodily injury per accident, and
property damage) or combined single limits (a single limit for all damages).
Unit 7: Dwelling Insurance
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The Dwelling Policy:
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1.
Dwelling insurance is designed to cover property used primarily for residential purposes. It
can cover homes that may not be eligible for a homeowners policy, such as rental
properties or vacation homes. These policies do not provide liability or personal property
coverage unless added by endorsement.
Forms of Dwelling Policies:
Basic Form (DP-1):
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This form provides coverage for named perils, meaning it only covers specific risks
listed in the policy. Commonly covered perils include fire, lightning, and internal
explosion.
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Losses are settled on an Actual Cash Value (ACV) basis, which considers
depreciation.
2.
Broad Form (DP-2):
3.
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The broad form provides a more comprehensive list of named perils, including those
in DP-1 and additional perils like burglary damage, falling objects, and weight of
snow or ice.
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Losses are settled on a Replacement Cost basis for the dwelling, provided the
insured carries insurance equal to at least 80% of the property's replacement value.
Special Form (DP-3):
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Personal property is still covered on a named peril basis, but the dwelling is
protected from all types of damage unless explicitly excluded.
The primary differences among the DP-1, DP-2, and DP-3 forms are the types of perils
covered and the method used to value losses (ACV vs. Replacement Cost). DP-1 is the
most basic, while DP-3 offers the broadest coverage.
Dwelling Policy Endorsements:
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The special form provides open peril coverage for the dwelling, meaning it covers all
risks except those specifically excluded in the policy.
Dwelling Forms Comparison:
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Dwelling policies can be customized with endorsements to provide additional coverage,
such as Personal Liability, Theft Coverage, or Ordinance or Law (which helps pay for
costs to rebuild in compliance with updated building codes).
Unit Test:
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This test evaluates understanding of the different dwelling policy forms, coverage types,
and settlement methods (ACV vs. Replacement Cost).
Unit 8: Homeowners Insurance
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The Homeowners Policy:
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Homeowners insurance is designed for owner-occupied residences and provides coverage
for both property and liability. It combines coverage for the dwelling, personal property, and
personal liability into one policy.
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Unlike dwelling policies, homeowners policies automatically include personal liability and
medical payments coverage.
Policy Sections:
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Section I—Property:
1. Coverage A (Dwelling): Protects the home and structures attached to it, like a
garage or porch.
2. Coverage B (Other Structures): Covers detached structures on the property, such
as fences, sheds, or detached garages. Usually, the limit for this coverage is a
percentage (e.g., 10%) of the dwelling coverage (Coverage A).
3. Coverage C (Personal Property): Provides protection for personal belongings inside
the home. It covers furniture, electronics, clothing, and other items. This coverage
extends to belongings worldwide, not just in the home.
4. Coverage D (Loss of Use): Covers additional living expenses if the home becomes
uninhabitable due to a covered loss (e.g., paying for a temporary rental home).
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Section II—Liability:
1. Coverage E (Personal Liability): Provides protection if the insured is legally
responsible for bodily injury or property damage to others. It covers legal fees, court
costs, and damages.
2. Coverage F (Medical Payments to Others): Pays for medical expenses if someone
is injured on the insured's property, regardless of fault.
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Homeowners Policy Forms:
1.
HO-2 (Broad Form): Provides named-peril coverage for the dwelling, other structures, and
personal property. It includes a list of specific covered perils (e.g., fire, theft, and vandalism).
2.
HO-3 (Special Form): Offers open-peril coverage for the dwelling and other structures, meaning
everything is covered unless specifically excluded. Personal property is covered on a named-peril basis.
3.
HO-4 (Contents Broad Form): Known as renters insurance, this form provides personal property
and liability coverage for those who rent their residence.
4.
HO-5 (Comprehensive Form): Provides the broadest coverage, offering open-peril protection for
both the dwelling and personal property.
5.
HO-6 (Unit-Owners Form): Designed for condominium owners, this policy covers personal
property and the interior of the unit (e.g., walls, floors) and includes liability coverage.
6.
HO-8 (Modified Coverage Form): Provides coverage for older homes, where the replacement cost
of the home may exceed its market value. Losses are paid on an Actual Cash Value (ACV) basis rather
than replacement cost.
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Homeowners Endorsements:
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Personal Property Replacement Cost: Changes the valuation of personal property from
ACV to replacement cost.
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Scheduled Personal Property: Provides additional coverage for high-value items like
jewelry, furs, or fine art.
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Ordinance or Law: Covers the increased cost to repair or rebuild due to changes in
building codes.
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Homeowners Forms Comparison:
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The forms vary in terms of the breadth of coverage provided. HO-2 is the most basic form,
while HO-5 offers the most comprehensive protection. HO-4 is tailored to renters, and HO6 is for condo owners.
Unit 9: Personal Auto Insurance
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Personal Auto Policy (PAP):
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Policy Organization and Eligibility:
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The PAP is organized into different parts, each covering specific risks related to the
operation of a personal vehicle.
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Eligible vehicles include cars, SUVs, and small trucks used for personal use. Commercial
use vehicles are typically not covered under PAP.
Policy Definitions:
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Key terms, such as "you" (the named insured), "family members" (people related to the
insured by blood, marriage, or adoption living in the same household), and "your covered
auto" (vehicles listed on the declarations page), are clearly defined in the policy.
