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Insurance policy


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what is a insurance policy?
A insurance policy is a contract or social device for tranferring risk from a person, business, or organization to an insurance company.
What is the uncertainty of loss?
The uncertainty of loss is because of the uncontrollable potential occurrences that are common to everyone everywhere, including death, disability, sickness, accident, property damage, or loss, and financial difficulty that can result from retirement.
What is a Hazard?
A Hazard is any thing that increases the chance of a loss, or severity of loss due to a Peril.
** What is a Physical Hazard?
A Physical Hazard is typically something that can be seen, heard, touched, tasted or smelled.

"A house is located next to a manufacturer of explosives."
** What is a Peril?
A Peril is the cause of loss.

Fire, Theft, Flood, and negligence are a common Peril that can be covered by an insurance company.
** Why must the loss be definite and measurable?
To help prevent fraud, it is important for the insurer to ascertain the Time, Place and Dollar amount of the loss insured.
** What if the loss is Catastrophic?
A risk is not insurable if it is Catastrophic.

A Catastrophic Peril is a large amount of loss comparessed into a very short amount of time.
What is the McCarran-Ferguson Act (public Law 15) in 1945?
A McCarran-Ferguson Act is a law that reconizes that the state regulation of insurance was in the public's best interest and thus exempted the insurance industry from the federal regulation required for most interstate commerce industries.

To avoid federal intervention, each state has revised its insurance laws to conform to these requirements.
What is Casualty Insurance?
(Is a cause to others paying to others not me)

A casualty insurance includes a variety of unrelated insurance products.

Casualty is often associated with liability insurance.

Liability Insurance covers our actions toward others and any legally imposed responsibility if those actions cause another person a loss such as bodily injury or property damage.

For example, Mr. Jones fails to stop in time to avoid hitting Mr. Smith's car causing $1,500 in damages. Mr. Jones is at fault and is found liable for the accident. Mr. Jones' auto liability insurer would pay for Mr. Smith's car damage.

In additon to liability insurance, casualty also includes avaition, boiler and machinery, crime insurance, worker's compensation, surety bonds and auto insurance.
What is Disability Insurance (Dual Authority)?
Disability Insurance is designed to handle the risk of medical bills and loss of income resulting from injury and sickness.

In California, the Disability category includes Medical (Heath insurance), Disability Income, Accidental Death and Dismemberment, Medicare Supplements, and Long Term Care insurance.
What is a Risk (Pure Risk)?
A Risk is a chance of becoming diabled.
(Insurable Risk)

Is a chance of loss only, with no chance of gain or profit.
What is Speculative Risk?
Speculative Risk is where there exists both the chance of gain and the possibility of loss.

(Not Insurable)

Will not cover anything with the chance to gain
What are the Methods of Risk Management?
Risk Management that work for insurance companies as well as other individuals cope with risk on a daily basis: Buying a new home, crossing a busy street, or being late for an appointment.

Some Risk represent small financial loss.

Other Risks represent much greater financial impact such as when a house burns down or a car accident occurse.

There are Five differant methods of management risk. The acronym (STARR) will help you remember them.

Sharing, Transfer, Avoid, Retain, Reduce
What is a Transfer?
A Transfer is a Risk that is transferred when it is shifted to another.

Some risk are managed by purchasing insurance.

When insurance is purchased to cover a risk, this known as a RISK of TRANSFER.

It is known as RISK TRANSFER in the sense that the client experiences the loss but then TRANSFERS it to the insurer for payment of the loss.

For the state exam, when a question asks, "what method of risk management is used when someone buys insurance?"

The answer will be "transfer"

Purpose of insurance
How to Avoid a risk?
A person may choose to bypass an activity that represtnts too much risk, therefore avoiding it.

Certain risk may be managed by avoidance.

Example: A person who decides not to bungee jump because of the risk of injury.

All of falling
How to Retain a Risk?
Retaining or retention may mean one of two things.

Retaining a risk includes self-insuring, that is, not purchasing insurance and being out of pocket for the entire loss.

Self-Insuring occurs when an individual or business has the cash to pay for the loss and can forego buying insurance.

Retaing can also mean being responsable for only part of the loss by paying the deductible, coinsurance, or copayment amount on a policy.

Deductible = Self-Retention Limit
What is Reduce?
Any steps taken by the insured to lessen the chance that a loss will occur is considered to be reducing the risk, i.e., Installing a burglar alarm or smoke detectors in a home, will reduce the chance of loss.
What is Moral Hazard?
Moral Hazard is a person that lies about his heath on an application.

Moral Hazard deals with the mental attitudes, behaviors, and habits that individuals have which are relative to a particular risk.

