Part 1 (P&c Fundamentals)

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The National Association of Insurance Commissioners (NAIC) provides resource, research, legislative, and regulatory recommendations for

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state insurance regulators.

The association promotes uniformity among states and members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws.

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A mutual company is owned by

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policyholders (who may be referred to as members).

Policyholders receive non-taxable dividends as a return of unused premium when declared by the directors.

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A reciprocal insurance company is a group-owned insurer

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whose main activity is risk sharing.

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Fraternal Benefits Society

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Usually organized on a non-profit basis, fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society.

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Risk Retention Groups are group-owned insurers

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that primarily assume and spread the liability related risks of their members. RRGs are owned by their policyholders and licensed in at least one state. However, they may insure members of the group in other states.

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To self-insure means to

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assume the financial risk one’s self. This is generally an option only for large companies who may even reinsure for risks above certain maximum limits.

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Lloyds of London is not an insurance company, but consists of groups of

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underwriters called Syndicates, each of which specializes in insuring a particular type of risk. Lloyds provides a meeting place and clerical services for syndicate members who actually transact the business of insurance. Members are individually liable for each risk they assume

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A stock company is owned by stockholders or shareholders. Directors and officers direct the company operations and are elected by stockholders. Stockholders receive

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taxable corporate dividends as a return of profit when declared by the Directors.

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The insurance industry is regulated primarily at the state level. The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public. The judicial branch is responsible for

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interpreting and determining the constitutionality of the statutes.

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The role of a state’s executive branch is to

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enforce the existing statutes that have been put in place.

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The Commissioner, Director, or Superintendent of Insurance is typically appointed by the

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Governor, and the Commissioner has the power to issue rules and regulations to help enforce these statutes.

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Insurer Domicile and Admittance

Domicile refers to the

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jurisdiction (i.e., state or country) where an insurer is formed or incorporated

Exam Tip #2: Domicile has nothing to do with being licensed in a state—that is being authorized or admitted.

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An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.

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Domestic Insurer

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An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.

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Foreign Insurer

Exam Tip #1: A company can only be domiciled in 1 state. They are foreign in the 49 other states and alien in any other country.

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An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state

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Alien Insurer

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Admitted vs. Nonadmitted – Refers to whether or not an insurer

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is approved or authorized to write business in this State. The domicile does not impact whether an insurer may be admitted to do business in this State.

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An Admitted (Authorized) insurer is authorized by

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this State’s Commissioner of Insurance to do business in this State. It has received a Certificate of Authority to do business in this State.

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A Non-admitted (Unauthorized) insurer

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has either applied for authorization to do business in this state and was declined or they have not applied. They are not authorized to transact insurance in this state.

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The Law of Agency is a

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three-party relationship where a Principal authorizes an Agent to act on its behalf to create a legal relationship with a Third Party.

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Contract Law is the information pertaining to

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the formation and enforcement of contracts.

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civil wrongs; they’re not crimes or breaches of contract. They result in injuries or harm that constitute the basis of a claim by a third party.

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Tort Law

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Both parties bargain in good faith when forming and entering into the contract. The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made. Applicants are required to make full, fair, and honest disclosure.

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Contract of Upmost Good Faith

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A legal defense tool used when someone reneges on or contradicts a previous agreement or claim. Estoppel prevents someone from arguing something contrary to a claim made or act performed by that person previously. Conceptually, it is meant to prevent people from being unjustly wronged by the inconsistencies of another person’s words or actions.

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Estoppel

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A contractual agreement that transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.

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Hold Harmless Agreement

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A written contract may not be altered without the written consent of both parties.

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Parole Evidence Rule

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Voluntary surrender of a known right, claim or privilege

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Waiver

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In order to have a Legal Contact, you must have 4 Elements...

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CLAC

Competent Parties, Legal Purpose, Agreement (Offer & Acceptance) and Consideration

Exam Tip #2: The absence of any of these 4 elements can void the contract.

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What’s another name for the insured’s consideration?

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PREMIUM

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One party writes the contract, without input from the other party; one party (insurer) prepares the contract and presents it to the other party (applicant) on a “take-it-or-leave-it” basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).

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CONTACT ADHESION

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Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right.

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FRAUD

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The underwriter’s primary responsibility is the

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selection of risks to be insured. The underwriter also determines the classification, and premium rate if a risk is accepted by the insurer. Underwriting protects the insurer against adverse selection and risks that are more likely than average to suffer losses.