Part A—Liability Coverage:
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Liability Coverage provides protection if the insured is legally responsible for bodily injury
or property damage to others. It covers legal defense costs, settlements, or judgments up
to the policy limits.
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Split Limits: Liability coverage can have split limits (e.g., $50,000 per person for bodily
injury, $100,000 per accident for bodily injury, and $25,000 for property damage).
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Exclusions: Liability coverage does not apply to intentional acts, damage to property
owned by the insured, or using a vehicle for commercial purposes.
Part B—Medical Payments Coverage:
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The Personal Auto Policy (PAP) provides coverage for private passenger vehicles. It offers
protection for both property damage and liability resulting from the use of the vehicle.
Medical Payments Coverage pays for medical and funeral expenses for the insured and
passengers, regardless of who is at fault in an accident. Coverage is typically limited to a
specific dollar amount per person.
Part C—Uninsured Motorists Coverage (UM):
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Uninsured Motorists (UM) Coverage protects the insured if they are involved in an
accident with an at-fault driver who has no insurance.
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Underinsured Motorists Coverage (added by endorsement) applies when the at-fault
driver has some insurance, but not enough to cover the full extent of the damages.
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Part D—Coverage for Damage to Your Auto:
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Collision Coverage: Pays for damage to the insured’s vehicle resulting from a collision,
regardless of fault.
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Other-than-Collision (Comprehensive) Coverage: Pays for non-collision-related damage,
such as theft, fire, vandalism, or natural disasters.
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Deductibles: The insured is responsible for a specified deductible before the insurance
company pays for the remainder of the loss.
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Exclusions: Coverage does not apply to wear and tear, mechanical breakdown, or using
the vehicle for racing.
Parts E and F—Conditions:
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Part E (Duties After an Accident or Loss): The insured must promptly report any accident,
cooperate with the insurer, and allow the insurer to inspect the vehicle before repairs are
made.
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Part F (General Provisions): Includes conditions such as policy changes, subrogation
rights, and how disputes will be handled.
Personal Auto Policy Endorsements:
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Towing and Labor Costs: Provides reimbursement for towing and labor needed to move a
disabled vehicle.
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Rental Reimbursement: Pays for the cost of renting a vehicle while the insured’s car is
being repaired after a covered loss.
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Extended Non-Owned Coverage: Provides liability and medical payments coverage for a
vehicle not owned by the insured but used regularly (e.g., a company car).
No-Fault Insurance:
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In no-fault states, Personal Injury Protection (PIP) is mandatory. It covers medical
expenses, lost wages, and other related costs for the insured, regardless of fault in an
accident.
Assigned Risk Plans:
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High-risk drivers who cannot obtain coverage in the voluntary market can purchase
insurance through state assigned risk plans, where insurers share the burden of providing
coverage to high-risk individuals.
Unit 10: Miscellaneous Personal Insurance
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Introduction:
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Miscellaneous personal insurance covers risks that are not typically included in standard
homeowners or auto policies. These cover specialized perils and types of property that
require additional protection.
Flood Insurance:
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Flood insurance is provided through the National Flood Insurance Program (NFIP), as
most homeowners and property policies do not cover flood damage.
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Eligibility: Properties in communities that participate in NFIP are eligible. Coverage
includes buildings and personal property.
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Waiting Period: There is typically a 30-day waiting period before coverage takes effect.
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Limits: NFIP sets limits on the amount of coverage for both the building and contents.
Excess flood insurance can be purchased for additional coverage.
Earthquake Insurance:
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Standard property policies typically exclude earthquakes. Earthquake insurance can be
added by endorsement or through a separate policy.
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Earthquake policies often have higher deductibles than standard policies, typically a
percentage of the property’s value (e.g., 10-20%).
Mobile Home Insurance:
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Mobile homes are not covered by standard homeowners’ insurance. Mobile home
insurance provides protection for the structure and personal property, and it includes
liability coverage.
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The policy can be written similarly to a homeowner’s policy, but it is tailored to the unique
risks associated with mobile homes.
Personal Inland Marine Insurance:
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This type of insurance covers personal property that is movable or in transit. It is often used
for high-value items that are frequently taken out of the home, such as:
1. Jewelry and Furs.
2. Fine Art.
3. Musical Instruments.
4. Cameras and Electronics.
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Personal inland marine policies are typically open-peril, meaning they cover any loss
unless specifically excluded.
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Personal Watercraft Insurance:
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Boats and personal watercraft, such as jet skis, are not covered by homeowners’ policies.
Watercraft insurance provides coverage for:
1. Physical Damage: Damage to the boat, motor, and equipment.
2. Liability: Injuries or property damage caused by the boat.
3. Medical Payments: Covers medical expenses for the insured and passengers.
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Personal Umbrella Insurance:
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Umbrella insurance provides additional liability protection beyond the limits of underlying
homeowners, auto, or watercraft policies.
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It covers significant liability claims, such as major accidents, and provides coverage for
personal injury claims like defamation or invasion of privacy.
FAIR Plans (Fair Access to Insurance Requirements):
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FAIR Plans are state-run programs designed to provide property insurance to high-risk
individuals who cannot obtain coverage through the standard market. They typically cover
basic perils like fire, vandalism, and windstorm.
