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The Property and Casualty Insurance Cram Sheet

The Property and Casualty Insurance Cram Sheet

This cram sheet contains the distilled key topics that are likely to appear on your licensing exam. Review this information as the last thing you do before entering the test room, paying special attention to areas in which you feel you need the most review. You should also review the glossary for a complete listing of definitions of terms included on the exam.

BASIC TERMS AND CONCEPTS

  1. Peril: A cause of loss [md] for example, fire, collision, or flood.

  2. Hazard: Something that increases the chance of loss [md] for example, overloaded electrical outlets, worn brakes on a car, or building on a flood plain.

  3. Law of large numbers: Principle that helps insurers predict the number of losses that will occur and allows them to provide large amounts of insurance for relatively little money. It states that the more examples used to develop any statistic, the more reliable the statistic will be.

  4. Insurable risk: A risk must meet certain criteria to be a suitable subject for insurance. These criteria are: pure risk, definite as to time and place, not expected, large enough to create financial hardship for insured, affordable to insured, can be assigned a financial value, will not occur to large number of insureds at the same time, and large number of persons with similar potential loss.

  5. Indemnity: Insurance policies are contracts of indemnity because they restore the insured to approximately the same financial condition he or she was in before a loss. A person whose two-year-old car is totaled in an accident will be paid the value of that car, not the amount required to purchase a new car.

  6. Aleatory contract: Contract that is contingent on an uncertain event. An insurance policy is an aleatory contract because an insured does not receive claim payments unless a covered loss occurs.

  7. Contract of adhesion: A contract in which only one party draws up the terms and the other party simply consents to them; ambiguities in the terms are interpreted by courts in favor of the party who did not write the terms. Insurance is a contract of adhesion.

  8. Unilateral contract: A contract in which only one party is legally bound to perform its part of the agreement. An insurance policy is a unilateral contract because the insurer is legally required to pay for covered losses under the policy. An insured is not legally required to pay premiums or comply with the policy terms.

  9. First named insured: Person whose name appears first in the declarations as an insured. Might be responsible for paying premiums, receiving cancellation notices, and agreeing to changes in the policy.

Contract Law Requirements

  1. Offer and acceptance: One party to a contract must make an offer, and the other party must accept it. With an insurance contract, the insured makes the offer by completing an application and the insurance company accepts the offer by issuing a policy.

  2. Consideration: Both parties to a contract must provide consideration, which is a thing of value exchanged for the performance promised in the contract. The consideration the insured provides is the premium; the consideration the insurance company provides is the promise to pay if certain losses occur.

Insurance Transactions

  1. Binder: Oral or written statement used to provide immediate insurance protection for a specified time period. Can be issued by the agent or the insurance company. Guarantees temporary coverage, but is not a guarantee that a policy will be issued.

  2. Material fact: A fact that would cause an insurer to decline a risk, charge a different premium, or change the provisions of a policy that was issued. The fact that an individual has caused three auto accidents in the past five years would be a material fact for a company issuing auto liability insurance.

  3. Misrepresentation: Written or verbal misstatement of a material fact involved in the contract on which the insurer relies. Can be grounds for the insurer to void the policy. Might be intentional or unintentional.

  4. Fraud: A deliberate misrepresentation that causes harm. Unlike misrepresentation, which might be either intentional or unintentional, fraud is always intentional and involves an all-out effort by one party to deceive and cheat the other.

  5. Representations versus warranties: A representation is a statement in an application that the insured believes is true. A warranty is a specific agreement between the insured and insurer that certain conditions will be met. The key difference between the two is that a representation is not a part of the contract, but a warranty is. A policy cannot be voided on the basis of a representation, but it can be voided for breach of warranty.

  6. Waiver: Intentional relinquishment of a known right, such as not applying a policy condition that could be grounds to deny payment of a claim.