They involve evaluating the character and reputation of the proposed insured.

alcoholism, drug abuse, smoking, or dishonest or exaggerated claims are considered moral hazards.
What is a Morale Hazard?
Morale Hazard is similar to moral hazard in that they are also individual tendencies, but are distinguished by the fact that they arise from a state of mind, causing indifference or apathy toward loss.

This indifference can result in extreme carelessness, such as an individual who instead of taking reasonable care of property, says, "It's Insured, so why should I worry?" or actions taken without forethought which may cause personal injuries.

(A person always drives fast and crazy)
What is a Legal Hazard?
Legal Hazard are derived from court actions that increase the likelihood or size of a loss.

Example: is the tendency of people to file lawsuits and claim enormous sums of money for alleged damages.

Legal Hazard are usually associated with the field of liability insurance.

(Lawsuit increases chance of loss)
What is a Peril?
A Peril is the cause of loss.

Fire, Theft, Flood, and Negligence are common PERILS that can be covered by an insurance company.

PERIL....the cause of loss

HO-1 HO-2 HO-3
basic broad special
The why must loss be definite and measurable?
To help prevent fraud, it is important for the insurer to ascertain the time, place, and dollar amount of the loss insured.

(when, where, what caused the loss)
Why must the loss be accidental not intentional?
A loss is not insured if it is caused by an intentional act or is certain to occur.

Life insurance exists even though death is certain.

The time of death still makes the event to some degree uncertain.

(Dose not cover intentional losses)
Why should the Law of Large Numbers apply?
A insurance company must be able to predict losses on a group basis.
Why must the loss create economic hardship?
Insurance is only a practical solution if the loss insured is greater then the current loss or revenue that occurs by paying the premium.
What is Indemnity?
Indemnity is the most basic.

The purpose of insurance is to indemnify the insured to restore them to the same financial condition that existed prior to the loss.

To indemnify the insured also means to cover the loss, without paying an amount that would cause the insured to profit from a loss.

Example: the insured may have property valued at $75,000 insured by a $100,000 policy. However, if the total loss due to a covered peril occurs, the most the insured would pay would be able to collect is $75,000.

(The basic principle of insurance)
What is a deductible?
A deductible is the portion of the loss the insured must pay before the insurance applies to the claim.

Because the insured is assuming responsibility for some of the potential loss, a higher deductible will generally cause the premium to be lower.

(Self Retention Limits)
What is a Grace Period?
The grace period is the period of time when the client may pay the premium after the due date, but before the end of the grace period, and not suffer a lapse in coverage or be requires to show proof of insurability in the form of a medical exam.

This period varies from between 7, 10, 31 days, depending on the type of policy.

If paid by:

7 Day's Weekly
10 Day's Monthly
31 Day's Yearly
What is Reinsurance?
Reinsurance is shifting all or part of the risk originally accepted by the issuing insurer to one or more additional insurers.

The retention limit exists because, by law, insurance companies cannot carry on their books a larger amount at risk than they can expect to cover with their reserves.

When an insurance company works with another insurance company.
(This is called an insurer's capacity)
What dose a Actuarial Department due?
Actuarial Department uses computer data, claims history, as well as statistics from rating bureaus and other insurance companies to predict losses.

Actuaries determine the rates to be charged for various types of insurance from this data.

(To Establish)
What is a Underwriting Department?
Underwriting Department included individual underwriters who make decisions about whether to accept or reject applications and insure particular risks sent in by agents based on company standards and their own judgment.

(Get to know your underwriter)
What is a Claims Department?
Claims Department is a department that oversees the evaluation of losses and payment of claims after an insured event occurs.

Claims adjusters are used to inspect a loss, determine if there is coverage, estimate amount of coverage and in some cases pay immediately for the loss, or instruct the insured to pay the loss
What is Field Underwriting?
Underwriting is the evaluation and selection of risk and issuance of policies in a way that is profitable to insurers and equitable to insureds.

Underwriters in the underwriting department within an insurance company handle these responsibilities.

Another type of underwriting, known as "Field Underwriting", takes place before the insurance company review.

The agent, broker, or solicitor performs field underwriting.

Field Underwriting occurs when the agent, broker, or solicitor takes the client's application and conducts a preliminary review to determine if the client is an acceptable risk based on their answers to application questions.
What is Adverse Selection?
Adverse Selection is the tendency for people who "need" insurance to seek it.

Example: People who "need" insurance include those who wait until they have a known illness before seeking medical insurance, those who have an auto accident and are cited for driving without insurance before they will apply for coverage.