Unit 11: The Commercial Package Policy
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Introduction:
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The Commercial Package Policy (CPP) is a flexible policy designed to meet the specific
needs of businesses. It allows businesses to bundle various types of insurance coverage
under a single policy, making it customizable and cost-effective.
Eligible Coverages:
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A CPP can include a variety of coverages such as:
1. Property Insurance: Covers buildings, contents, and business income.
2. General Liability: Protects against legal liability for bodily injury, property damage,
and personal/advertising injury.
3. Crime Insurance: Covers losses from employee theft or burglary.
4. Inland Marine: Covers movable business property, such as construction equipment
or valuable documents.
5. Boiler and Machinery Insurance: Protects against equipment breakdown.
6. Commercial Auto Insurance: Covers business vehicles.
7. Farm Insurance: Tailored for agricultural businesses.
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Common Policy Declarations:
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The declarations page provides essential details such as the name of the insured, the
policy period, the coverage types included, and limits of liability.
Common Policy Conditions:
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The CPP includes standard conditions that apply to all coverages, including:
1. Cancellation: Either the insured or the insurer can cancel the policy, with specific
notice requirements.
2. Changes: Only an authorized representative of the insurer can make changes to the
policy.
3. Examinations of Books and Records: The insurer can audit the insured’s books
during the policy period and up to three years afterward.
4. Premiums: The first named insured is responsible for paying premiums.
5. Transfer of Rights: The insured cannot transfer the policy without the insurer’s
written consent.
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Coverage Parts:
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Each type of coverage included in the CPP is referred to as a coverage part. The policy can
include multiple coverage parts, allowing the insured to tailor the policy to their specific
business needs.
Endorsements:
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CPPs can be customized further with endorsements that modify coverage to meet specific
business requirements, such as:
1. Additional Insureds: Adding other entities that have an interest in the property (e.g.,
mortgage holders).
2. Waiver of Subrogation: Preventing the insurer from seeking recovery from a third
party responsible for a loss.
Unit 12: The Business Owners Policy (BOP)
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Introduction:
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The Business Owners Policy (BOP) is a pre-packaged policy designed for small to
medium-sized businesses. It provides property and liability insurance in a single,
convenient, and cost-effective policy.
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The BOP is similar to the Commercial Package Policy (CPP) but is tailored to businesses
with simpler insurance needs.
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Eligibility and Policy Organization:
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The BOP is available for small businesses that meet specific criteria, such as a limited
number of employees and square footage. Eligible businesses typically include:
1. Retail Stores.
2. Office Buildings.
3. Service Businesses.
4. Small Restaurants.
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Businesses with higher risks, such as auto dealers and large manufacturers, are generally
ineligible for a BOP.
Property Coverage:
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The property section of the BOP includes the following:
1. Coverage A (Buildings): Covers the building and any attached structures, as well as
fixtures and permanently installed machinery.
2. Coverage B (Business Personal Property): Covers personal property used in the
business, including furniture, inventory, and equipment.
3. Additional Coverages: The BOP includes additional coverages such as debris
removal, preservation of property, fire department service charges, and business
income coverage (to replace lost income if the business cannot operate due to a
covered loss).
4. Optional Coverages: Businesses can add coverage for valuable papers, outdoor
signs, or mechanical breakdown.
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Liability and Medical Expenses Coverage:
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Business Liability Coverage: Protects the insured against legal liabilities for bodily injury,
property damage, and personal/advertising injury arising from business operations.
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Medical Expenses: Pays for medical expenses of individuals injured on the business
premises, regardless of fault.
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Defense Costs: The policy also covers the cost of defending lawsuits, even if the claims
are groundless.
BOP Conditions:
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The BOP includes standard conditions that outline the responsibilities of both the insured
and the insurer, such as:
1. Duties in the Event of Loss or Damage: The insured must notify the insurer
promptly and take steps to protect property from further damage.
2. Loss Payment: Specifies how the insurer will settle claims (either by paying the
value of the loss or replacing/repairing damaged property).
3. Vacancy Condition: Limits coverage if a building has been vacant for more than 60
consecutive days.
4. Co-insurance Requirement: The insured must carry insurance equal to a specified
percentage (usually 80%) of the property’s value. If they do not, they will receive a
reduced payment in the event of a loss.
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Endorsements:
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The BOP can be modified with endorsements to tailor coverage for specific business
needs. Common endorsements include:
1. Hired and Non-Owned Auto Liability: Extends liability coverage for rented or nonowned vehicles used for business purposes.
2. Employee Dishonesty: Covers losses resulting from theft or dishonest acts
committed by employees.
3. Ordinance or Law: Pays for the additional cost of rebuilding to comply with updated
building codes.
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Comparison of CPP and BOP:
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The BOP is more streamlined and cost-effective than the CPP, as it bundles basic property
and liability coverage in a single policy. However, the CPP allows for greater customization
and can accommodate larger, more complex businesses.
Unit 13: Commercial Property Insurance
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Commercial Property Coverage Part:
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The Commercial Property Coverage Part is a major component of a commercial package
policy (CPP). It protects business property, such as buildings, personal property, and
inventory, from various risks and perils.