  7. Estoppel: Legal principle that prevents someone from asserting that something is not true after creating the impression that it is true. Under this principle, if a producer misinterprets a policy and tells an insured that a loss will be covered, the insurer cannot deny payment of the claim.

Underwriting and Administering Insurance Contracts

  1. Short rate versus pro rata cancellation: When an insurance policy is cancelled before its expiration date, any premium paid for insurance that will not be provided (unearned premium) must be returned to the insured. If the insured cancels the policy, the insurer is also allowed to keep a certain amount for expenses involved in issuing the policy (short rate cancellation). This is not permitted when the insurer cancels the policy (pro rata cancellation).

Property Insurance Concepts

  1. Direct loss versus indirect loss: A direct loss is a financial loss resulting directly from a loss to property, such as tornado damage to a home. An indirect loss is a consequence of a direct loss, such as the expenses required to stay at a motel while tornado damage to a home is repaired.

  2. Actual cash value: Method of determining reimbursement for an insured loss; usually calculated by determining the property's replacement cost and subtracting an amount for depreciation. Depreciation is deducted because the insured has already had use of the property. Paying the full replacement cost would violate the principle of indemnity.

  3. Replacement cost: Losses may be reimbursed on a replacement cost basis, without deduction for depreciation, if the insured agrees to maintain insurance equal to a specified percentage of the property's value.

  4. Blanket insurance: Insurance that is written to cover more than one item of property at a single location or one or more items of property at multiple locations. Personal property coverage in Dwelling and homeowners policies is an example of blanket insurance.

  5. Valued policy: Certain hard-to-value items, such as art work, may be insured under a valued policy to avoid the difficulty involved in determining the property's value after it is damaged. The property is written for a specified amount that is used to value losses. Also called an agreed amount policy.

  6. Coinsurance: Policy condition that benefits insureds who insure property for its full value. If the insured maintains insurance equal to a specified percentage of the property's value, the insurer will fully reimburse losses (up to the policy limits). If the coinsurance requirement is not met, the amount paid for the loss will be reduced.

  7. Subrogation: The transfer of an insured's right to collect from a negligent third party to the insurance company. Under the subrogation condition, the insurance company will initially pay an insured's loss, and then attempt to recover that amount from the party who was responsible for the loss.

  8. Other insurance: Policy condition that stipulates how losses will be paid when more than one policy applies to a loss. If losses are paid on a primary/excess basis, the primary policy pays the entire loss (up to the policy limit) first, and the excess policy pays any amount not covered under the primary policy. When losses are paid on a pro rata basis, each policy pays a proportion of the loss based on the amount of coverage under its policy.

  9. Nonconcurrency: Occurs when property is insured by two or more policies that do not provide identical coverage. Nonconcurrency can result in coverage gaps or disputed claim payments.

Liability Insurance Concepts

  1. Negligence: Liability insurance policies cover certain losses arising out of an insured's negligence. Negligence is the lack of reasonable care that is required to protect others from the unreasonable chance of harm.

  2. Proximate cause: Action that establishes a link between a person's negligent actions and resulting damage to a third party.

  3. Intervening cause: A separate action that breaks the chain of causation between a person's negligent actions and resulting damage to a third party. The intervening cause then becomes the proximate cause of loss.

  4. Personal injury: In the insurance industry, this term does not have the same meaning as bodily injury. It refers to losses arising out of such things as slander, libel, and invasion of privacy.

  5. Absolute liability: Type of law imposed on those involved in activities considered especially hazardous, such as activities involving dangerous materials, hazardous operations, and dangerous animals. A person involved in these activities can be held liable for damages arising out of them, even though the individual was not negligent.

  6. Supplementary payments: Expenses included in a liability insurance policy that are paid in addition to the policy's regular limit of liability. Typically includes defense costs, claim investigation expenses, bond premiums, first aid expenses, expenses incurred by the insured at the insurer's request, loss of earnings, prejudgment interest, and postjudgment interest.