Underwriters try to avoid "ADVERSE SELECTION" by adhering to underwriting guidelines used to eliminate too many high-risk application from being offered coverage.
What is Rate Making?
Rate Making is the process of an insurance company calculation rates and premiums.

There are various ways a premium can be determined by the insurance company.

They include: Judgment Rating, Merit Rating, Manual Rating and Experience Rating.
What is a Judgment Rating?
The individual risk is considered.

The underwriter determines the premium using their intuition and experience instead of a rating manual.

Uses the application chance or probabilities of sustaining a loss.
What is a Merit Rating?
Merit rating begins with a class or manual rate, which is then modified, based on loss experience or other unique characteristics.

Lower premiums are given to those insureds that have few or minimal losses.
** What is Manual Rating?
In manual rating, the underwriter simply refers to a rating plan or manual produced by the insurer to determine the premium.

Pre-printed rates based on statistics
What is Experience Rating?
Experience Rating is a form of merit rating that modifies the manual premium based on the insureds loss experience.

Use the applicants actual loss history.
*** What is Loss Reserves?
Loss Reserves are an amount equal to the loss that are due but not as yet payable, and an estimated of losses incurred, but as yet reported.

(Keyword Estimated)
** What dose Prior Approval System do?
The insurance company must obtain approval of the rate prior to using the rate to sell policies.

Prior approval is the system in use for most property and casualty insurance written in California.
What is ISO (Insurance Services Office)?
The ISO is the largest rating bureau for property and casualty insurers that provides statistics and advice regarding most property and casualty policy forms.
How many Types of Losses are there?
There are two types of losses, which include: Direct Loss, and Indirect (Consequential) Loss
What is Direct Loss?
Direct loss includes destruction of property (property damage) or theft, as the direct result of peril.
What is (Consequential) Loss?
Indirect or consequential loss is a monetary loss occurring because of direct loss.

Example: A family must move from their home and live temporarily in a hotel while their house is being repaired after a fire.

The direct loss is the fire.

The indirect loss would be the hotel expenses covered by the policy.
What is Utmost Good Faith?
Under the law, it is assumed that insurance contract are entered into in good faith.

This means that both parties know all material facts and have disclosed all relevant information with the full intention of carrying out their obligations.

There no attempt by either party to misrepresent, conceal, disguise, or deceive.

Associated with this are the concepts of warranties, representations, materiality, and concealment.

(openly and honestly)
What is Adhesion? <-- stick to
Contracts are prepared by the insurance company and offered to prospective insured on a "take-it-or-leave-it" basis, meaning that it is not the result of negotiation between the parties.

The application "ADHERES" to the terms of the contract when he or she accepts it.

As results, if there is any ambiguity in the (insurer), and in favor of the insured because only the insurance company has control over the wording and content of the original policy; the insured must accept it as is issued.

What is Unilateral?
Contract may be Unilateral or bilateral.

Bilateral contracts are those where there is an exchange of a promise for a promise.

Insurance contract are unilateral, meaning a "premium-for-a-premium", because only one party--the insurer--.makes an enforceable promise.

The promise is to pay benefits upon the happening of a certain event, such as death or disability.

The promise of the concept is that only the insurance company must live up to its side of the agreement, and they are the only party bound bye the contract.

The applicant makes no such promise, dose not event have to pay premiums, and the insurer cannot require that they be paid.

(Only the company is obligated to perform)
What is Conditional/Executory?
Insurance contracts are conditional because when a loss occurs, certain conditions must be met in order for claims to be paid, and promises described in the contract are to be executed in the future after certain events occur.

A condition is any action that the insured must take, or continue to take, for the insurance policy to remain in force and the insurance company to pay a claim.

It also refers to contract provisions that limit the right contained in the contract.
What is a Valued, Indemnity, Reimbursement, or Service Contracts?
All insurance contracts fall into one of these four classifications.

Life insurance contracts are VALUED contracts because they pay the full value of the policy or the "face amount."

Many health and property insurance policies can be INDEMNITY contracts because they pay an amount to off set part or all of an insured loss.

They can also be structured as REIMBURSEMENT contracts , which reimburse the insured, up to the policy limits, for the actual amount of the loss after the insured has paid for the loss or claim out of pocket.
What is Service Contracts?
it pays the health care providers (hospitals doctors) directly after the patient (insured) has received medical treatment.

HMO, PPO so on
What is Subrogation?
The concept of subrogation or substitution, most commonly used in the Property & Casualty field, but often the concept applies in relation to health insurance, means that an individual gives up the right to collect twice in the event of a loss.

It is the surrendering of rights by an insured against a third party to an insurance company that has paid a claim.