Building and Personal Property Coverage Form:
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This form is the foundation of commercial property insurance. It covers:
1. Buildings: Includes the structure, permanently installed fixtures, machinery, and
equipment.
2. Business Personal Property: Covers property located in or near the insured
building, including furniture, inventory, and equipment.
3. Personal Property of Others: Provides coverage for property belonging to others
that is in the insured’s care, custody, or control.
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Coverage Extensions:
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The building and personal property coverage form includes coverage extensions that offer
additional protection in certain situations, such as:
1. Newly Acquired Property: Temporary coverage for new buildings or newly
purchased personal property.
2. Personal Effects and Property of Others: Covers personal belongings of the
insured and employees while on the insured premises.
3. Valuable Papers and Records: Provides limited coverage for the cost of restoring
lost or damaged valuable records.
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Exclusions and Limitations:
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Certain types of losses are excluded from coverage, such as:
1. Earthquakes (can be covered by endorsement).
2. Floods (can be covered by endorsement).
3. War and terrorism.
4. Wear and tear, mechanical breakdown, or rust.
•
•
Valuation Methods:
o
Replacement Cost: Pays to replace damaged property with new property of similar kind
and quality.
o
Actual Cash Value (ACV): Pays the replacement cost minus depreciation.
o
Agreed Value: The insurer and insured agree on a specific value for the property before a
loss occurs. This avoids penalties for underinsurance.
Builders Risk Coverage Form:
o
•
This form covers buildings under construction. It provides protection against damage to
materials, equipment, and structures being built or renovated. Coverage is usually
terminated once the building is completed.
Condominium Coverage Forms:
o
Condominium Association Coverage Form: Covers the condominium building, common
areas, and business personal property owned by the condominium association.
o
Condominium Unit-Owners Coverage Form: Provides coverage for the business personal
property of individual unit owners.
•
•
Business Income Coverage Forms:
o
Business Income Coverage: Replaces lost income if business operations are interrupted
due to a covered loss (e.g., fire).
o
Extra Expense Coverage: Covers additional expenses the business incurs to continue
operations after a covered loss, such as renting temporary office space.
Causes of Loss Forms:
o
The causes of loss form specifies which perils are covered. There are three types:
1. Basic Form: Provides named peril coverage for risks such as fire, lightning, and
vandalism.
2. Broad Form: Includes all perils covered by the basic form, plus additional perils like
falling objects and water damage.
3. Special Form: Provides open peril coverage, meaning all risks are covered unless
specifically excluded.
•
Endorsements:
o
Commercial property policies can be tailored with endorsements, such as:
1. Ordinance or Law Endorsement: Covers the increased costs of repairing or
rebuilding due to changes in building codes.
2. Spoilage Endorsement: Provides coverage for perishable goods damaged by
temperature changes or power outages.
Unit 14: Ocean and Inland Marine Insurance
•
Ocean Marine Insurance:
o
Ocean marine insurance covers goods transported over water. This insurance has
historically been used to protect against the risks associated with transporting cargo by
sea.
o
Types of Ocean Marine Coverage:
1. Hull Insurance: Covers physical damage to the ship or vessel.
2. Cargo Insurance: Protects the goods or cargo being transported, from the point of
departure to the destination.
3. Freight Insurance: Compensates the shipping company for the loss of income if
cargo is lost or damaged.
4. Protection and Indemnity (P&I) Insurance: Provides liability coverage for the ship
owner in case they are held legally responsible for injury or damage caused to
others (e.g., injuries to crew or passengers, damage to other ships or cargo).
o
Perils Covered:
▪
•
Ocean marine policies generally cover perils such as perils of the sea (e.g., storms,
collisions, sinking), fire, pirates, and jettison (the voluntary act of throwing cargo
overboard to lighten the ship during an emergency).
Inland Marine Insurance:
o
Inland marine insurance covers property that is in transit over land, movable property, or
property used in transportation-related industries. It evolved from ocean marine insurance
to cover risks that occur inland.
o
Types of Inland Marine Coverage:
1. Domestic Shipments: Covers goods being transported within a country by various
means, including truck or rail.
2. Instrumentalities of Transportation and Communication: Covers bridges,
tunnels, pipelines, and communication equipment (e.g., radio towers, satellite
dishes).
3. Commercial Property Floaters: Covers property that frequently moves from one
location to another, such as construction equipment, tools, or exhibition materials.
o
•
Filed vs. Non-filed Forms:
▪
Filed Forms: Standardized inland marine policies that are regulated and filed with
insurance regulators. Examples include accounts receivable and commercial
articles floaters.
▪
Non-filed Forms: Customized policies tailored to the specific needs of the insured,
often used for unique or high-value items. Non-filed forms are less regulated and
more flexible.
Examples of Inland Marine Coverages:
o
Contractor’s Equipment: Covers mobile machinery and equipment used in construction,
such as bulldozers and cranes.
o
Bailee’s Customer Insurance: Protects businesses that hold others’ property in their care,
such as dry cleaners or repair shops.
o
Installation Floater: Covers property (e.g., equipment, building materials) that is in transit
to a job site, awaiting installation, or being installed.
o
Jeweler’s Block Insurance: Protects jewelers against loss or damage to merchandise,
whether on the premises or in transit.