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Underwriting Factors:

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>Nature of the risk >Hazards that are present >Claims history >Other factors that depend upon the type of risk being insured

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An adequate premium must be charged for

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the risk based on the same factors used in evaluating the risk. Premium rates are considered inadequate when they do not cover projected losses and expenses; rates must not be excessive or unfairly discriminatory.

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The dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance.

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RATE

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The total cost for the amount of insurance purchased.*

For instance, $50,000 of coverage = $5 rate x 50 (per $1,000 of insurance) for a $250 premium.

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PREMIUM

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Loss Cost Rating – A rating organization provides insurers with the

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portion of a rate that does not include provisions for expenses or profit.

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Class Rating – A rate charged to a group of

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policyholders who have similar exposures and experience.

* A Class Rate system is the most common approach and is the key element in premium calculation.
* Class rates apply to all members of a large group of similar risks.
* When class rates are printed in a rate manual, they are sometimes referred to as manual rates

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Experience Rating – A rate based on the policyholder’s

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actual loss history when compared to the loss history of similar risks.

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Individual Rating – A rate used for a policyholder because a large enough pool

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of similar risks is not available to any other type of rate. Primarily used for commercial any specialty risks because of the number of unique variables involved.

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"A" Rating or Judgment Rating – An individual rate that doesn’t use

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loss history as a component and that is derived largely from the underwriter’s evaluation and best judgment the risk poses to the insurer.

Exam Tip: This is the only method where the underwriter rates the policy. In all other rating methods, actuaries determine the rates.

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Loss Ratio Method – A loss reserve formula

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based upon the expected losses for a particular class or line

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Premium Calculation
When computing insurance premiums

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you multiply the units of exposure times the rate. The purpose of the premium calculation is to bring in enough premium dollars to cover claims and expenses.

Example: If the rate is $2.25 per square foot, then the annual premium for a 10,000 square foot building would be $22,500.

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A sudden, unforeseen, unintended, and unplanned event from which loss or damage results.

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ACCIDENT

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An event that results in a loss. An accident includes continuous or repeated exposure to the same general harmful conditions.

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OCCURANCE

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A principle holding that when two perils simultaneously cause a loss (i.e., they are both considered the proximate cause of loss), the insurer must pay the loss even if one of the perils is excluded by the policy. Example: A policy that excludes earth movement will still pay a loss due to fire or explosion that ensues directly from the earth movement.

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CONCURRENT CAUSATION

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Named Perils – This type of property coverage only provides insurance for

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the causes of loss, or perils, listed. If a peril is not “named” in the policy, no coverage applies for loss or damage caused by that peril. Typical “named perils” are fire and theft.

Named perils may contain coverage for up to 16 named perils; coverage for additional perils may be added by endorsement. The insured has the burden of proof following the claim.

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Open Perils – This type of property coverage provides insurance for

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all causes of loss that are not specifically excluded under the policy. Typical exclusions in an “open perils” policy are flood and earthquake. The insurance company has the burden of proof following a claim.

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Replacement Value

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The cost to replace or repair the damaged property (not exceeding policy limits) with property of like kind and quality, at current pricing, without a deduction for depreciation

Note: The Replacement Cost method of loss valuation requires that the coverage amount at the time of the loss be at least equal to 80% of the cost of replacement.

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Actual Cash Value (ACV)

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THE COST TO REPAIR OR REPLACE - DEPRECIATION

Example: A building has a roof with a 20-year life expectancy destroyed by hail 5 years after its installation, and the cost to replace the roof at the time of the loss is $10,000. The current replacement value of $10,000, less depreciation of $2,500 (25%), equals the actual cash value of $7,500.

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The Declarations Page describes

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basic information about the policy including:

* Who – Names the insurer and insured, including legal representatives in the event of the insured’s death.
* What – A description of the property being insured and other parties having insurable interests, such as a mortgagee.
* Where – The location of insured property and the named insured’s mailing address.
* When – The effective and expiration dates of the policy.
* How Much – The limits of liability insuring covered property and the annual premium for each type of coverage.

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The insuring agreement states the

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insurance company’s promise to pay the insured. This promise is usually broad and the other sections of the policy restrict or limit the scope of coverage provided by the policy. Property insurance policies state in the insuring agreement what perils are covered.

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The conditions section states the obligations

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of the parties to the contract, as well as any other conditions of coverage. The insureds rights, rules, duties and obligations are spelled out in this section.