This concept dose not apply in regards to life insurance because all policies in force when the insured dies will be eligible for a claim payment.

(Transfer of 3rd party money rights)
What is the named Insured?
The named insured refers to any individual, or legal entity specifically designated by name as being insured in a policy.
What is a first named insured?
The first named insured is the first name to appear on the Declarations page of a commercial policy under the heading "Named Insured".

The insure is allowed to satisfy advance notice requirements for cancellation and non renewal as well as other contractual requirements by simply notifying the "first named insured", instead of having to notify all named insureds.

In charge of commercial package policy
What is Cancellation?
Cancellation is the termination of a contract before its normal expiration by a voluntary act of the insurer or insured.
** What is Rescission?
A rescinded policy is one that is terminated from the beginning.

This can occur due to the insurer's discovery of fraud or misrepresentation.

Has never been enforced
What is a Lapse?
A lapse is the termination of a policy due to non payment of premium.

Once the grace period has expired.
What is Short Rate Cancellation?
With a short rate cancellation, the insurer keeps earned premium plus an extra charge when the client cancels too soon after the issue date (insurer discretion).

Insured or add cancels the policy
What is Pro-Rata Cancellation?
The insurer keeps the earned premium and refunds unearned premium when the insurer cancels.

The company cancels.
What is Mutual Insurance Company?
In a mutual company, policyholders contribute capital, become the owners, and profit sharers by purchasing policies and paying the premium.

A participating policy.

non taxable dividends.

Policy holder
What is Lloyd's of London?
Lloyd's of London is an example of an insurance exchange, and not considered an insurance company.
** What is Fraternal Insurance?
Fraternal organization provide chartable and benevolent activities as an incorporated society or order operated on the lodge system.

Fraternal offer insurance only to their members and beneficiaries, and are not for profit.

Dose not come under the authority of the D.O.I.
What is a Third Party Claim?
Is a liability insurance, that the insurance policy pays to a third party, on behalf of the insured, who would otherwise have been legally liable.

Example: Jane runs into another vehicle causing $10,000 in damages. Jane's liability insurance will pay for the damage to the other person's vehicle, as it was Jane's fault. In the absence of liability coverage, the other driver may have sued Jane personally for the $10,000 damage. The owner of the damaged vehicle benefits from Jane's liability coverage and is considered the "third party".

(Always pays to the third party)
What is a Independent Agency System?
An independent Agent or independent agency represents more than one insurer.

The independent agent has an agent's contract with each insurer he or she represents.

The independent agent owns the business the obtain including expirations and rights of renewal.

Can represent any number of companies.
What is a Exclusive System?
An exclusive or captive agent represents only one insurer.

The company using exclusive agents owns and controls the renewals and expiration of client accounts.

(Represents one company)
What is a Insurance Solicitor/Solicitor?
A Solicitor is an employee of an Agent or Broker who assists with client service.

A Solicitor is requires to have a Broker-Agent license and may have a Life Agent License.

If a Solicitor has a Life Agent License, they would be called a Solicitor with a Life Agents License, not a Life Solicitor.
What is a Managing General Agent?
A Managing General Agent manages a sales territory or branch office, provides underwriting, and claims services for a specific insurer.

An "MGA" receives an overriding commission on any business the agency handles.

According to the California Insurance Code, a Managing General Agent is a licensed Fire and Casualty Broker-Agent or a Life Agent who has a management contract and an appointment in force with one or more admitted insurers.

The Managing General Agent has the power to do the following:

1.) Appoint, supervise and terminate the appointment of agents in their territory.

2.) Accept or decline risk.

3.)** Collect premium moneys from producing broker-agents and remit those moneys to those insurers pursuant to the account current system.
*** What is Fiduciary Relationship?
A Fiduciary is one who occupies a position of financial trust and confidence in handling or supervising affairs or funds of another.

Any person licensed in insurance has a Fiduciary responsibility to the insurer and the insured.

(Promptly deliver the premium to the company).
What is Express Authority?
Express Authority is specific Authority given by the insurer to the agent, usually in the agency agreement, i.e., in writing.

The agency agreement is a contract specifically detailing the general duties of the agent and expectations of the insurer.

Express Authority can include the agent's ability to represent the company in dealing with the public in soliciting business and selling the insurer's products.

Anything in writing.
What is Implied Authority?
Is additional authority not specifically "expressed (written) in the agency agreement, but customarily given to an agent.

If not in contract....
Anything that is not in writing
What is a Apparent Authority?
Is any authority the public logically has reason to believe the agent has, because of certain words, actions, and circumstances that the principal has created.
What is a Binder?
Provides temporary coverage upto $1 million

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