•
Perils Covered in Inland Marine Policies:
o
Inland marine policies generally cover a wide range of perils, including fire, theft,
vandalism, and transportation-related risks like collision or overturning of the transport
vehicle.
Unit 15: Commercial General Liability Insurance (CGL)
•
Business Liability Exposures:
o
Businesses face various types of liability risks, including:
1. Premises and Operations: Liability arising from accidents on the business
premises or as a result of business operations.
2. Products Liability: Liability from the sale of defective products that cause injury or
damage.
3. Completed Operations: Liability related to work that has been completed, such as
faulty construction or installation work.
4. Contractual Liability: Liability assumed under a contract, such as lease
agreements or contracts with vendors.
5. Independent Contractors Liability: Liability arising from work done by independent
contractors on behalf of the business.
•
Commercial General Liability Coverage Part:
o
•
Occurrence and Claims-Made Forms:
o
•
CGL policies provide coverage for the liability exposures faced by businesses and are often
a core component of a commercial package policy (CPP).
The CGL can be written on either an occurrence or claims-made basis.
▪
Occurrence Form: Covers claims for injuries or damages that occur during the
policy period, regardless of when the claim is made.
▪
Claims-Made Form: Covers claims made during the policy period, as long as the
incident occurred after the retroactive date specified in the policy. This form is
typically used for risks that may have a delay between the incident and the filing of a
claim (e.g., product liability).
Definitions:
o
Important definitions in the CGL include:
▪
Bodily Injury: Physical injury to a person, including sickness, disease, and death.
▪
Property Damage: Physical damage to tangible property, including loss of use.
▪
•
•
•
Coverage A—Bodily Injury and Property Damage Liability:
o
Provides coverage for claims of bodily injury or property damage caused by the insured’s
business operations, products, or premises. It also covers legal defense costs.
o
Exclusions: Coverage A does not apply to intentional acts, pollution, damage to property
owned by the insured, or injuries to employees (which would be covered under workers’
compensation).
Coverage B—Personal and Advertising Injury Liability:
o
Covers claims for non-physical injuries, including false arrest, defamation (libel or slander),
malicious prosecution, copyright infringement, and invasion of privacy.
o
Exclusions: Coverage B excludes liability from breach of contract, intentional acts, or
damage arising from advertisements that knowingly contain false information.
Coverage A and B Supplementary Payments:
o
•
•
The CGL includes supplementary payments that cover additional costs, such as bail
bonds, pre- and post-judgment interest, and legal fees incurred during a lawsuit.
Coverage C—Medical Payments:
o
Pays for medical expenses resulting from accidents on the insured’s premises, regardless
of fault. It covers expenses such as first aid, medical services, and funeral costs.
o
This coverage is intended to handle minor injuries and reduce the likelihood of a larger
lawsuit.
Who Is an Insured:
o
•
Personal and Advertising Injury: Non-physical harm, such as defamation, false
arrest, or invasion of privacy.
The CGL defines the individuals or organizations covered under the policy, which typically
includes:
▪
The named insured.
▪
Employees of the insured while performing duties related to the business.
▪
Any newly acquired or formed organizations under the insured’s control (for a
limited period).
Limits of Insurance:
o
The policy specifies limits for different types of claims, including:
▪
General Aggregate Limit: The maximum the insurer will pay for all claims during the
policy period (excluding products-completed operations).
▪
Each Occurrence Limit: The maximum the insurer will pay for a single claim.
•
Personal and Advertising Injury Limit: The maximum payout for personal and
advertising injury claims.
▪
Medical Payments Limit: The maximum the insurer will pay for medical expenses
per person.
Conditions:
o
•
▪
The CGL includes standard conditions that govern how the policy operates, including the
insured’s duties in the event of a claim and how claims are handled.
Other Commercial General Liability Coverage Forms and Endorsements:
o
The CGL can be modified with endorsements to provide additional coverage, such as:
1. Liquor Liability Coverage: For businesses that manufacture, sell, or distribute
alcoholic beverages.
2. Pollution Liability Coverage: Covers liability from the release of pollutants.
3. Products-Completed Operations Aggregate Endorsement: Extends coverage for
liability arising from products or completed operations.
•
Unit Test:
o
The test at the end of this unit covers key aspects of commercial general liability insurance,
including coverage parts (A, B, C), occurrence vs. claims-made forms, and policy limits.
Unit 16: Commercial Auto Insurance
•
Introduction:
o
•
•
Commercial Auto Insurance provides coverage for vehicles used in business operations.
It covers liability and physical damage for a wide range of commercial vehicles, including
cars, trucks, and trailers.
Commercial Auto Coverage Forms:
o
Business Auto Coverage Form: The most commonly used form, covering a variety of
vehicles owned, leased, hired, or borrowed by businesses.
o
Garage Coverage Form: Designed for businesses that sell, service, repair, or park vehicles
(e.g., auto dealerships and repair shops).
o
Motor Carrier Coverage Form: For businesses that transport goods or people, whether the
vehicles are owned or not. It replaces the Truckers Coverage Form and provides more
flexibility.