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Subrogation – States the insured must transfer to the insurance company

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its right of recovery against any party causing a loss after it accepts payment from the insurer for a loss. Subrogation allows the insurer to recover from the party that caused a loss any amounts paid to an insured.

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Duties in the Event of Loss – Specifies the obligations of the insured in the event of a loss. With respect to any loss, these obligations include:

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Giving prompt written notice to the insurer, including a complete description of how, when, and where the loss or damage occurred.

Notifying the police if a theft occurred. Cooperating with the insurer in the investigation and settlement of the loss. Protecting property from further damage. Preparing an inventory of the damaged property. Allowing the insurer to inspect any damaged property and examine books and records. Submitting proof of loss to the insurer, including: * The time and cause of loss.
* Any other insurance that may cover the loss.
* Any appropriate receipts, evidence, or affidavits to support the loss.

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An artificial condition on land that attracts children, such as a swimming pool, and requires the owner to exhibit a special duty of care. Legally, children are considered invitees to the premises if it contains an attractive nuisance even when they are not expressly invited.

Example: Swimming pools, ladders, refrigerators with doors left on, trampolines, and other kinds of property around a business or home.

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Attractive Nusiance

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An award to an injured party, in addition to compensatory damages, to punish and discourage a wrongdoer from repeating negligent acts or omissions. Most liability policies do not provide coverage for punitive damages.

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Punitive Damages

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an unintentional tort, in a broad sense, is the failure to use ordinary care. Specifically, it is a wrongful act that is neither criminal nor a breach of contract that violates a duty or the rights of another—and for which the injured party may demand compensation. It is the failure to use the same degree of care a reasonable and prudent person would use when given the same knowledge and set of circumstances.

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Negligence

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Ignorance, inaction, carelessness.

are examples or

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negligence acts

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Tort Elements – In order for an act or failure to act to be negligent, it must contain 4 elements

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L -Legal Duty Owed – The obligation to conform to a certain standard of conduct for the protection of others. Requires the injured party to prove the alleged wrongdoer owed a duty to the injured party or to the public. When the insured and third party cannot agree on legal liability, the courts make the final decision.B – Breach of Legal Duty Owed (Standard of Care) – Requires the injured party to prove the alleged wrongdoer not only owed a duty but also violated that duty. Basically, the alleged wrongdoer didn’t exhibit reasonable care.P -Proximate Cause – A natural and continuous sequence, unbroken by any efficient intervening cause, that produces injury and without which the result would not have occurred. Requires the injured party to prove the alleged wrongdoer’s negligent actions or inactions were the proximate cause of actual injuries or damages.D – Damages (Actual Loss) – Loss or damage resulting from the real and substantial destruction of property of another or physical injury to another. Requires the injured party to prove the actual injuries or damages were a reasonably foreseeable consequence at the time the negligent action or inaction occurred.
Note: If any of the four elements is absent, an act, or the failure to act, is not considered negligent.

Exam Tip: Use the Acronym LBPC to remember the four elements of negligence.

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With liability claims, in most cases the claimant must prove the defendant (insured) is legally liable for the cause of injury or damage. If proven, the insurer pays the claim to the claimant. The insurer can also pay a claim to avoid a lawsuit or to reduce the financial impact of the legal action, even if the insured (defendant) was not liable for the incident.

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No fault benefits

Medical Payments – Pays regardless of fault. Medical payments are sometimes referred to as Goodwill Insurance. However, they only pay the medical costs related to the injury. Limits are typically low, but will pay the doctor, the hospital, the dentist and the funeral home.

Supplementary Payments – Pays a variety of costs, such as investigative costs, appeal or attachments bonds, pre-judgment interest awarded to the claimant, and reimburses defense costs to the insured (defendant).

Exam Tip: Know that these benefits are paid regardless of fault.

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Absolute liability is most often associated with

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dangerous animal ownership, abnormally dangerous activities, and employers liability for injuries sustained by their employees. Owners of dangerous animals including lions, bears, and certain dog breeds such as pit bulls and rottweilers are absolutely liable for injuries caused by those animals.

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Strict and Absolute liability is a legal principle

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that imposes legal liability based on conditions, activities, or products that exhibit very high hazards

the degree of care exercised by the insured isn’t considered when making a determination of liability.

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Strict Liability Applies to Products – If a claimant can prove that a product caused the injury,

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the manufacturer will be held liable whether or not the product was defective.