Dwelling and Homeowner Coverages

  1. Covered perils: Dwelling forms can provide basic, broad, or special coverage. Homeowner forms can provide broad or special coverage for owner-occupied dwellings and broad form coverage for tenants or condominium unit owners.

  2. Removal coverage: Dwelling and homeowners forms both cover property against loss from any peril while being removed from a premises endangered by a covered peril, and for a specified number of days while it is away from the premises.

  3. Debris removal: Dwelling and homeowners forms both contain debris removal coverage, which pays for the expense of removing debris resulting from a covered loss.

Automobile Insurance

  1. Temporary substitute auto: An auto the insured rents or borrows while the insured's damaged auto is out of service because of its breakdown, repair, servicing, loss, or destruction. In both personal and commercial auto policies, temporary substitute autos are considered covered autos for liability coverage.

  2. Collision: One of two physical damage coverage options in personal and commercial auto policies. Covers damage caused by the impact of the auto with another object or vehicle or by the upset of the vehicle.

  3. Nonowned auto: In the personal auto policy, it is any private passenger auto, pickup truck, trailer, or van not owned by or available for the regular use of the named insured or a family member. Under the policy's physical damage coverage (but not liability coverage), a temporary substitute auto is considered a nonowned auto instead of a covered auto.

  4. Transportation expenses: Physical damage coverage in personal and commercial auto policies that covers transportation expenses incurred because of physical damage losses to the covered auto and loss of use expenses for which the insured is legally responsible because of loss to a nonowned auto.

  5. Extended nonowned coverage: Personal auto policy endorsement that eliminates most policy exclusions applicable to autos that are furnished or available for the regular use of the named insured or family members.

  6. Named nonowner coverage: Personal auto policy endorsement that provides extended coverage for the use of nonowned autos to individuals who do not own a car.

Commercial Package policy

  1. Interline endorsements: They may be used with more than one line of insurance. A single interline endorsement can be included in a package policy to modify several lines of insurance.

Businessowners Policy

  1. Eligible occupancies: Generally, the business may not exceed 25,000 square feet of floor area or have more than $3 million in annual gross sales. For some types of risks, the building may not exceed a specified number of stories. Only certain wholesale, processing and service, restaurant, convenience store, and contract risks are eligible.

  2. Ineligible risks: The following risks cannot be covered under a Businessowners policy: auto repair or service stations; auto, motor home, mobile home, and motorcycle dealers; banks, credit unions, stockbrokers, and similar financial institutions; bars and pubs; buildings with a manufacturing occupancy; condominium associations other than office or residential condominiums; household personal property; business operations that involve manufacturing; one- or two-family dwellings; parking lots or garages; and places of amusement.

  3. Covered causes of loss: Businessowners property coverage is written on an open peril basis.

  4. Coverage extensions: In the Businessowners policy, they include newly acquired or constructed property, property off premises, outdoor property, personal effects, valuable papers and records, and accounts receivable.

  5. Optional coverages: In the Businessowners policy, they apply only if designated in the declarations and usually require an additional premium. Optional coverages are available for employee dishonesty, mechanical breakdown, outdoor signs, and money and securities.

Commercial Property Insurance

  1. Business personal property: Commercial property insurance can be written to cover business personal property, such as furniture, fixtures, machinery, and inventory.

  2. Personal property of others: Commercial property insurance can be written to cover damage to personal property of others in the insured's care, custody, or control, regardless of whether the insured is legally liable for that loss.

  3. Agreed value: Optional commercial property coverage that suspends the coinsurance requirement and stipulates a certain value for designated property. If the policy limit equals or exceeds this amount, the insured will not be assessed a coinsurance penalty.

  4. Business Income From Dependent Properties Form: Commercial Property form designed for insureds whose business income is dependent on the ongoing operations of other businesses they do not own. This includes businesses that: deliver materials or services to the insured (contributing locations), are the primary purchasers of the insured's products or services (recipient locations), manufacture products for delivery to the insured's customers (manufacturing locations), or attract customers to the insured's business (leader locations).