Symbols for Covered Autos:
o
Commercial auto policies use numerical symbols (1-9) to define the specific vehicles
covered by the policy. Key symbols include:
1. Symbol 1: Any auto, whether owned, hired, or borrowed (broadest coverage).
2. Symbol 2: Owned autos only.
3. Symbol 7: Specifically described autos (listed in the declarations).
4. Symbol 8: Hired autos only (vehicles the business rents or leases).
5. Symbol 9: Non-owned autos (vehicles owned by employees but used for business
purposes).
•
•
Liability Coverage:
o
Commercial Auto Liability Coverage protects the insured against legal liability for bodily
injury or property damage caused by an accident involving a business vehicle. It also
covers legal defense costs.
o
The coverage applies to accidents that occur while the insured is using covered vehicles for
business purposes.
Physical Damage Coverage:
o
This part of the policy covers physical damage to the insured’s vehicles. There are three
main types of physical damage coverage:
1. Collision: Covers damage to the insured vehicle resulting from a collision with
another object or overturning of the vehicle.
2. Comprehensive (Other-than-Collision): Covers non-collision-related damage,
such as theft, fire, vandalism, or hail.
3. Specified Causes of Loss: A more limited form of comprehensive coverage that
only covers specific perils, such as theft, fire, or explosion.
•
Garage Coverage Form:
o
The Garage Coverage Form provides coverage for businesses involved in the sale, service,
or storage of vehicles. It combines liability, garage-keepers, and physical damage
coverages:
1. Garage Liability: Covers both auto-related and business-related liability exposures
(e.g., accidents involving garage-owned vehicles and slip-and-fall incidents on the
premises).
2. Garage-keepers Insurance: Protects the business from liability for damage to
customers’ vehicles in its care (e.g., vehicles left for repair or parking).
3. Physical Damage: Provides coverage for damage to garage-owned vehicles.
•
•
Motor Carrier Coverage Form:
o
The Motor Carrier Coverage Form provides liability and physical damage coverage for
businesses that transport goods or passengers. It applies whether the vehicles are owned
or hired by the insured.
o
Trailer Interchange Coverage: Protects trailers in the insured’s possession that are being
used under a trailer interchange agreement with another business.
Endorsements:
o
Commercial auto policies can be customized with endorsements to add or modify
coverage:
1. Drive Other Car Coverage: Extends liability and physical damage coverage to nonowned vehicles (e.g., personal vehicles driven by employees for business purposes).
2. Additional Insured – Lessor: Adds the vehicle lessor as an insured under the policy.
3. Individual Named Insured: Extends personal auto-like coverage to business
owners who do not have a personal auto policy.
•
Federal Motor Carrier Safety Administration (FMCSA) Regulations:
o
Businesses involved in interstate trucking must comply with FMCSA regulations, which
set minimum liability coverage requirements based on the type of cargo being transported.
For example:
▪
$750,000 for non-hazardous cargo.
▪
$5,000,000 for certain hazardous materials.
Unit 17: Workers’ Compensation Insurance
•
Purpose of Workers’ Compensation Insurance:
o
•
Workers' compensation insurance provides benefits to employees who suffer job-related
injuries or illnesses. It covers medical expenses, lost wages, rehabilitation, and death
benefits for employees injured in the course of employment, regardless of fault.
Workers’ Compensation Laws:
o
Workers' compensation laws are established at the state level, and every state has its own
system for providing benefits. Employers are typically required by law to carry workers'
compensation insurance.
o
Exclusive Remedy Doctrine: Workers' compensation is the exclusive remedy for injured
employees, meaning they cannot sue their employer for damages related to the injury,
except in cases of gross negligence or intentional harm.
•
Benefits Provided:
o
o
o
Medical Benefits: Covers the cost of medical treatment for work-related injuries or
illnesses, including hospital visits, surgeries, and medications.
Income Benefits: Provides wage replacement for employees who cannot work due to their
injury. The amount is typically a percentage of their average weekly wage.
Disability Benefits: Workers' compensation provides benefits based on the extent of the
disability:
▪
Temporary Total Disability (TTD): Employee cannot work for a temporary period but
is expected to recover.
▪
Temporary Partial Disability (TPD): Employee can perform light or part-time work
during recovery.
▪
Permanent Total Disability (PTD): Employee is permanently unable to work.
▪
Permanent Partial Disability (PPD): Employee can work but has a permanent
impairment.
Death Benefits: Paid to the surviving family members of an employee who dies due to a workrelated injury or illness. These benefits include a lump-sum payment and coverage of funeral
expenses.
Rehabilitation Benefits: Covers costs of rehabilitation services to help injured workers return to
their job or transition to a new job.
•
Employers' Responsibilities:
o
•
Employers' Liability Insurance:
o
•
While workers' compensation insurance provides benefits to injured employees,
employers' liability insurance protects the employer from lawsuits filed by employees or
third parties for work-related injuries. This coverage comes into play when employees
claim that the employer’s negligence contributed to their injury.
Monopolistic vs. Competitive State Funds:
o
•
Employers are required to provide a safe work environment and purchase workers'
compensation insurance. Failure to carry workers' compensation coverage can result in
fines, penalties, and exposure to lawsuits.
Some states operate monopolistic state funds, where workers' compensation insurance
must be purchased through the state. In competitive states, employers can purchase
coverage from private insurers or state-operated funds.
Federal Workers' Compensation Laws:
o
Federal Employers Liability Act (FELA): Applies to railroad workers and allows them to
sue their employers for injuries resulting from negligence.
•
o
U.S. Longshore and Harbor Workers' Compensation Act: Covers workers employed in
maritime occupations, such as dock workers and shipbuilders.
o
The Jones Act: Provides coverage for crew members injured while working on vessels,
allowing them to sue for damages.
o
The Black Lung Benefits Act: Provides compensation to coal miners suffering from black
lung disease.
Workers' Compensation Insurance Premiums:
o
Premiums are based on several factors, including:
▪
▪
▪
•
Classification of Employees: Each job type is assigned a risk classification. Higherrisk jobs (e.g., construction) have higher premiums than lower-risk jobs (e.g., office
work).
Experience Modification Factor (EMR): Employers with a history of fewer claims
may receive lower premiums, while those with more claims may pay higher
premiums.
Payroll: Premiums are calculated based on the employer’s total payroll.
Other Coverages:
o
Voluntary Compensation Endorsement: Extends workers' compensation benefits to
employees who are not required to be covered by law (e.g., domestic workers or farm
laborers).
o
Foreign Coverage Endorsement: Provides workers' compensation benefits for employees
working abroad.
Unit 18: Crime Insurance
•
Introduction to Crime Insurance:
o
•
Crime insurance protects businesses from financial losses resulting from criminal acts
such as theft, burglary, robbery, and fraud. It can cover both internal (employee-related)
and external (third-party-related) crimes.
Commercial Crime Coverage Forms:
o
There are two main types of crime insurance forms:
1. Loss Sustained Form: Covers losses that occur and are discovered during the
policy period or within a specified time after the policy expires.
2. Discovery Form: Covers losses discovered during the policy period, regardless of
when the loss actually occurred (even if the crime happened before the policy
started).
•
1.
Types of Coverage in Crime Insurance:
Employee Theft:
▪
2.
Protects the business against losses caused by theft or embezzlement by
employees. It covers money, securities, and other property.
Forgery or Alteration:
▪
3.
Covers losses resulting from the forgery or alteration of checks, promissory notes, or
other written instruments. For example, if an employee or third party forges
signatures or alters documents to steal funds.
Inside the Premises – Theft of Money and Securities:
▪
4.
Provides coverage for the theft, disappearance, or destruction of money and
securities within the business premises. It covers losses from break-ins or internal
theft.
Inside the Premises – Robbery or Safe Burglary of Other Property:
▪
5.
Protects against the loss of property (other than money and securities) caused by
robbery or the burglary of a safe inside the premises.
Outside the Premises:
▪
6.
Covers the theft, disappearance, or destruction of money and securities while they
are in transit or in the custody of a messenger or armored vehicle service.
Computer Fraud:
▪
7.
Provides coverage for losses resulting from the use of computers to fraudulently
transfer money, securities, or other property.
Funds Transfer Fraud:
▪
8.
Covers losses due to fraudulent instructions issued to a financial institution to
transfer funds from the insured’s account to someone else’s account.
Money Orders and Counterfeit Paper Currency:
▪
•
Protects against losses from the acceptance of counterfeit currency or money
orders in exchange for goods or services.
Exclusions:
o
Common exclusions in crime insurance policies include:
1. Acts Committed by the Insured: No coverage for criminal acts committed by the
business owner or partners.
2. Governmental Action: Losses due to seizure or destruction of property by the
government.
3. Legal Expenses: Legal costs or expenses related to lawsuits are generally not
covered.
4. Indirect Losses: Losses that are not direct financial losses (e.g., loss of potential
income due to theft).
•
Endorsements:
o
Crime insurance policies can be tailored with endorsements to address specific risks.
Examples include:
1. Clients’ Property Endorsement: Provides coverage for property that belongs to
clients but is in the care of the insured (e.g., property in the custody of a janitorial
service).
2. Extortion Endorsement: Covers losses due to threats of violence or property
damage, such as ransom demands.
•
Fidelity Bonds:
o
Fidelity bonds are similar to crime insurance but are typically used to protect businesses
from losses due to employee dishonesty. There are several types of fidelity bonds:
1. Individual Bonds: Covers a specific employee.
2. Name Schedule Bonds: Covers specific employees listed in the policy.
3. Position Schedule Bonds: Covers specific positions, regardless of who holds the
position.
4. Blanket Bonds: Provides coverage for all employees, with no need to specify
individual names or positions.
Unit 19: Bonds (Expanded)
What Are Bonds?
•
Bonds are a type of financial guarantee that ensures one party (the principal) will fulfill an
obligation to another party (the obligee). If the principal fails to meet their obligations, the surety
(usually an insurance company or bonding agency) compensates the obligee for losses incurred.
The principal is then required to reimburse the surety for the amount paid out.
•
Bonds differ from insurance because they are three-party contracts:
1. Principal: The person or business required to fulfill the obligation (e.g., a contractor).
2. Obligee: The party that requires the bond and is protected if the principal defaults (e.g., a
project owner).
3. Surety: The organization (usually an insurance company) that guarantees the principal’s
performance and compensates the obligee if the principal fails to perform.