  5. Additional coverages: The Commercial Property Building and Personal Property coverage form includes the following additional coverages: debris removal, preservation of property, fire department service charge, pollutant cleanup and removal, increased cost of construction, and electronic data.

  6. Coverage extensions: The commercial property building and personal property coverage form includes the following coverage extensions, which apply only if the insured has agreed to meet an 80% or higher coinsurance requirement or has purchased a reporting form: newly acquired or constructed property, personal effects and property of others, valuable papers and records [md] other than electronic data, property off premises, outdoor property, and nonowned detached trailers.

  7. Optional coverages: The commercial property building and personal property coverage form includes the following optional coverages, which apply only if designated in the declarations and require an additional premium: agreed value coverage, inflation guard coverage, and replacement cost coverage.

Commercial General Liability Insurance

  1. Personal and advertising injury: In the Commercial General Liability (CGL) forms, this is injury that results from false arrest or imprisonment, malicious prosecution, wrongful eviction or entry, slander, libel, violation of personal privacy, use of another's advertising idea, or copyright infringement.

  2. Occurrence versus claims made forms: CGL coverage can be written on an occurrence or claims-made basis. The major difference between occurrence and claims-made forms is how coverage under the form is activated, or triggered. An occurrence form covers bodily injury (BI) or property damage (PD) that occurs during the policy period, regardless of when the claim is made. A claims-made form pays for BI or PD losses for which a claim was first made against the insured during the policy period.

  3. Supplementary payments: The following supplementary payments are available under Coverage A and Coverage B of the CGL: expenses incurred by the insurance company; up to $250 for the cost of bail bonds; cost of bonds to release attachments; reasonable expenses incurred by insured to assist in investigation and defense of a claim, including up to $250 per day for loss of earnings; all costs taxed against the insured in a suit; prejudgment and postjudgment interest; and defense costs for an indemnitee.

  4. General aggregate limit: Total limit of insurance coverage that will be paid in one policy for all coverages except the products-completed operations hazard.

  5. Medical expense limit: Separate sublimit in the CGL for Coverage C [md] Medical Payments coverage. It is subject to both the per occurrence and the general aggregate limit.

Commercial Crime Insurance

  1. Loss sustained versus discovery forms: Commercial Crime coverage is written on a loss sustained or discovery basis. The major difference between the forms is how coverage under the form is activated. Coverage under a loss sustained form is triggered by a loss sustained during the policy period, but not necessarily discovered during the policy period. Coverage under the discovery form is triggered by a loss discovered during the policy period, but not necessarily sustained during the policy period.

Workers Compensation

  1. Common law defenses: Assumption of risk, contributory negligence, and the fellow servant rule.

  2. Compulsory compensation laws: A type of state workers compensation law requiring each employer to accept and comply with all the law's provisions. Most state workers compensation laws are compulsory.

  3. Elective compensation laws: A type of state workers compensation law under which employers have the option to accept or reject the law's provisions. If rejected, the employer cannot use the three common law defenses.

  4. Exclusive remedy: The benefits stipulated in workers compensation laws are the only means available to employees against employers for injuries covered by those laws. Employees cannot sue their employers in court to obtain additional compensation.

Miscellaneous Commercial Coverages

  1. Expediting expenses: Coverage under the Equipment Breakdown Protection coverage form that pays extra costs necessarily incurred by the insured to make temporary repairs and expedite permanent repairs or replacement of the damaged property.

  2. Errors and omissions insurance: Type of professional liability insurance written for nonmedical professionals, such as insurance agents, accountants, architects, stockbrokers, and attorneys.

  3. Difference in conditions insurance: Type of Commercial Property policy that covers most insurable perils but excludes basic fire and extended coverage perils. It is usually written on large risks with a high deductible.

  4. Surplus lines: Term used to describe highly specialized insurance coverages that are not available or cannot be procured from authorized insurers within a state.

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