Types of Bonds
1. Contract Bonds:
o
Used primarily in the construction industry to ensure that contractors fulfill their
contractual obligations. There are several types:
o
Bid Bond:
▪
o
Performance Bond:
▪
o
Guarantees that the contractor will complete the project as per the contract’s terms
and specifications. If the contractor fails to complete the work or defaults, the
surety will either hire a new contractor or compensate the project owner for the
financial loss.
Payment Bond:
▪
o
Ensures that if a contractor submits a bid for a project and wins the bid, they will
enter into the contract and provide the necessary performance and payment bonds.
If the contractor refuses, the obligee is compensated for the difference between the
winning bid and the next lowest bid. This ensures the integrity of the bidding
process.
Protects subcontractors, laborers, and material suppliers from non-payment. If the
general contractor fails to pay these parties, the surety steps in and covers the
unpaid amounts. This ensures that subcontractors and suppliers will be
compensated, even if the contractor runs out of funds.
Maintenance Bond:
▪
Guarantees that the contractor will correct any defects in workmanship or materials
that arise after the project is completed, for a specific period (usually 1-2 years).
This protects the obligee from poor construction quality or substandard materials.
2. License and Permit Bonds:
o
Required by government agencies as a condition for obtaining a business license or permit.
These bonds ensure that businesses comply with applicable laws and regulations. They
protect the public from potential harm due to the business’s failure to meet industry
standards.
o
Examples of businesses that may require these bonds include:
1. Contractors: Ensures that building contractors follow local building codes and
regulations.
2. Auto Dealers: Guarantees that car dealerships will comply with state regulations for
the sale of vehicles.
3. Professional Service Providers: Electricians, plumbers, and other professionals may
be required to post a bond to ensure they perform their services legally and
competently.
3. Judicial Bonds:
o
Required by courts to protect individuals or entities involved in legal proceedings. These
bonds ensure that a party will meet specific obligations ordered by the court.
o
Bail Bond:
▪
o
Appeal Bond:
▪
o
Guarantees that a defendant will appear in court for their trial. If the defendant fails
to appear, the bond compensates the court. Bail bonds are common in criminal
cases.
Required when a party appeals a court decision. It ensures that if the appeal is
unsuccessful, the party will pay the original judgment. This prevents frivolous
appeals and ensures that the winning party will receive compensation if the
judgment is upheld.
Injunction Bond:
▪
Required when one party seeks a court-ordered injunction to stop the other party
from taking certain actions. If the injunction causes harm and is later found to be
unjustified, the bond compensates the affected party.
4. Fiduciary Bonds:
o
These bonds are used to protect the interests of individuals or estates managed by a
fiduciary, such as executors of estates, guardians, or trustees. They ensure that the
fiduciary manages assets and affairs in the best interest of the beneficiaries.
o
Executor Bond:
▪
Guarantees that the executor of a will properly manages the deceased’s estate,
ensuring that assets are distributed according to the terms of the will and legal
obligations are met (e.g., paying off debts or taxes).
o
Guardianship Bond:
▪
Ensures that legal guardians manage the assets and well-being of their wards
(minors or incapacitated persons) responsibly. This bond protects the ward’s assets
from mismanagement or fraud.
5. Public Official Bonds:
o
Required for certain public officials to guarantee they perform their duties ethically,
lawfully, and in the public’s best interest. These bonds protect the public from losses due
to misconduct or failure to perform official duties.
o
Examples include:
1. Treasurers: Ensure that government funds are handled responsibly and not
misappropriated.
2. Notaries Public: Ensure that notarial services are provided correctly and legally.
3. Law Enforcement Officers: Protect the public from abuse of authority or misconduct
by officers.
Surety vs. Insurance
•
Surety Bonds differ from insurance in several key ways:
1. Three-party Agreement: In surety, there are three parties involved (principal, obligee,
surety), whereas insurance is a two-party agreement (insured and insurer).
2. Reimbursement: In surety, if the bond is called, the principal is responsible for reimbursing
the surety for the claim amount. Insurance does not require the insured to repay the insurer
for claims.
3. Purpose: Surety bonds protect the obligee, while insurance is designed to protect the
insured from financial losses.
Bonding Process
•
The bonding process involves the surety company evaluating the principal’s ability to fulfill their
obligations. This evaluation may include reviewing the principal’s financial stability,
creditworthiness, experience, and capacity to perform the work. The surety may require:
1. Indemnity Agreement: The principal agrees to reimburse the surety if the bond is called.
2. Collateral: In higher-risk situations, the surety may require collateral to secure the bond.
•
If the principal fails to meet their obligation, the surety steps in to ensure that the obligee is
compensated. The principal must then reimburse the surety for any payments made.
Bond Premiums
•
The cost of a bond is typically a small percentage of the bond amount, often ranging from 15%. Premiums are based on:
1. Risk: Higher-risk projects or principals may result in higher premiums.
2. Bond Type: Certain bonds, like performance bonds, may have higher premiums due to the
greater financial risk involved.
3. Principal’s Financial Strength: Strong financials and good credit may result in lower
premiums.
Conclusion
•
Bonds play a crucial role in ensuring the fulfillment of various obligations, from construction
contracts to legal duties. By providing financial protection to the obligee, bonds help ensure that
projects and duties are completed as promised, even in cases where the principal may default.